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SECURITIES AND EXCHANGE COMMISSION
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Puerto Rico (STATE OF INCORPORATION) | 66-0555678 (I.R.S. ID) |
(787) 749-4949
Title of each class Class B common stock, $1.00 par value | Name of each exchange on which registered New York Stock Exchange |
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Percentage of Total | ||||
Segment Revenues for | ||||
the Year Ended | ||||
Line of Business | December 31, 2009 | |||
Home service | 57 | % | ||
Ordinary life | 18 | |||
Cancer | 15 | |||
Other | 10 |
Percentage of Total | ||||
Segment Revenues for | ||||
the Year Ended | ||||
Line of Business | December 31, 2009 | |||
Commercial multi-peril | 46 | % | ||
Auto | 21 | |||
Dwelling and commercial property mono-line | 18 | |||
Other | 15 |
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Enrollment at | Percentage of | |||||||
Market Sector | December 31, 2009 | Total Enrollment | ||||||
Commercial | 737,286 | 54.7 | % | |||||
Reform | 540,142 | 40.1 | ||||||
Medicare Advantage | 69,608 | 5.2 | ||||||
Total | 1,347,003 | 100.0 | % | |||||
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• | failure to maintain our total adjusted capital at 200% of Health Risk-Based Capital Authorized Control Level, as defined by the National Association of Insurance Commissioners (“NAIC”) Risk Based Capital (“RBC”) Model Act; | |
• | failure to maintain liquidity of greater than one month of underwritten claims and administrative expenses, as defined by the BCBSA, for two consecutive quarters; | |
• | failure to satisfy state-mandated statutory net worth requirements; | |
• | impending financial insolvency; and | |
• | a change of control not otherwise approved by the BCBSA or a violation of the BCBSA voting and ownership limitations on our capital stock. |
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• | grant, suspend and revoke licenses to transact business; | |
• | regulate many aspects of the products and services we offer; | |
• | assess fines, penalties and/or sanctions; | |
• | monitor our solvency and adequacy of our financial reserves; and | |
• | regulate our investment activities on the basis of quality, diversification and other quantitative criteria, within the parameters of a list of permitted investments set forth in applicable insurance laws and regulations. |
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• | initiatives to provide greater access to coverage for uninsured and under-insured populations without adequate funding to health plans or to be funded through taxes or other negative financial levy on health plans; | |
• | payments to health plans that are tied to achievement of certain quality performance measures; | |
• | other efforts or specific legislative changes to the Medicare or Reform programs, including changes in the bidding process or other means of materially reducing premiums; | |
• | local government regulatory changes; | |
• | increased government enforcement of or changes in interpretation or application of fraud and abuse laws; and | |
• | regulations that increase the operational burden on health plans or laws that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health plans care; |
• | licensure; | |
• | policy forms, including plan design and disclosures; | |
• | premium rates and rating methodologies; | |
• | underwriting rules and procedures; | |
• | benefit mandates; | |
• | eligibility requirements; | |
• | security of electronically transmitted individually identifiable health information; | |
• | geographic service areas; | |
• | market conduct; | |
• | utilization review; | |
• | payment of claims, including timeliness and accuracy of payment; | |
• | special rules in contracts to administer government programs; | |
• | transactions with affiliated entities; | |
• | limitations on the ability to pay dividends; | |
• | rates of payment to providers of care; | |
• | transactions resulting in a change of control; | |
• | member rights and responsibilities; | |
• | fraud and abuse; | |
• | sales and marketing activities; | |
• | quality assurance procedures; | |
• | privacy of medical and other information and permitted disclosures; | |
• | rates of payment to providers of care; | |
• | surcharges on payments to providers; | |
• | provider contract forms; | |
• | delegation of financial risk and other financial arrangements in rates paid to providers of care; | |
• | agent licensing; | |
• | financial condition (including reserves); | |
• | reinsurance; | |
• | issuance of new shares of capital stock; | |
• | corporate governance; and | |
• | permissible investments. |
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• | trends in health care costs and utilization rates; | |
• | ability to secure sufficient premium rate increases; | |
• | competitor pricing below market trends of increasing costs; | |
• | re-estimates of our policy and contract liabilities; | |
• | changes in government regulation of managed care, life insurance or property and casualty insurance; | |
• | significant acquisitions or divestitures by major competitors; | |
• | introduction and use of new prescription drugs and technologies; | |
• | a downgrade in our financial strength ratings; | |
• | litigation or legislation targeted at managed care, life insurance or property and casualty insurance companies; | |
• | ability to contract with providers consistent with past practice; | |
• | ability to successfully implement our disease management and utilization management programs; | |
• | volatility in the securities markets and investment losses and defaults; | |
• | general economic downturns, major disasters and epidemics. |
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• | Reform:We participate in the government of Puerto Rico Health Reform Program to provide health coverage to medically indigent citizens in Puerto Rico. Our results of operations have depended to a significant extent on our participation in the Reform program. During each of the years ended December 31, 2009, 2008 and 2007, the Reform program has accounted for 18.6%, 20.1% and 22.1%, respectively , of our consolidated premiums earned, net. During the 2009 period, we were the sole Reform provider in two of the eight Reform regions in Puerto Rico on a fully-insured basis. We are also the sole Reform provider in another Reform region on an ASO basis. Since we obtained our first Reform contract in 1995, we have been the sole provider for two to three regions each year. The contract for each geographical area is subject to termination in the event of any non-compliance by the insurance company which is not corrected or cured to the satisfaction of the government entity overseeing the Reform, or on 90 days’ prior written notice in the event that the government determines that there is an insufficiency of funds to finance the Reform. These contracts typically have one-year terms that expire on June 30 of each year, except for the Metro-North region contract which had an October 30 expiration date. Upon the expiration of the contract for a geographical area, the government of the Commonwealth of Puerto Rico usually commences an open bidding process for such area. We intend to continue to participate in the Reform program, but we may not be able to retain the right to service a particular geographical area in which we currently operate after the expiration of our current or any future contracts. Our two fully-insured contracts with the government of Puerto Rico that terminated in June 30, 2009, were first extended until October 31, 2009 and then to December 31, 2009. In December 2009, all of our three government contracts, the two that are fully-insured and the one ASO contract, were extended until June 30, 2010. The premium rates of the Reform business were last increased in July 2008. | ||
• | Medicare:We provide services through our Medicare Advantage products pursuant to a limited number of contracts with CMS. These contracts generally have terms of one year and must be renewed each year. Each of our contracts with CMS is terminable for cause if we breach a material provision of the contract or violate relevant laws or regulations. If we are unable to renew, or to successfully re-bid or compete for any of these contracts, or if the process for bidding materially changes or if any of these contracts are terminated, our business could be materially impaired. During each of the years ended December 31, 2009, |
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2008 and 2007, contracts with CMS represented 27.4%, 25.9% and 17.2% of our consolidated premiums earned, net, respectively, and 33.9%, 12.4% and 34.6% of our consolidated operating income, respectively. |
• | Commercial:Our managed care subsidiary is a qualified contractor to provide managed care coverage to federal government employees within Puerto Rico. Such coverage is provided pursuant to a contract with the OPM that is subject to termination in the event of noncompliance not corrected to the satisfaction of the OPM. During each of the years ended December 31, 2009, 2008 and 2007 premiums generated under this contract represented 6.7%, 7.3% and 8.2% of our consolidated premiums earned, net, respectively. The operating income generated under this contract represented 1.2% during the year ended December 31, 2009 and 1.1% of our consolidated operating income, during each of the years ended December 31, 2008 and 2007. |
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• | rising levels of actual costs that are not known by companies at the time they price their products; | ||
• | volatile and unpredictable developments, including man-made and natural catastrophes; | ||
• | changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and | ||
• | fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital. |
• | identify profitable new geographic markets to enter; |
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• | operate in new geographic areas, as we have very limited experience operating outside Puerto Rico; | ||
• | obtain licenses in new geographic areas in which we wish to market and sell our products; | ||
• | successfully implement our underwriting, pricing, claims management and product strategies over a larger operating region; | ||
• | properly design and price new and existing products and programs and reinsurance facilities for markets in which we have no direct experience; | ||
• | identify, train and retain qualified employees; | ||
• | identify, recruit and integrate new independent agencies and brokers and expand the range of Triple-S products carried by our existing agents and brokers; | ||
• | develop a network of physicians, hospitals and other managed care providers that meets our requirements and those of applicable regulators; and | ||
• | augment our internal monitoring and control systems as we expand our business. |
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• | Significantly reducing the value of the debt securities we hold in our investment portfolio, and creating net realized capital losses that reduces our operating results and/or net unrealized capital losses that reduce our shareholders’ equity. | ||
• | Reducing interest rates on high quality short-term debt securities and thereby materially reducing our net investment income and operating results. | ||
• | Making it more difficult to value certain of our investment securities, for example if trading becomes less frequent, which could lead to significant period-to-period changes in our estimates of the fair values of those securities and cause period-to-period volatility in our operating results and shareholders’ equity. | ||
• | Reducing our ability to issue other securities. |
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• | claims relating to the denial of managed care benefits; | ||
• | medical malpractice actions; | ||
• | allegations of anti-competitive and unfair business activities; | ||
• | provider disputes over compensation and termination of provider contracts; | ||
• | disputes related to self-funded business; | ||
• | disputes over co-payment calculations; | ||
• | claims related to the failure to disclose certain business practices; | ||
• | claims relating to customer audits and contract performance; and | ||
• | claims by regulatory agencies or whistleblowers for regulatory non-compliance, including but not limited to fraud. |
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• | disruption of on-going business operations, distraction of management, diversion of resources and difficulty in maintaining current business standards, controls and procedures; | ||
• | difficulty in integrating information technology of acquired entity and unanticipated expenses related to such integration; | ||
• | difficulty in the integration of the new company’s accounting, financial reporting, management, information, human resources and other administrative systems and the lack of control if such integration is delayed or not implemented; | ||
• | difficulty in the implementation of controls, procedures and policies appropriate for filers with the SEC at companies that prior to acquisition lacked such controls, policies and procedures; | ||
• | potential unknown liabilities associated with the acquired company; | ||
• | failure of acquired businesses to achieve anticipated revenues, earnings or cash flow; | ||
• | dilutive issuances of equity securities and incurrence of additional debt to finance acquisitions; | ||
• | other acquisition-related expenses, including amortization of intangible assets and write-offs; and | ||
• | competition with other firms, some of which may have greater financial and other resources, to acquire attractive companies. |
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• | initiatives to provide greater access to coverage for uninsured and under-insured populations without adequate funding to health plan or to be funded through taxes or other negative financial levy on health plans; | ||
• | payments to health plans that are tied to achievement of certain quality performance measures; | ||
• | other efforts or specific legislative changes to the Medicare of Reform programs, including changes in the bidding process or other means of materially reducing premiums; | ||
• | local government regulatory changes; | ||
• | increased government enforcement of or changes in intermpretation or application of fraud and abuse laws; and | ||
• | regulations that increase the operational burden on health plans or laws that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health plans. |
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• | recoupment of amounts we have been paid pursuant to our government contracts; | ||
• | mandated changes in our business practices; | ||
• | imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key employees; | ||
• | loss of our right to participate in Medicare, the Reform or other federal or local programs; damage to our reputation; | ||
• | increased difficulty in marketing our products and services; | ||
• | inability to obtain approval for future services or geographic expansions; and | ||
• | loss of one or more of our licenses to act as an insurance company, preferred provider or managed care organization or other licensed entity or to otherwise provide a service. |
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• | permit our board of directors to issue one or more series of preferred stock; | ||
• | divide our board of directors into three classes serving staggered three-year terms; | ||
• | limit the ability of shareholders to remove directors; | ||
• | impose restrictions on shareholders’ ability to fill vacancies on our board of directors; | ||
• | impose advance notice requirements for shareholder proposals and nominations of directors to be considered at meetings of shareholders; and | ||
• | impose restrictions on shareholders’ ability to amend our articles and bylaws. |
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High | Low | |||||||
2008 | ||||||||
First quarter | $ | 21.69 | $ | 16.83 | ||||
Second quarter | 19.94 | 16.34 | ||||||
Third quarter | 18.05 | 15.19 | ||||||
Fourth quarter | 16.43 | 6.55 | ||||||
2009 | ||||||||
First quarter | $ | 15.00 | $ | 10.67 | ||||
Second quarter | 16.23 | 12.06 | ||||||
Third quarter | 17.84 | 14.50 | ||||||
Fourth quarter | 18.88 | 15.52 |
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Approximate Dollar | ||||||||||||||||
Value of Shares | ||||||||||||||||
Total Number of | that May Yet Be | |||||||||||||||
Shares Purchased as | Purchased Under the | |||||||||||||||
Total Number | Average Price Paid | Part of Publicly | Programs | |||||||||||||
(Dollar amounts in millions, except per share data) | of Shares Purchased | per Share | Announced Programs1 | (in millions) | ||||||||||||
November 1, 2009 to November 30, 2009 | 235,000 | $ | 16.30 | 235,000 | $ | 0.3 | ||||||||||
December 1, 2009 to December 31, 2009 | 15,672 | 16.27 | 15,672 | 0.0 |
1 | In October 2008, the Board of Directors authorized a $40.0 million share repurchase program, which commenced on December 8, 2008. This repurchase program was completed during December 2009. |
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![](https://capedge.com/proxy/10-K/0000950123-10-021561/g22249g2224900.gif)
Period Ending | ||||||||||||||||||||||||
Index | 12/07/07 | 12/31/07 | 06/30/08 | 12/31/08 | 06/30/09 | 12/31/09 | ||||||||||||||||||
Triple-S Management Corporation | 100.00 | 133.40 | 107.92 | 75.91 | 102.90 | 116.17 | ||||||||||||||||||
S&P 500 | 100.00 | 97.59 | 85.07 | 60.03 | 61.10 | 74.11 | ||||||||||||||||||
Morgan Stanley Healthcare Payor Index | 100.00 | 100.38 | 58.66 | 45.37 | 52.42 | 69.59 |
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(Dollar amounts in millions, except per share data) | ||||||||||||||||||||
Years ended December 31, | 2009 | 2008 | 2007 | 2006 (1) | 2005 | |||||||||||||||
Premiums earned, net | $ | 1,876.1 | $ | 1,695.5 | $ | 1,483.6 | $ | 1,511.6 | $ | 1,380.2 | ||||||||||
Administrative service fees | 48.6 | 19.2 | 14.0 | 14.1 | 14.4 | |||||||||||||||
Net investment income | 52.1 | 56.2 | 47.2 | 42.7 | 29.1 | |||||||||||||||
Total operating revenues | 1,976.8 | 1,770.9 | 1,544.8 | 1,568.4 | 1,423.7 | |||||||||||||||
Net realized investments gains (losses) | 0.6 | (13.9 | ) | 5.9 | 0.8 | 7.2 | ||||||||||||||
Net unrealized investment gain (loss) on trading securities | 10.5 | (21.1 | ) | (4.1 | ) | 7.7 | (4.7 | ) | ||||||||||||
Other income (expense), net | 1.3 | (2.5 | ) | 3.2 | 2.3 | 3.7 | ||||||||||||||
Total revenues | 1,989.2 | 1,733.4 | 1,549.8 | 1,579.2 | 1,429.9 | |||||||||||||||
Benefits and expenses: | ||||||||||||||||||||
Claims incurred | 1,612.8 | 1,434.9 | 1,223.8 | 1,259.0 | 1,208.3 | |||||||||||||||
Operating expenses | 279.4 | 251.9 | 237.5 | 236.1 | 181.7 | |||||||||||||||
Total operating costs | 1,892.2 | 1,686.8 | 1,461.3 | 1,495.1 | 1,390.0 | |||||||||||||||
Interest expense | 13.3 | 14.7 | 15.9 | 16.6 | 7.6 | |||||||||||||||
Total benefits and expenses | 1,905.5 | 1,701.5 | 1,477.2 | 1,511.7 | 1,397.6 | |||||||||||||||
Income before taxes | 83.7 | 31.9 | 72.6 | 67.5 | 32.3 | |||||||||||||||
Income tax expense | 14.9 | 7.1 | 14.1 | 13.0 | 3.9 | |||||||||||||||
Net income | $ | 68.8 | $ | 24.8 | $ | 58.5 | $ | 54.5 | $ | 28.4 | ||||||||||
Basic net income per share (2): | $ | 2.33 | $ | 0.77 | $ | 2.15 | $ | 2.04 | $ | 1.06 | ||||||||||
Diluted net income per share: | $ | 2.33 | $ | 0.77 | $ | 2.15 | $ | 2.04 | $ | 1.06 | ||||||||||
Dividend declared per common share (3): | $ | — | $ | — | $ | 0.82 | $ | 0.23 | $ | — | ||||||||||
December 31, | 2009 | 2008 | 2007 | 2006 (1) | 2005 | |||||||||||||||
Cash and cash equivalents | $ | 40.4 | $ | 46.1 | $ | 240.2 | $ | 81.6 | $ | 49.0 | ||||||||||
Total assets | $ | 1,648.7 | $ | 1,559.2 | $ | 1,659.5 | $ | 1,345.5 | $ | 1,137.5 | ||||||||||
Long-term borrowings | $ | 167.7 | $ | 169.3 | $ | 170.9 | $ | 183.1 | $ | 150.6 | ||||||||||
Total stockholders’ equity | $ | 537.8 | $ | 485.9 | $ | 482.5 | $ | 342.6 | $ | 308.7 | ||||||||||
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Years ended December 31, | 2009 | 2008 | 2007 | 2006 (1) | 2005 | |||||||||||||||
Medical loss ratio | 90.0 | % | 88.9 | % | 87.0 | % | 87.6 | % | 90.3 | % | ||||||||||
Operating expense ratio | 10.6 | % | 10.5 | % | 11.2 | % | 11.5 | % | 10.8 | % | ||||||||||
Medical membership (period end) | 1,347,033 | 1,195,450 | 977,190 | 979,506 | 1,252,649 | |||||||||||||||
(1) | On January 31, 2006 we completed the acquisition of GA Life (now TSV). The results of operations and financial condition of GA Life are included in this table for the period following the effective date of the acquisition. | |
(2) | Further details of the calculation of basic earnings per share are set forth in notes 2 and 22 of the audited financial consolidated financial statements for the years ended December 31, 2009, 2008 and 2007. | |
(3) | Shareowners holding qualifying shares were excluded from dividend payment. See note 19 of the audited financial consolidated financial statements for the years ended December 31, 2009, 2008 and 2007. | |
(4) | Does not reflect inter-segment eliminations. |
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Years ended December 31, | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Premiums earned, net: | ||||||||||||
Managed care | $ | 1,684.1 | $ | 1,513.0 | $ | 1,301.8 | ||||||
Life insurance | 100.1 | 92.8 | 88.9 | |||||||||
Property and casualty insurance | 96.2 | 93.8 | 96.9 | |||||||||
Intersegment premiums earned | (4.3 | ) | (4.1 | ) | (4.0 | ) | ||||||
Consolidated premiums earned, net | $ | 1,876.1 | $ | 1,695.5 | $ | 1,483.6 | ||||||
Administrative service fees: | ||||||||||||
Managed care | $ | 51.3 | $ | 22.5 | $ | 17.2 | ||||||
Intersegment administrative service fees | (2.7 | ) | (3.3 | ) | (3.2 | ) | ||||||
Consolidated administrative service fees | $ | 48.6 | $ | 19.2 | $ | 14.0 | ||||||
Operating income: | ||||||||||||
Managed care | $ | 57.2 | $ | 52.6 | $ | 57.4 | ||||||
Life insurance | 14.6 | 12.5 | 10.7 | |||||||||
Property and casualty insurance | 8.8 | 13.1 | 10.7 | |||||||||
Intersegment and other | 4.0 | 5.9 | 4.7 | |||||||||
Consolidated operating income | $ | 84.6 | $ | 84.1 | $ | 83.5 | ||||||
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As of December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Commercial(1) | 737,286 | 592,723 | 574,251 | |||||||||
Reform(2) | 540,142 | 527,447 | 353,694 | |||||||||
Medicare(3) | 69,605 | 75,280 | 49,245 | |||||||||
Total | 1,347,033 | 1,195,450 | 977,190 | |||||||||
(1) | Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, Federal government employees and local government employees. | |
(2) | Includes rated and self-funded members. | |
(3) | Includes Medicare Advantage as well as stand-alone PDP plan membership. |
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(Dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Years ended December 31, | ||||||||||||
Revenues: | ||||||||||||
Premiums earned, net | $ | 1,876.1 | $ | 1,695.5 | $ | 1,483.6 | ||||||
Administrative service fees | 48.6 | 19.2 | 14.0 | |||||||||
Net investment income | 52.1 | 56.2 | 47.2 | |||||||||
Total operating revenues | 1,976.8 | 1,770.9 | 1,544.8 | |||||||||
Net realized investment gains (losses) | 0.6 | (13.9 | ) | 5.9 | ||||||||
Net unrealized investment gain (loss) on trading securities | 10.5 | (21.1 | ) | (4.1 | ) | |||||||
Other income (expense), net | 1.3 | (2.5 | ) | 3.2 | ||||||||
Total revenues | 1,989.2 | 1,733.4 | 1,549.8 | |||||||||
Benefits and expenses: | ||||||||||||
Claims incurred | 1,612.8 | 1,434.9 | 1,223.8 | |||||||||
Operating expenses | 279.4 | 251.9 | 237.5 | |||||||||
Total operating costs | 1,892.2 | 1,686.8 | 1,461.3 | |||||||||
Interest expense | 13.3 | 14.7 | 15.9 | |||||||||
Total benefits and expenses | 1,905.5 | 1,701.5 | 1,477.2 | |||||||||
Income before taxes | 83.7 | 31.9 | 72.6 | |||||||||
Income tax expense | 14.9 | 7.1 | 14.1 | |||||||||
Net income | $ | 68.8 | $ | 24.8 | $ | 58.5 | ||||||
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(Dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Operating revenues: | ||||||||||||
Medical premiums earned, net: | ||||||||||||
Commercial | $ | 822.1 | $ | 734.2 | $ | 718.7 | ||||||
Reform | 348.1 | 340.1 | 327.5 | |||||||||
Medicare | 513.9 | 438.7 | 255.6 | |||||||||
Medical premiums earned, net | 1,684.1 | 1,513.0 | 1,301.8 | |||||||||
Administrative service fees | 51.3 | 22.5 | 17.2 | |||||||||
Net investment income | 21.6 | 23.1 | 19.7 | |||||||||
Total operating revenues | 1,757.0 | 1,558.6 | 1,338.7 | |||||||||
Medical operating costs: | ||||||||||||
Medical claims incurred | 1,515.2 | 1,345.4 | 1,133.2 | |||||||||
Medical operating expenses | 184.6 | 160.6 | 148.1 | |||||||||
Total medical operating costs | 1,699.8 | 1,506.0 | 1,281.3 | |||||||||
Medical operating income | $ | 57.2 | $ | 52.6 | $ | 57.4 | ||||||
Additional data: | ||||||||||||
Member months enrollment: | ||||||||||||
Commercial: | ||||||||||||
Fully-insured | 5,421,586 | 4,947,854 | 4,983,980 | |||||||||
Self-funded | 2,726,036 | 2,049,140 | 1,930,850 | |||||||||
Total Commercial member months | 8,147,622 | 6,996,994 | 6,914,830 | |||||||||
Reform: | ||||||||||||
Fully-insured | 4,016,332 | 4,101,905 | 4,262,248 | |||||||||
Self-funded | 2,321,144 | 376,975 | — | |||||||||
Total Reform member months | 6,337,476 | 4,478,880 | 4,262,248 | |||||||||
Medicare: | ||||||||||||
Medicare Advantange | 742,666 | 727,274 | 416,512 | |||||||||
Stand-alone PDP | 117,700 | 127,658 | 137,528 | |||||||||
Total Medicare member months | 860,366 | 854,932 | 554,040 | |||||||||
Total member months | 15,345,464 | 12,330,806 | 11,731,118 | |||||||||
Medical loss ratio | 90.0 | % | 88.9 | % | 87.0 | % | ||||||
Operating expense ratio | 10.6 | % | 10.5 | % | 11.2 | % | ||||||
• | Medical premiums generated by the Commercial business increased by $87.9 million, or 12.0%, to $822.1 million during the year ended December 31, 2009. This fluctuation is primarily the result of an increase in member months enrollment of 473,732, or 9.6%, and higher average premium rates per member of |
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approximately 2.9%. Increase in member months was mainly attributed to new members acquired from LCA effective July 1, 2009, which represented 49.1% of the increase in member months enrollment during this period, and to new groups acquired during the period. | |||
• | Medical premiums generated by the Medicare business increased during the year ended December 31, 2009 by $75.2 million, or 17.1%, to $513.9 million, primarily due to higher average premium rates by approximately 11% and an increase in member months enrollment of 5,434 or 0.6%. The fluctuation in member months is the net result of an increase of 15,392, or 2.1%, in the membership of our Medicare Advantage products and a decrease of 9,958, or 7.8%, in the membership of our PDP product. In addition, the premiums for the year ended December 31, 2009 include the net effect of approximately $8.7 million in adjustments related to CMS final risk score adjustment for 2008. The premiums for the year ended December 31, 2008 include the net effect of approximately $1.4 million related to CMS final risk score adjustments for 2007. | ||
• | Medical premiums earned in the Reform business increased by $8.0 million, or 2.4%, to $348.1 million during the year ended December 31, 2009. This fluctuation is due to an increase in premium rates, effective July 1, 2008, of approximately 10%, offset in part by a lower member months enrollment in the Reform’s fully-insured membership by 85,573, or 2.1% and premium adjustments of approximately $8.3 million to provide for unresolved reconciling items with the government of Puerto Rico. |
• | The medical claims incurred of the Commercial business increased by $99.3 million during the 2009 period and its MLR increased by 2.8 percentage points during the year ended December 31, 2009. The increase in claims was partially attributed to the increase in members. The increase in the MLR is primarily due to the effect of prior period reserve developments in the 2009 and 2008 periods and higher utilization trends. Excluding the effect of prior period reserve developments, the MLR increased by 1.6 percentage points. This variance in the MLR is due to a higher than expected claims experience in the local government employees’ policy, mainly in the utilization of pharmacy and in-patient benefits, and the effect of the AH1N1 flu of approximately $4.4 million, or 0.5 percentage points. | ||
• | The medical claims incurred of the Medicare business increased by $59.2 million during the 2009 period primarily due to the higher member months enrollment of this business. The MLR for the year ended December 31, 2009 was 88.1%, 1.6 percentage points lower than 2008. The reduction in MLR is attributed to the effect of risk score premium adjustments recorded during this period, as well as premium rate increases and lower utilization trends. Excluding the effect of prior period reserve developments in the 2009 and 2008 periods, as well as premium adjustments, the MLR decreased by 4.7 percentage points, mostly due to the effect of lower medical costs resulting from an improvement in utilization trends and premium rate increases effective January 1, 2009. | ||
• | The medical claims incurred of the Reform business increased by $11.3 million and its MLR increased by 1.2 percentage points during the year ended December 31, 2009. The increase in MLR is primarily due to reserve development in the 2009 and 2008 periods and the effect of the premium adjustments to provide for unresolved reconciling items with the government of Puerto Rico. Such increase is also a result of the extension during 2009 of the current Reform contracts to all the participating insurance companies without the re-negotiation of premium rates. In addition, during 2008 we recognized a retroactive adjustment due to a reduction in capitation rates. Excluding the effect of these items in the 2009 and 2008 periods the MLR increased by 1.9 percentage points. |
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• | Medical premiums generated by the Medicare business increased by $183.1 million, or 71.6%, to $438.7 million, primarily due to an increase in member months enrollment of 300,892, or 54.3%, and a change in the mix of products. The increase in member months is the net result of an increase of 310,762, or 74.6%, in the membership of our Medicare Advantage products, mainly in dual eligible members, and a decrease of 9,870, or 7.2%, in the membership of our PDP product. | ||
• | Medical premiums generated by the Commercial business increased by $15.5 million, or 2.2%, to $734.2 million during 2008. This fluctuation is primarily the net result of an increase in the average premium rates of approximately 4.4%, offset in part by a decrease in fully-insured member months enrollment of 36,126 or 0.7%. | ||
• | Medical premiums earned of the Reform business increased by $12.6 million, or 3.8%, to $340.1 million during 2008. This fluctuation is primarily due to the increases in premium rates of approximately 10% effective on July 1, 2008 and of 8.6% during 2007, partially offset by a decrease in member months enrollment of 160,343, or 3.8%. |
• | The medical claims incurred of the Medicare business increased by $190.0 million during the 2008 period mainly as the result of the increase in member months and a higher MLR by 10.0 percentage points. The higher MLR is in part due to the effect of prior period reserve developments and to higher utilization trends. Excluding the effect of prior period reserve developments in the 2007 and 2008 periods, the MLR increased by 7.1 percentage points. The increase in utilization trends is primarily the result of higher utilization in outpatient visits and drug benefits for the dual eligible product. The higher MLR is also the result of a change in enrollment mix between dual and non-dual eligible members within the business. Member months during the year ended December 31, 2008 have a higher concentration of dual eligible members than the prior year. Dual eligible members have higher utilization and MLR than non-dual eligible members. | ||
• | The medical claims incurred of the Reform business increased by $16.9 million during the 2008 period and its MLR increased by 1.6 percentage points during the year ended December 31, 2008. The higher MLR is primarily the effect of prior period reserve developments and the retroactive premium rate increase |
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received by this business during June 2007 amounting to $2.8 million corresponding to 2006. Excluding the effect of prior period reserve developments in the 2007 and 2008 periods and considering the effect of this retroactive premium rate increase, the MLR actually decreased by 1.5 percentage points during the 2008 period. | |||
• | The medical claims incurred of the Commercial business increased by $5.3 million during the 2008 period and its MLR decreased by 1.2 percentage points during the year ended December 31, 2008. The lower MLR is primarily the result of the re-pricing or termination of less profitable groups, cost containment initiatives and lower utilization trends in drug and medical services. |
(Dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Years ended December 31, | ||||||||||||
Operating revenues: | ||||||||||||
Premiums earned, net | ||||||||||||
Premiums earned, net | $ | 106.2 | $ | 100.1 | $ | 97.4 | ||||||
Premiums earned ceded | (6.1 | ) | (7.6 | ) | (8.8 | ) | ||||||
Net premiums earned | 100.1 | 92.5 | 88.6 | |||||||||
Commission income on reinsurance | — | 0.3 | 0.3 | |||||||||
Premiums earned, net | 100.1 | 92.8 | 88.9 | |||||||||
Net investment income | 16.8 | 16.5 | 15.0 | |||||||||
Total operating revenues | 116.9 | 109.3 | 103.9 | |||||||||
Operating costs: | ||||||||||||
Policy benefits and claims incurred | 50.3 | 47.4 | 45.7 | |||||||||
Underwriting and other expenses | 52.0 | 49.4 | 47.5 | |||||||||
Total operating costs | 102.3 | 96.8 | 93.2 | |||||||||
Operating income | $ | 14.6 | $ | 12.5 | $ | 10.7 | ||||||
Additional data: | ||||||||||||
Loss ratio | 50.2 | % | 51.1 | % | 51.4 | % | ||||||
Expense ratio | 51.9 | % | 53.2 | % | 53.4 | % | ||||||
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(Dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Years ended December 31, | ||||||||||||
Operating revenues: | ||||||||||||
Premiums earned, net: | ||||||||||||
Premiums written | $ | 163.3 | $ | 168.0 | $ | 170.9 | ||||||
Premiums ceded | (67.5 | ) | (72.1 | ) | (69.1 | ) | ||||||
Change in unearned premiums | 0.4 | (2.1 | ) | (4.9 | ) | |||||||
Premiums earned, net | 96.2 | 93.8 | 96.9 | |||||||||
Net investment income | 11.7 | 12.5 | 11.8 | |||||||||
Total operating revenues | 107.9 | 106.3 | 108.7 | |||||||||
Operating costs: | ||||||||||||
Claims incurred | 47.3 | 42.1 | 44.9 | |||||||||
Underwriting and other operating expenses | 51.8 | 51.1 | 53.1 | |||||||||
Total operating costs | 99.1 | 93.2 | 98.0 | |||||||||
Operating income | $ | 8.8 | $ | 13.1 | $ | 10.7 | ||||||
Additional data: | ||||||||||||
Loss ratio | 49.2 | % | 44.9 | % | 46.3 | % | ||||||
Expense ratio | 53.8 | % | 54.5 | % | 54.8 | % | ||||||
Combined ratio | 103.0 | % | 99.4 | % | 101.1 | % | ||||||
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(dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Years ended December 31, | ||||||||||||
Sources of cash: | ||||||||||||
Net cash provided by operating activities | $ | 72.6 | $ | — | $ | 115.9 | ||||||
Net proceeds from investments sold | — | — | 1.0 | |||||||||
Proceeds from annuity contracts | 4.3 | 8.0 | 6.1 | |||||||||
Net proceeds from initial public offering | — | — | 70.3 | |||||||||
Other | — | 18.3 | — | |||||||||
Total sources of cash | 76.9 | 26.3 | 193.3 | |||||||||
Uses of cash: | ||||||||||||
Net cash used in operating activities | — | (3.0 | ) | — | ||||||||
Net purchases of investment securities | (17.3 | ) | (178.6 | ) | — | |||||||
Capital expenditures | (18.7 | ) | (22.4 | ) | (9.4 | ) | ||||||
Dividends | — | — | (2.4 | ) | ||||||||
Payments of long-term borrowings | (1.6 | ) | (1.6 | ) | (12.1 | ) | ||||||
Surrenders of annuity contracts | (7.1 | ) | (7.1 | ) | (7.4 | ) | ||||||
Repurchase and retirement of common stock | (32.3 | ) | (7.6 | ) | — | |||||||
Other | (5.6 | ) | — | (3.4 | ) | |||||||
Total uses of cash | (82.6 | ) | (220.3 | ) | (34.7 | ) | ||||||
Net (decrease) increase in cash and cash equivalents | $ | (5.7 | ) | $ | (194.0 | ) | $ | 158.6 | ||||
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• | On January 31, 2006, we issued and sold $35.0 million of our 6.7% senior unsecured notes payable due January 2021 (the 6.7% notes). The 6.7% notes were privately placed to various institutional accredited investors. The notes pay interest each month until the principal becomes due and payable. These notes can be redeemed after five years at par, in whole or in part, as determined by us. The proceeds obtained from this issuance were used to finance the acquisition of 100% of the common stock of GA Life effective January 31, 2006. | ||
• | On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes due December 2020 (the 6.6% notes). The 6.6% notes were privately placed to various institutional accredited investors. The notes pay interest each month until the principal becomes due and payable. These notes can |
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be redeemed after five years at par, in whole or in part, as determined by us. The proceeds obtained from this issuance were used to pay the ceding commission to GA Life on the effective date of the coinsurance funds withheld reinsurance agreement. | |||
• | On September 30, 2004, TSS issued and sold $50.0 million of its 6.3% senior unsecured notes due September 2019 (the 6.3% notes). The 6.3% notes are unconditionally guaranteed as to payment of principal and interest by us. The notes were privately placed to various institutional accredited investors. The notes pay interest semiannually until the principal becomes due and payable. These notes can be prepaid after five years at par, in whole or in part, as determined by TSS. Most of the proceeds obtained from this issuance were used to repay $37.0 million of short-term borrowings. The remaining proceeds were used for general business purposes. |
• | Unearned premiums – This amount accounts for the premiums collected prior to the end of coverage period and does not represent a future cash outflow. As of December 31, 2009, we had $108.3 million in unearned premiums. | ||
• | Policyholder deposits – The cash outflows related to these instruments are not included because they do not have defined maturities, such that the timing of payments and withdrawals is uncertain. There are currently |
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no significant policyholder deposits in paying status. As of December 31, 2009, our policyholder deposits had a carrying amount of $47.6 million. | |||
• | Other long-term liabilities – Due to the indeterminate nature of their cash outflows, $57.3 million of other long-term liabilities are not reflected in the following table, including $41.0 million of liability for pension benefits and $13.0 million in liabilities to the Federal Employees’ Health Benefits Plan Program. |
Contractual obligations by year | ||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||||
Long-term borrowings (1) | $ | 270.0 | $ | 11.4 | $ | 11.4 | $ | 11.3 | $ | 11.3 | $ | 11.3 | $ | 213.3 | ||||||||||||||
Operating leases | 20.1 | 4.6 | 3.3 | 2.2 | 1.7 | 1.6 | 6.7 | |||||||||||||||||||||
Purchase obligations (2) | 148.8 | 146.6 | 1.6 | 0.4 | 0.2 | — | — | |||||||||||||||||||||
Claim liabilities (3) | 360.4 | 241.4 | 68.6 | 14.5 | 13.2 | 6.7 | 16.0 | |||||||||||||||||||||
Estimated obligation for future policy benefits (4) | 1,038.3 | 77.3 | 67.0 | 62.3 | 58.9 | 55.9 | 716.9 | |||||||||||||||||||||
$ | 1,837.6 | $ | 481.3 | $ | 151.9 | $ | 90.7 | $ | 85.3 | $ | 75.5 | $ | 952.9 | |||||||||||||||
(1) | As of December 31, 2009, our long-term borrowings consist of our managed care subsidiary’s 6.3% senior unsecured notes payable (which are unconditionally guaranteed as to payment of principal, premium, if any, and interest by us), our 6.6% senior unsecured notes payable, our 6.7% senior unsecured notes payable, and a loan payable to a commercial bank. Total contractual obligations for long-term borrowings include the current maturities of long term debt. For the 6.3%, 6.6% and 6.7% senior unsecured notes, scheduled interest payments were included in the total contractual obligations for long-term borrowings until the maturity dates of the notes in 2019, 2020, and 2021, respectively. We may redeem the notes starting five years after issuance; however no redemption is considered in this schedule. The interest payments related to our loan payable were estimated using the interest rate applicable as of December 31, 2009. The actual amount of interest payments of the loans payable will differ from the amount included in this schedule due to the loans’ variable interest rate structure. See the “Financing and Financing Capacity” section for additional information regarding our long-term borrowings. | |
(2) | Purchase obligations represent payments required by us under material agreements to purchase goods or services that are enforceable and legally binding and where all significant terms are specified, including: quantities to be purchased, price provisions and the timing of the transaction. Other purchase orders made in the ordinary course of business for which we are not liable are excluded from the table above. Estimated pension plan contributions amounting to $7.0 million were included within the total purchase obligations. However, this amount is an estimate which may be subject to change in view of the fact that contribution decisions are affected by various factors such as market performance, regulatory and legal requirements and plan funding policy. | |
(3) | Claim liabilities represent the amount of our claims processed and incomplete as well as an estimate of the amount of incurred but not reported claims and loss-adjustment expenses. This amount does not include an estimate of claims to be incurred subsequent to December 31, 2009. The expected claims payments are an estimate and may differ materially from the actual claims payments made by us in the future. Also, claim liabilities are presented gross, and thus do not reflect the effects of reinsurance under which $30.7 million of reserves had been ceded at December 31, 2009. | |
(4) | Our life insurance segment establishes, and carries as liabilities, actuarially determined amounts that are calculated to meet its policy obligations when a policy matures or surrenders, an insured dies or becomes disabled or upon the occurrence of other covered events. A significant portion of the estimated obligation for future policy benefits to be paid included in this table considers contracts under which we are currently not making payments and will not make payments until the occurrence of an insurable event not under our control, such as death, illness, or the surrender of a policy. We have estimated the timing of the cash flows related to these contracts based on historical experience as well as expectations of future payment patterns. The amounts presented in the table above represent the estimated cash payments for benefits under such contracts based on assumptions related to the receipt of future premiums and assumptions related to mortality, morbidity, policy lapses, renewals, retirements, disability incidence and other contingent events as appropriate for the respective product type. All estimated cash payments included in this table are not discounted to present value nor do they |
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take into account estimated future premiums on policies in-force as of December 31, 2009 and are gross of any reinsurance recoverable. The $1,038.3 million total estimated cash flows for all years in the table is different from the liability of future policy benefits of $222.6 million included in our audited consolidated financial statements principally due to the time value of money. Actual cash payments to policyholders could differ significantly from the estimated cash payments as presented in this table due to differences between actual experience and the assumptions used in the estimation of these payments. |
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Property and | ||||||||||||||||
Managed | Life | Casualty | ||||||||||||||
(Dollar amounts in millions) | Care | Insurance | Insurance | Consolidated | ||||||||||||
Claims processed and incomplete(1) | $ | 106.0 | $ | 31.6 | $ | 48.5 | $ | 186.1 | ||||||||
Unreported losses(2) | 125.6 | 8.2 | 21.2 | 155.0 | ||||||||||||
Unpaid loss-adjustment expenses(3) | 4.8 | 0.3 | 14.2 | 19.3 | ||||||||||||
$ | 236.4 | $ | 40.1 | $ | 83.9 | $ | 360.4 | |||||||||
(1) | The liability for claims processed and incomplete represents those claims that have been incurred and reported to us that remain unpaid as of the balance sheet date. This amount includes claims that have been investigated and adjusted but have not been paid as well as those reported claims that have not gone through the investigation and adjustment process. | |
(2) | The liability for estimated unreported losses is the amount needed to provide for the estimated ultimate cost of settling those claims related to insured events that have occurred but have not been reported to us. | |
(3) | The liability for unpaid loss-adjustment expenses is the amount needed to provide for the estimated ultimate cost required to investigate and adjust claims related to insured events that have occurred as of the balance sheet date, whether or not the claims have been reported to us at that date. |
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Completion Factor1 | Claims Trend Factor2 | |||||
(Decrease) Increase | (Decrease) Increase | |||||
In unpaid claim | In claims trend | In unpaid claim | ||||
In completion factor | liabilities | factor | liabilities | |||
(0.6)% | $10.5 | (0.75)% | $10.5 | |||
(0.4)% | 7.0 | (0.50)% | 7.0 | |||
(0.2)% | 3.5 | (0.25)% | 3.5 | |||
0.2% | (3.5) | 0.25% | (3.5) | |||
0.4% | (6.9) | 0.50% | (7.0) | |||
0.6% | (10.4) | 0.75% | (10.5) |
(1) | Assumes (decrease) increase in the completion factors for the most recent twelve months. | |
(2) | Assumes (decrease) increase in the claims trend factors for the most recent twelve months. |
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(Dollar amounts in millions | 2008 | 2007 | 2006 | |||||||||
Years ended December 31, | ||||||||||||
Total incurred claims: | ||||||||||||
As reported(1) | $ | 1,348.9 | $ | 1,156.8 | $ | 1,184.3 | ||||||
On a retrospective basis | 1,352.0 | 1,149.2 | 1,160.7 | |||||||||
Variance | $ | (3.1 | ) | $ | 7.6 | $ | 23.6 | |||||
Variance to total incurred claims as reported | -0.2 | % | 0.7 | % | 2.0 | % | ||||||
(1) | Includes total claims incurred less adjustments for prior year reserve development. |
• | Through the management of our cash flows and investment portfolio. | ||
• | We have the ability to increase the premium rates throughout the year in the monthly renewal process, when renegotiating the premiums for the following contract year of each group as they become due. We consider the actual claims trend of each group when determining the premium rates for the following contract year. | ||
• | We have available short-term borrowing facilities that from time to time address differences between cash receipts and disbursements. |
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• | Identification and evaluation of securities that have possible indications of other-than-temporary impairment, which includes an analysis of all investments with gross unrealized investments losses that represent 20% or more of cost. | ||
• | Review and evaluation of any other security based on the investee’s current financial condition, liquidity, near-term recovery prospects, implications of rating agency actions, the outlook for the business sectors in which the investee operates and other factors. This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of cost. | ||
• | Consideration of evidential matter, including an evaluation of factors or triggers that may or may not cause individual investments to qualify as having other-than-temporary impairments; and | ||
• | Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision. |
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• | the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including the impact of prepayment rates on mortgages; and | ||
• | the model assumes that the composition of assets and liabilities remains unchanged throughout the year. |
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Expected | Amount of | % | ||||||||||||||
Change in Interest Rates | Fair Value | Decrease | Change | |||||||||||||
December 31, 2009: | ||||||||||||||||
Base Scenario | $ | 935.5 | ||||||||||||||
+100 bp | 885.4 | (50.1 | ) | (5.4 | )% | |||||||||||
+200 bp | 836.2 | (99.3 | ) | (10.6 | )% | |||||||||||
+300 bp | 786.7 | (148.8 | ) | (15.9 | )% | |||||||||||
December 31, 2008: | ||||||||||||||||
Base Scenario | $ | 910.7 | ||||||||||||||
+100 bp | 891.0 | (19.7 | ) | (2.2 | )% | |||||||||||
+200 bp | 844.9 | (65.8 | ) | (7.2 | )% | |||||||||||
+300 bp | 787.7 | (123.0 | ) | (13.5 | )% | |||||||||||
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• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | ||
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | ||
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. |
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Financial Statements | Description | |
F-1 | Reports of Independent Registered Public Accounting Firms | |
F-2 | Consolidated Balance Sheets as of December 31, 2009 and 2008 | |
F-3 | Consolidated Statements of Earnings for the years ended December 31, 2009, 2008 and 2007 | |
F-4 | Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007 | |
F-5 | Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 | |
F-7 | Notes to Consolidated Financial Statements – December 31, 2009, 2008 and 2007 |
Financial Statements | Description | |
Schedules | ||
S-1 | Schedule II – Condensed Financial Information of the Registrant | |
S-2 | Schedule III – Supplementary Insurance Information |
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Financial Statements | Description | |
Schedules | ||
S-3 | Schedule IV – Reinsurance | |
S-4 | Schedule V – Valuation and Qualifying Accounts |
Exhibits | Description | |
3(i)(a) | Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3(i)(d) to TSM’s Annual Report on Form 10-K for the Year Ended December 31, 2007 (File No. 001-33865). | |
3(i)(b) | Amendment to Article Tenth of the Amended and Restated Articles of Incorporation of Triple-S Management Corporation, incorporated by reference to Exhibit 3(i)(b) to TSM’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-33865). | |
3(i)(c) | Articles of Incorporation of Triple-S Management Corporation, as currently in effect, incorporated by reference to Exhibit 3(i)(c) to TSM’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-33865). | |
3(ii) | Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to TSM’s Current Report on Form 8-K filed on October 23, 2007 (File No. 001-33865)). | |
10.1 | Agreement between the Puerto Rico Health Insurance Administration and TSS for the provision of health insurance coverage to eligible population in the North and South-West Regions (incorporated herein by reference to Exhibit 10.1 to TSM's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2008 (File No. 001-33865)). | |
10.2 | Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS for the provision of health insurance coverage to eligible population in the North and South-West regions (incorporated herein by reference to Exhibit 10.3 of TSM's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2009 (File No. 001-33865)). | |
10.3* | Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS for the provision of health insurance coverage to eligible population in the North and South-West. | |
10.4 | Agreement between the Puerto Rico Health Insurance Administration and TSS to act as Third Party Administrator in the Metro-North Region (incorporated herein by reference to Exhibit 10.17 to TSM's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-33865)). | |
10.5* | Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS. to act as Third Party Administrator in the Metro-North Region. | |
10.6 | Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS for the provision of the wraparound coverage for the Government health insurance dual eligible population (incorporated herein by reference to Exhibit 10.4 of TSM's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2009 (File No. 001-33865)). |
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Exhibits | Description | |
10.7 | Federal Employees Health Benefits Contract (incorporated herein by reference to Exhibit 10.5 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)). | |
10.8 | Credit Agreement with FirstBank Puerto Rico in the amount of $41,000,000 (incorporated herein by reference to Exhibit 10.6 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)). | |
10.9 | Credit Agreement with FirstBank Puerto Rico in the amount of $20,000,000 (incorporated herein by reference to Exhibit 10.7 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)). | |
10.10 | Non-Contributory Retirement Program (incorporated herein by reference to Exhibit 10.8 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)). | |
10.11* | Blue Shield License Agreement by and between BCBSA and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting. | |
10.12* | Blue Shield Controlled Affiliate License Agreement by and among BCBSA, TSS and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting. | |
10.13* | Blue Cross License Agreements by and between BCBSA and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting. | |
10.14* | Blue Cross Controlled Affiliate License Agreement by and among BCBSA, TSS and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting. | |
10.15 | 6.30% Senior Unsecured Notes Due September 2019 Note Purchase Agreement, dated September 30, 2004, between Triple-S Management Corporation, Triple-S, Inc. and various institutional accredited investors (incorporated herein by reference to Exhibit 10.15 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-33865)). | |
10.16 | 6.60% Senior Unsecured Notes Due December 2020 Note Purchase Agreement, dated December 15, 2005, between Triple-S Management Corporation and various institutional accredited investors (incorporated herein by reference to Exhibit 10.16 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-33865)). | |
10.17 | 6.70% Senior Unsecured Notes Due December 2021 Note Purchase Agreement, dated January 23, 2006, between Triple-S Management Corporation and various institutional accredited investors (incorporated herein by reference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2006 (File No. 001-33865)). | |
10.18 | TSM 2007 Incentive Plan, dated October 16, 2007 (incorporated herein by reference to Exhibit C to TSM’s 2007 Proxy Statement (File No. 001-33865)). | |
10.19 | Software License and Maintenance Agreement between Quality Care Solutions, Inc, and TSS dated August 16, 2007 (incorporated herein by reference to Exhibit 10.15 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)). | |
10.20 | Addendum Number One to the Software License and Maintenance Agreement between Quality Care Solutions, Inc, and TSS (incorporated herein by reference to Exhibit 10.15(a) to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)). |
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Exhibits | Description | |
10.21 | Addendum Number Two to the Software License and Maintenance | |
Agreement between Quality Care Solutions, Inc, and TSS | ||
(incorporated herein by reference to Exhibit 10.15(b) to TSM’s | ||
Annual Report on Form 10-K for the year ended December 31, 2007 | ||
(File No. 001-33865)). | ||
10.22 | Addendum Number Three to the Software License and Maintenance | |
Agreement between Quality Care Solutions, Inc, and TSS | ||
(incorporated herein by reference to Exhibit 10.15(c) to TSM’s | ||
Annual Report on Form 10-K for the year ended December 31, 2007 | ||
(File No. 001-33865)). | ||
10.23 | Work Order Agreement between Quality Care Solutions, Inc. and TSS | |
(incorporated herein by reference to Exhibit 10.16 to TSM’s Annual | ||
Report on Form 10-K for the year ended December 31, 2007 (File No. | ||
001-33865)). | ||
10.24* | Employment Contract between Ramón M. Ruiz Comas and TSM. | |
11.1 | Statement re computation of per share earnings; an exhibit | |
describing the computation of the earnings per share has been | ||
omitted as the detail necessary to determine the computation of | ||
earnings per share can be clearly determined from the material | ||
contained in Part II of this Annual Report on Form 10-K. | ||
12.1 | Statement re computation of ratios; an exhibit describing the | |
computation of the loss ratio, expense ratio and combined ratio has | ||
been omitted as the detail necessary to determine the computation | ||
of the loss ratio, operating expense ratio and combined ratio can | ||
be clearly determined from the material contained in Part II of | ||
this Annual Report on Form 10-K. | ||
21* | List of Subsidiaries of TSM. | |
23.1* | Consent of Independent Registered Public Accounting Firm | |
(PricewaterhouseCoopers LLP). | ||
23.2* | Consent of Independent Registered Public Accounting Firm (KPMG LLP). | |
31.1* | Certification of the President and Chief Executive Officer required | |
by Rule 13a-14(a)/15d-14(a). | ||
31.2* | Certification of the Vice President of Finance and Chief Financial | |
Officer required by Rule 13a-14(a)/15d-14(a). | ||
32.1* | Certification of the President and Chief Executive Officer required | |
pursuant to 18 U.S. Section 1350. | ||
32.2* | Certification of the Vice President of Finance and Chief Financial | |
Officer required pursuant to 18 U.S. Section 1350. |
* | Filed herein. |
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Registrant
By: | /s/ Ramón M. Ruiz-Comas | Date: | March 5, 2010 | |||||||
President and Chief Executive Officer | ||||||||||
By: | /s/ Juan J. Román Vice President of Finance and Chief Financial Officer, Principal Accounting Officer | Date: | March 5, 2010 |
By: | /s/ Luis A. Clavell-Rodríguez, MD | Date: | March 5, 2010 | |||||||
Director and Chairman of the Board | ||||||||||
By: | /s/ Vicente J. León-Irizarry, CPA | Date: | March 5, 2010 | |||||||
Director and Vice-Chairman of the Board | ||||||||||
By: | /s/ Jesús R. Sánchez-Colón, DMD | Date: | March 5, 2010 | |||||||
Director and Secretary of the Board | ||||||||||
By: | /s/ Adamina Soto-Martínez, CPA | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ Ms. Carmen Ana Culpeper-Ramírez | Date: | March 5, 2010 | |||||||
Director |
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By: | /s/ Jorge L. Fuentes-Benejam, PE | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ Mr. Antonio F. Faría-Soto | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ Manuel Figueroa-Collazo, PE, Ph.D. | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ José Hawayek-Alemañy, MD | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ Jaime Morgan-Stubbe, Esq. | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ Roberto Muñoz-Zayas, MD | Date: | March 5, 2010 | |||||||
Director | ||||||||||
By: | /s/ Juan E. Rodríguez-Díaz, Esq. | Date: | March 5, 2010 | |||||||
Director |
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Table of Contents
Page(s) | ||||
1 | ||||
3 | ||||
4 | ||||
5—65 |
Table of Contents
/s/ PricewaterhouseCoopers LLP | ||||
San Juan, Puerto Rico March 5, 2010 | ||||
(OF PUERTO RICO)
License No. 216 Expires December 1, 2010
Stamp 2389700 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
1
Table of Contents
Triple-S Management Corporation:
Society of Certified Public Accountants
was affixed to the record copy of this report.
2
Table of Contents
December 31, 2009 and 2008
(dollar amounts in thousands, except per share data) | 2009 | 2008 | ||||||
Assets | ||||||||
Investments and cash | ||||||||
Equity securities held for trading, at fair value (cost of $42,075 in 2009 and $40,847 in 2008) | $ | 43,909 | $ | 32,184 | ||||
Securities available for sale, at fair value: | ||||||||
Fixed maturities (amortized cost of $911,362 in 2009 and $879,663 in 2008) | 918,977 | 887,684 | ||||||
Equity securities (cost of $61,531 in 2009 and $70,054 in 2008) | 64,689 | 68,629 | ||||||
Securities held to maturity, at amortized cost: | ||||||||
Fixed maturities (fair value of $16,490 in 2009 and $23,063 in 2008) | 15,794 | 21,753 | ||||||
Policy loans | 5,940 | 5,451 | ||||||
Cash and cash equivalents | 40,376 | 46,095 | ||||||
Total investments and cash | 1,089,685 | 1,061,796 | ||||||
Premium and other receivables, net | 272,932 | 237,158 | ||||||
Deferred policy acquisition costs and value of business acquired | 139,917 | 126,347 | ||||||
Property and equipment, net | 68,803 | 58,448 | ||||||
Deferred tax asset | 37,551 | 35,926 | ||||||
Other assets | 39,816 | 39,515 | ||||||
Total assets | $ | 1,648,704 | $ | 1,559,190 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Claim liabilities | 360,446 | 323,710 | ||||||
Liability for future policy benefits | 222,619 | 207,545 | ||||||
Unearned premiums | 108,342 | 110,141 | ||||||
Policyholder deposits | 47,563 | 48,684 | ||||||
Liability to Federal Employees’ Health Benefits Program | 13,002 | 11,157 | ||||||
Accounts payable and accrued liabilities | 139,161 | 148,713 | ||||||
Deferred tax liability | 11,088 | 10,731 | ||||||
Borrowings | 167,667 | 169,307 | ||||||
Liability for pension benefits | 41,044 | 44,103 | ||||||
Total liabilities | 1,110,932 | 1,074,091 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity | ||||||||
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 9,042,809 at December 31, 2009 and 2008 | 9,043 | 9,043 | ||||||
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 20,110,391 and 22,104,989 shares at December 31, 2009 and 2008, respectively | 20,110 | 22,105 | ||||||
Additional paid-in capital | 159,303 | 179,504 | ||||||
Retained earnings | 360,892 | 292,112 | ||||||
Accumulated other comprehensive loss, net | (11,576 | ) | (17,665 | ) | ||||
Total stockholders’ equity | 537,772 | 485,099 | ||||||
Total liabilities and stockholders’ equity | $ | 1,648,704 | $ | 1,559,190 | ||||
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Years Ended December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
Revenues | ||||||||||||
Premiums earned, net | $ | 1,876,072 | $ | 1,695,457 | $ | 1,483,548 | ||||||
Administrative service fees | 48,643 | 19,187 | 14,018 | |||||||||
Net investment income | 52,136 | 56,253 | 47,194 | |||||||||
Total operating revenues | 1,976,851 | 1,770,897 | 1,544,760 | |||||||||
Net realized investment gains (losses): | ||||||||||||
Total other-than-temporary impairment losses on securities | (7,118 | ) | (16,494 | ) | (1,087 | ) | ||||||
Net realized gains, excluding other-than-temporary impairment losses on securities | 7,732 | 2,554 | 7,018 | |||||||||
Total net realized investment gains (losses) | 614 | (13,940 | ) | 5,931 | ||||||||
Net unrealized investment gain (loss) on trading securities | 10,497 | (21,064 | ) | (4,116 | ) | |||||||
Other income (loss), net | 1,237 | (2,467 | ) | 3,217 | ||||||||
Total revenues | 1,989,199 | 1,733,426 | 1,549,792 | |||||||||
Benefits and expenses | ||||||||||||
Claims incurred | 1,612,860 | 1,434,914 | 1,223,775 | |||||||||
Operating expenses | 279,418 | 251,887 | 237,533 | |||||||||
Total operating costs | 1,892,278 | 1,686,801 | 1,461,308 | |||||||||
Interest expense | 13,270 | 14,681 | 15,839 | |||||||||
Total benefits and expenses | 1,905,548 | 1,701,482 | 1,477,147 | |||||||||
Income before taxes | 83,651 | 31,944 | 72,645 | |||||||||
Income tax expense (benefit) | ||||||||||||
Current | 19,197 | 11,542 | 15,906 | |||||||||
Deferred | (4,326 | ) | (4,388 | ) | (1,779 | ) | ||||||
Total income taxes | 14,871 | 7,154 | 14,127 | |||||||||
Net income | $ | 68,780 | $ | 24,790 | $ | 58,518 | ||||||
Basic net income per share | $ | 2.33 | $ | 0.77 | $ | 2.15 | ||||||
Diluted net income per share | $ | 2.33 | $ | 0.77 | $ | 2.15 |
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December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Accumulated | ||||||||||||||||||||||||
Class A | Class B | Additional | Other | Total | ||||||||||||||||||||
Common | Common | Paid-in | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||
Stock | Stock | Capital | Earnings | Income (Loss) | Equity | |||||||||||||||||||
Balance, December 31, 2006 | $ | 26,733 | $ | — | $ | 124,031 | $ | 211,266 | $ | (19,431 | ) | $ | 342,599 | |||||||||||
Dividends declared | — | — | — | (2,448 | ) | — | (2,448 | ) | ||||||||||||||||
Sale of stock in public offering | (10,813 | ) | 16,100 | 64,992 | — | — | 70,279 | |||||||||||||||||
Grant of restricted Class B common stock | — | 166 | — | — | — | 166 | ||||||||||||||||||
Share-based compensation | 34 | 34 | ||||||||||||||||||||||
Other | 123 | — | (122 | ) | — | — | 1 | |||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net income | — | — | — | 58,518 | — | 58,518 | ||||||||||||||||||
Net unrealized change in fair value | ||||||||||||||||||||||||
of available for sale securities | — | — | — | — | 9,549 | 9,549 | ||||||||||||||||||
Defined benefit pension plan | ||||||||||||||||||||||||
Prior service cost, net | — | — | — | — | 3,935 | 3,935 | ||||||||||||||||||
Actuarial loss | — | — | — | — | 155 | 155 | ||||||||||||||||||
Net change in fair value of cash | ||||||||||||||||||||||||
flow hedges | — | — | — | — | (250 | ) | (250 | ) | ||||||||||||||||
Total comprehensive income | 71,907 | |||||||||||||||||||||||
Balance, December 31, 2007 | 16,043 | 16,266 | 188,935 | 267,336 | (6,042 | ) | 482,538 | |||||||||||||||||
Conversion of Class A common stock to Class B common stock | (7,000 | ) | 7,000 | — | — | — | — | |||||||||||||||||
Share-based compensation | — | — | 3,268 | — | — | 3,268 | ||||||||||||||||||
Grant of restricted Class B common stock | — | 20 | — | — | — | 20 | ||||||||||||||||||
Repurchase and retirement of common stock | — | (1,181 | ) | (12,699 | ) | — | — | (13,880 | ) | |||||||||||||||
Other | — | — | — | (14 | ) | — | (14 | ) | ||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net income | — | — | — | 24,790 | — | 24,790 | ||||||||||||||||||
Net unrealized change in fair value | ||||||||||||||||||||||||
of available for sale securities | — | — | — | — | (3,952 | ) | (3,952 | ) | ||||||||||||||||
Defined benefit pension plan | ||||||||||||||||||||||||
Prior service credit, net | — | — | — | — | (266 | ) | (266 | ) | ||||||||||||||||
Actuarial loss | — | — | — | — | (7,349 | ) | (7,349 | ) | ||||||||||||||||
Net change in fair value of cash | ||||||||||||||||||||||||
flow hedges | — | — | — | — | (56 | ) | (56 | ) | ||||||||||||||||
Total comprehensive income | 13,167 | |||||||||||||||||||||||
Balance, December 31, 2008 | 9,043 | 22,105 | 179,504 | 292,112 | (17,665 | ) | 485,099 | |||||||||||||||||
Share-based compensation | — | — | 3,897 | — | — | 3,897 | ||||||||||||||||||
Grant of restricted Class B common stock | — | 27 | — | — | — | 27 | ||||||||||||||||||
Repurchase and retirement of common stock | — | (2,022 | ) | (24,098 | ) | — | — | (26,120 | ) | |||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net income | — | — | — | 68,780 | — | 68,780 | ||||||||||||||||||
Net unrealized change in fair value | ||||||||||||||||||||||||
of available for sale securities | — | — | — | — | 3,539 | 3,539 | ||||||||||||||||||
Defined benefit pension plan | ||||||||||||||||||||||||
Prior service credit, net | — | — | — | — | (273 | ) | (273 | ) | ||||||||||||||||
Actuarial gain | — | — | — | — | 2,823 | 2,823 | ||||||||||||||||||
Total comprehensive income | 74,869 | |||||||||||||||||||||||
Balance, December 31, 2009 | $ | 9,043 | $ | 20,110 | $ | 159,303 | $ | 360,892 | $ | (11,576 | ) | $ | 537,772 | |||||||||||
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Statements of Cash Flows
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 68,780 | $ | 24,790 | $ | 58,518 | ||||||
Adjustments to reconcile net income to net cash | ||||||||||||
provided by (used in) operating activities | ||||||||||||
Depreciation and amortization | 9,643 | 7,367 | 7,562 | |||||||||
Net amortization of investments | 744 | 952 | 354 | |||||||||
Provision (reversal of provision) for doubtful receivables | 10,489 | (1,180 | ) | (2,305 | ) | |||||||
Deferred tax benefit | (4,326 | ) | (4,388 | ) | (1,779 | ) | ||||||
Net realized investment gains (losses) | (614 | ) | 13,940 | (5,931 | ) | |||||||
Net unrealized (gain) loss on trading securities | (10,497 | ) | 21,064 | 4,116 | ||||||||
Share-based compensation | 3,924 | 3,268 | 200 | |||||||||
Proceeds from trading securities sold | ||||||||||||
Equity securities | 4,240 | 24,640 | 43,614 | |||||||||
Acquisition of securities in trading portfolio | ||||||||||||
Equity securities | (6,132 | ) | (10,737 | ) | (23,921 | ) | ||||||
Gain on sale of property and equipment | — | 11 | 28 | |||||||||
(Increase) decrease in assets | ||||||||||||
Premium and other receivables, net | (46,263 | ) | (32,210 | ) | (34,337 | ) | ||||||
Deferred policy acquisition costs and value of business acquired | (13,570 | ) | (9,108 | ) | (5,822 | ) | ||||||
Other deferred taxes | 900 | (8,337 | ) | — | ||||||||
Other assets | (1,593 | ) | (933 | ) | (13,213 | ) | ||||||
Increase (decrease) in liabilities | ||||||||||||
Claim liabilities | 36,736 | (30,120 | ) | 39,148 | ||||||||
Liability for future policy benefits | 15,074 | 13,414 | 13,711 | |||||||||
Unearned premiums | (1,799 | ) | (22,458 | ) | 19,017 | |||||||
Policyholder deposits | 1,665 | 1,902 | 1,800 | |||||||||
Liability to FEHBP | 1,845 | (10,181 | ) | 7,775 | ||||||||
Accounts payable and accrued liabilities | 3,339 | 15,322 | 7,359 | |||||||||
Net cash provided by (used in) operating activities | 72,585 | (2,982 | ) | 115,894 | ||||||||
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Table of Contents
Consolidated Statements of Cash Flows
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | 2008 | 2007 | ||||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from investments sold or matured | ||||||||||||
Securities available for sale | ||||||||||||
Fixed maturities sold | $ | 241,368 | $ | 228,436 | $ | 299,561 | ||||||
Fixed maturities matured | 189,144 | 91,732 | 41,248 | |||||||||
Equity securities sold | 9,877 | 4,450 | 1,000 | |||||||||
Securities held to maturity | ||||||||||||
Fixed maturities matured | 7,819 | 22,875 | 13,246 | |||||||||
Acquisition of investments | ||||||||||||
Securities available for sale | ||||||||||||
Fixed maturities | (459,705 | ) | (505,896 | ) | (327,409 | ) | ||||||
Equity securities | (3,684 | ) | (19,636 | ) | (18,379 | ) | ||||||
Securities held to maturity | ||||||||||||
Fixed maturities | (1,502 | ) | (554 | ) | (8,244 | ) | ||||||
Net (disbursements) repayment for policy loans | (489 | ) | 30 | (287 | ) | |||||||
Capital expenditures | (18,706 | ) | (22,411 | ) | (9,390 | ) | ||||||
Net cash used in investing activities | (35,878 | ) | (200,974 | ) | (8,654 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Repurchase and retirement of common stock | (32,355 | ) | (7,645 | ) | — | |||||||
Change in outstanding checks in excess of bank balances | (5,645 | ) | 18,353 | (3,076 | ) | |||||||
Repayments of borrowings | (1,640 | ) | (1,639 | ) | (12,141 | ) | ||||||
Proceeds from annuity contracts | 4,307 | 8,018 | 6,150 | |||||||||
Surrenders of annuity contracts | (7,093 | ) | (7,195 | ) | (7,416 | ) | ||||||
Net proceeds from initial public offering | — | — | 70,279 | |||||||||
Dividends | — | — | (2,448 | ) | ||||||||
Other | — | 6 | 1 | |||||||||
Net cash (used in) provided by financing activities | (42,426 | ) | 9,898 | 51,349 | ||||||||
Net (decrease) increase in cash and cash equivalents | (5,719 | ) | (194,058 | ) | 158,589 | |||||||
Cash and cash equivalents | ||||||||||||
Beginning of year | 46,095 | 240,153 | 81,564 | |||||||||
End of year | $ | 40,376 | $ | 46,095 | $ | 240,153 | ||||||
7
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
1. | Nature of Business |
Triple-S Management Corporation (the Company or TSM) was incorporated under the laws of the Commonwealth of Puerto Rico on January 17, 1997 to engage, among other things, as the holding company of entities primarily involved in the insurance industry. | ||
The Company has the following wholly owned subsidiaries that are subject to the regulations of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance): (1) Triple-S Salud, Inc. (TSS) a managed care organization that provides health benefits services to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations; (2) Triple-S Vida, Inc. (TSV), which is engaged in the underwriting of life and accident and health insurance policies and the administration of annuity contracts; and (3) Triple-S Propiedad, Inc. (TSP), which is engaged in the underwriting of property and casualty insurance policies. The Company and TSS are members of the Blue Cross and Blue Shield Association (BCBSA). | ||
The Company also has two other wholly owned subsidiaries, Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TC). ISI is mainly engaged in providing data processing services to the Company and its subsidiaries. TC is mainly engaged as a third-party administrator for TSS in the administration of the Commonwealth of Puerto Rico Health Care Reform’s (the Reform) business. Also, TC provides healthcare advisory services to TSS and other health insurance-related services to the health insurance industry. | ||
A substantial majority of the Company’s business activity is with insurers located throughout Puerto Rico, and as such, the Company is subject to the risks associated with the Puerto Rico economy. |
2. | Significant Accounting Policies |
The following are the significant accounting policies followed by the Company and its subsidiaries: | ||
Basis of Presentation | ||
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). | ||
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. | ||
Use of Estimates | ||
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The most significant items on the consolidated balance sheets that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the near future are the assessment of other-than-temporary impairments, allowance for doubtful receivables, deferred policy acquisition costs and value of business acquired, claim liabilities, the liability for future policy benefits, and liability for pension benefits. As additional information becomes available (or actual amounts are determinable), the recorded estimates are revised and reflected in operating results of the period they are determined. |
8
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Although some variability is inherent in these estimates, the Company believes the amounts provided are adequate. | ||
Reclassifications | ||
Certain amounts in the 2008 and 2007 consolidated financial statements were reclassified to conform to the 2009 presentation. | ||
Cash Equivalents | ||
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents of $920 and $2,564 at December 31, 2009 and 2008, respectively, consist principally of obligations of government-sponsored enterprises and certificates of deposit with an initial term of less than three months. | ||
Investments | ||
Investment in securities at December 31, 2009 and 2008 consists mainly of obligations of government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, obligations of the Commonwealth of Puerto Rico and its instrumentalities, municipal securities, obligations of states of the United States and political subdivisions of the states, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, and equity securities. The Company classifies its debt and equity securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Securities classified as held to maturity are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held to maturity are classified as available for sale. | ||
Trading and available-for-sale securities are recorded at fair value. The fair values of debt securities (both available for sale and held to maturity investments) and equity securities are based on quoted market prices for those or similar investments at the reporting date. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts, respectively. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are included in earnings and are determined on a specific-identification basis. | ||
Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of other comprehensive income. The unrealized holding gains or losses included in the separate component of other comprehensive income for securities transferred from available for sale to held to maturity, are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. | ||
If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings. For impaired fixed maturity |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
securities that the Company does not intend to sell or it is more likely than not that such securities will not have to be sold, but the Company expects not to fully recover the amortized cost basis, the credit component of the other-than temporary impairment is recognized in other-than-temporary impairment losses recognized in earnings in the Company’s consolidated income statements and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income. Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income. | ||
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition. | ||
The unrealized gains or losses on the Company’s equity securities classified as available-for-sale are included in accumulated other comprehensive income as a separate component of stockholders’ equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such equity securities until their full cost can be recovered, in which case such equity securities are written down to fair value and the loss is charged to other-than-temporary impairment losses recognized in earnings | ||
A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, market conditions, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. | ||
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. | ||
The Company regularly invests in mortgaged-backed securities and other securities subject to prepayment and call risk. Significant changes in prevailing interest rates may adversely affect the timing and amount of cash flows on such securities. In addition, the amortization of market premium and accretion of market discount for mortgaged-backed securities is based on historical experience and estimates of future payment speeds on the underlying mortgage loans. Actual prepayment speeds will differ from original estimates and may result in material adjustments to amortization or accretion recorded in future periods. | ||
Revenue Recognition |
a. | Managed Care |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Subscriber premiums on the managed care business are billed in advance of their respective coverage period and the related revenue is recorded as earned during the coverage period. Managed care premiums are billed in the month prior to the effective date of the policy with a grace period of up to two months. If the insured fails to pay, the policy can be canceled at the end of the grace period at the option of the Company. Managed care premiums are reported as earned when due. | |||
Premiums for the Medicare Advantage (MA) business are based on a bid contract with the Centers for Medicare and Medicaid Services (CMS) and billed in advance of the coverage period. MA contracts provide for a risk factor to adjust premiums paid for members that represent a higher or lower risk to the Company. Retroactive rate adjustments are made periodically based on the aggregate health status and risk scores of the Company’s MA membership. These risk adjustments are evaluated quarterly based on actuarial estimates. Actual results could differ from these estimates. As additional information becomes available, the recorded estimate is revised and reflected in operating results. | |||
TSS offers prescription drug coverage to Medicare eligible beneficiaries as part of its MA plans (MA-PD) and on a stand-alone basis (stand-alone PDP). Premiums are based on a bid contract with CMS that considers the estimated costs of providing prescription drug benefits to enrolled participants. MA-PD and stand-alone PDP premiums are subject to adjustment, positive or negative, based upon the application of risk corridors that compare the estimated prescription drug costs included in the bids to CMS to actual prescription drug costs. Variances exceeding certain thresholds may result in CMS making additional payments to the TSS or in TSS refunding CMS a portion of the premiums collected. TSS estimates and records adjustments to earned premiums related to estimated risk corridor payments based upon actual prescription drug costs for each reporting period as if the annual contract were to end at the end of each reporting period. | |||
Administrative service fees include revenue from certain groups, including the Reform Metro-North Region contract, which has managed care contracts that provide for the group to be at risk for all or a portion of their claims experience. For these groups, the Company is not at risk and only handles the administration of the insurance coverage for an administrative service fee. The Company pays claims under self-funded arrangements from its own funds, and subsequently receives reimbursement from these groups. Claims paid under self-funded arrangements are excluded from the claims incurred in the accompanying consolidated financial statements. Administrative service fees under the self-funded arrangements are recognized based on the group’s membership or incurred claims for the period multiplied by an administrative fee rate plus other fees. In addition, some of these self-funded groups purchase aggregate and/or specific stop-loss coverage. In exchange for a premium, the group’s aggregate liability or the group’s liability on any one episode of care is capped for the year. Premiums for the stop-loss coverage are actuarially determined based on experience and other factors and are recorded as earned over the period of the contract in proportion to the coverage provided. This fully insured portion of premiums is included within the premiums earned, net in the accompanying consolidated statements of earnings. The contract for the Metro-North Region contains a savings-sharing provision whereby the Commonwealth of Puerto Rico shares with TSS a portion of the medical cost savings obtained with the administration of the contract. Any savings-sharing amount is recorded when earned as administrative service fees in the accompanying consolidated statements of earnings. | |||
b. | Life and Accident and Health Insurance | ||
Premiums on life insurance policies are billed in advance of their respective coverage period and the related revenue is recorded as earned when due. Premiums on accident and health and other short-term policies are recognized as earned primarily on a pro rata basis over the |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
contract period. Premiums on credit life policies are recognized as earned in proportion to the amounts of insurance in-force. Revenues from universal life and interest sensitive policies represent amounts assessed against policyholders, including mortality charges, surrender charges actually paid, and earned policy service fees. The revenues for limited payment contracts are recognized over the period that benefits are provided rather than on collection of premiums. | |||
c. | Property and Casualty Insurance | ||
Premiums on property and casualty contracts are billed in advance of their respective coverage period and they are recognized as earned on a pro rata basis over the policy term. The portion of premiums related to the period prior to the end of coverage is recorded in the consolidated balance sheets as unearned premiums and is transferred to premium revenue as earned. |
Allowance for Doubtful Receivables |
The allowance for doubtful receivables is based on management’s evaluation of the aging of accounts and such other factors, which deserve current recognition. Actual results could differ from these estimates. Receivables are charged against their respective allowance accounts when deemed to be uncollectible. |
Deferred Policy Acquisition Costs and Value of Business Acquired |
Certain direct costs for acquiring life and accident and health, and property and casualty insurance business are deferred by the Company. Substantially all acquisition costs related to the managed care business are expensed as incurred. |
In the life and accident and health business deferred acquisition costs consist of commissions and certain expenses related to the production of life, annuity, accident and health, and credit business. In the event that future premiums, in combination with policyholder reserves and anticipated investment income, could not provide for all future maintenance and settlement expenses, the amount of deferred policy acquisition costs would be reduced to provide for such amount. The related amortization is provided over the anticipated premium-paying period of the related policies in proportion to the ratio of annual premium revenue to expected total premium revenue to be received over the life of the policies. Interest is considered in the amortization of deferred policy acquisition cost and value of business acquired. For these contracts interest is considered at a level rate, at the time of issue of each contract, currently 5.4%, and, in the case of the value of business acquired, at the time of any acquisition. For certain other long-duration contracts, deferred amounts are amortized at historical and forecasted credited interest rates. Expected premium revenue is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated net realizable value. In determining estimated net realizable value, the computations give effect to the premiums to be earned, related investment income, losses and loss-adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Costs deferred on universal life and interest sensitive products are amortized as a level percentage of the present value of anticipated gross profits from investment yields, mortality, expenses and surrender charges. Estimates used are based on the Company’s experience as adjusted to provide for possible adverse deviations. These estimates are periodically reviewed and compared with actual experience. When it is determined that future expected experience differs significantly from that assumed, the estimates are revised for current and future issues. |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
The value assigned to the insurance in-force of TSV at the date of the acquisition is amortized using methods similar to those used to amortize the deferred policy acquisition costs of the life and accident and health business. |
In the property and casualty business, acquisition costs consist of commissions incurred during the production of business and are deferred and amortized ratably over the terms of the policies. |
Property and Equipment |
Property and equipment are stated at cost. Maintenance and repairs are expensed as incurred. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Costs of computer equipment, programs, systems, installations, and enhancements are capitalized and amortized straight-line over their estimated useful lives. The following is a summary of the estimated useful lives of the Company’s property and equipment: |
Estimated | ||
Asset Category | Useful Life | |
Buildings Building improvements Leasehold improvements Office furniture Computer software Computer equipment, equipment, and automobiles | 20 to 50 years 3 to 5 years Shorter of estimated useful life or lease term 5 years 3 to 10 years 3 years |
Software Development Costs |
Costs related to software developed or obtained for internal use that is incurred in the preliminary project stage are expensed as incurred. Once capitalization criteria are met, directly attributable development costs are capitalized and amortized over the expected useful life of the software. Upgrade and maintenance costs are expensed as incurred. During the year ended December 31, 2009 and 2008 the Company capitalized approximately $10,993 and $16,408 associated with the implementation of new software. No software development costs were capitalized during the year ended December 31, 2007. |
Long-Lived Assets |
Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheets. |
Goodwill and intangible assets that have indefinite useful lives are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. For goodwill, the impairment determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. |
Claim Liabilities |
Claim liabilities for managed care policies represent the estimated amounts to be paid to providers based on experience and accumulated statistical data. Loss-adjustment expenses related to such claims are currently accrued based on estimated future expenses necessary to process such claims. |
TSS contracts with various independent practice associations (IPAs) for certain medical care services provided to some policies subscribers. The IPAs are compensated on a capitation basis. In the Reform business and one of the MA policies, TSS retains a portion of the capitation payments to provide for incurred but not reported losses. At December 31, 2009 and 2008, total withholdings and capitation payable amounted to $25,568 and $24,462, respectively, which are recorded as part of the claim liabilities in the accompanying consolidated balance sheets. |
Claim liabilities include unpaid claims and loss-adjustment expenses of the life and accident and health business based on a case-basis estimate for reported claims, and on estimates, based on experience, for unreported claims and loss-adjustment expenses. The liability for policy and contract claims and claims expenses has been established to cover the estimated net cost of insured claims. |
Also included within the claim liabilities is the liability for losses and loss-adjustment expenses for the property and casualty business represents individual case estimates for reported claims and estimates for unreported losses, net of any salvage and subrogation based on past experience modified for current trends and estimates of expenses for investigating and settling claims. |
The above liabilities are necessarily based on estimates and, while management believes that the amounts are adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in the consolidated statements of earnings in the period determined. |
Future Policy Benefits |
The liability for future policy benefits has been computed using the level-premium method based on estimated future investment yield, mortality, morbidity and withdrawal experience. The interest rate assumption ranges between 5.0% and 5.40% for all years in issue. Mortality has been calculated principally on select and ultimate tables in common usage in the industry. Withdrawals have been determined principally based on industry tables, modified by Company’s experience. |
Policyholder Deposits |
Amounts received for annuity contracts are considered deposits and recorded as a liability along with the accrued interest and reduced for charges and withdrawals. Interest incurred on such |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
deposits, which amounted to $1,665, $1,902, and $1,800, during the years ended December 31, 2009, 2008, and 2007, respectively, is recorded as interest expense in the accompanying consolidated statements of earnings. |
Reinsurance |
In the normal course of business, the insurance-related subsidiaries seek to limit their exposure that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. |
Reinsurance premiums, commissions, and expense reimbursements, related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Accordingly, reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of insurance protection provided. |
Premiums ceded and recoveries of losses and loss-adjustment expenses have been reported as a reduction of premiums earned and losses and loss-adjustment expenses incurred, respectively. Commission and expense allowances received by TSP in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. |
Derivative Instruments and Hedging Activities |
The Company recognizes all derivative instruments, including certain derivative instruments embedded in other contracts, whether or not designated in hedging relationships, as either assets or liabilities in the balance sheet at their respective fair values. Changes in the fair value of derivative instruments are recorded in earnings, unless specific hedge accounting criteria are met in which case the change in fair value of the instrument is recorded within other comprehensive income for cash flow hedges. |
On the date the derivative contract designated as a hedging instrument is entered into, the Company designates the instrument as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair-value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge), a foreign currency fair-value or cash-flow hedge (foreign-currency hedge), or a hedge of a net investment in a foreign operation. For all hedging relationships the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that are designated as fair-value, cash-flow, or foreign-currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
hedge are recorded in other comprehensive income to the extent that the derivative is effective as hedge, until earnings are affected by the variability in cash flows of the designated hedged item. Changes in the fair value of derivatives that are highly effective as hedges and that are designated and qualify as foreign-currency hedges are recorded in either earnings or other comprehensive income, depending on whether the hedge transaction is a fair-value hedge or a cash-flow hedge. However, if a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within other comprehensive income. The ineffective portion of the change in fair value of a derivative instrument that qualifies as either a fair-value hedge or a cash-flow hedge is reported in earnings. Changes in the fair value of derivative trading instruments are reported in current period earnings. |
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is de-designated as a hedging instrument, because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. |
In all situations in which hedge accounting is discontinued and the derivative is retained, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Company no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Company removes any asset or liability that was recorded pursuant to recognition of the firm commitment from the balance sheet, and recognizes any gain or loss in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting if not already done and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income. |
Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of earnings in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. |
The Company records any interest and penalties related to unrecognized tax benefits within the operating expenses in the consolidated statement of earnings. |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Insurance-Related Assessments |
The Company records a liability for insurance-related assessments when the following three conditions are met: (1) the assessment has been imposed or the information available prior to the issuance of the financial statements indicates it is probable that an assessment will be imposed; (2) the event obligating an entity to pay (underlying cause of) an imposed or probable assessment has occurred on or before the date of the financial statements; and (3) the amount of the assessment can be reasonably estimated. A related asset is recognized when the paid or accrued assessment is recoverable through either premium taxes or policy surcharges. |
Commitments and Contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related liability. |
Share-Based Compensation |
Share-based compensation is measured at the fair value of the award and recognized as an expense in the financial statements over the vesting period. The Company recognizes compensation expense based on estimated grant date fair value using the Black-Scholes option-pricing model. |
Earnings Per Share |
Basic earnings per share excludes dilution and is computed by dividing net income available to all classes of common stockholders by the weighted average number of all classes of common shares outstanding for the period, excluding non-vested restricted stocks. Diluted earnings per share is computed in the same manner as basic earnings per share except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. Dilutive common shares are included in the diluted earnings per share calculation using the treasury stock method. |
Fair Value |
The fair value information of financial instruments in the accompanying consolidated financial statements was determined as follows: |
a. | Cash and Cash Equivalents | ||
The carrying amount approximates fair value because of the short-term nature of such instruments. | |||
b. | Investment in Securities | ||
The fair value of investment securities is estimated based on quoted market prices for those or similar investments. Additional information pertinent to the estimated fair value of investment in securities is included in note 3 and note 9. |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
c. | Policy Loans |
Policy loans have no stated maturity dates and are part of the related insurance contract. The carrying amount of policy loans approximates fair value because their interest rate is reset periodically in accordance with current market rates. |
d. | Receivables, Accounts Payable, and Accrued Liabilities |
The carrying amount of receivables, accounts payable, and accrued liabilities approximates fair value because they mature and should be collected or paid within 12 months after December 31. |
e. | Policyholder Deposits |
The fair value of policyholder deposits is the amount payable on demand at the reporting date, and accordingly, the carrying value amount approximates fair value. |
f. | Borrowings |
The carrying amounts and fair value of the Company’s borrowings are as follows: |
2009 | 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Loans payable to bank | 22,667 | 22,667 | $ | 24,307 | $ | 24,307 | ||||||||||
6.3% senior unsecured notes payable | 50,000 | 48,000 | 50,000 | 46,250 | ||||||||||||
6.6% senior unsecured notes payable | 60,000 | 57,420 | 60,000 | 55,800 | ||||||||||||
6.7% senior unsecured notes payable | 35,000 | 33,320 | 35,000 | 34,059 | ||||||||||||
$ | 167,667 | $ | 161,407 | $ | 169,307 | $ | 160,416 | |||||||||
The carrying amount of the loans payable to bank approximates fair value due to its floating interest-rate structure. The fair value of the senior unsecured notes payable was determined using market quotations. Additional information pertinent to borrowings is included in Note 12. |
g. | Derivative Instruments |
Current market pricing models were used to estimate fair value of structured notes agreements. Fair values were determined using market quotations provided by outside securities consultants or prices provided by market makers. Additional information pertinent to the estimated fair value of derivative instruments is included in note 12. | ||
Recently Issued Accounting Standards | ||
In April 2009, the Financial Accounting Standards Board (FASB) issued guidance to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of the new guidance did not have impact on the Company’s consolidated financial statements. | ||
In April 2009, the FASB issued guidance to amend the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
interim and annual periods ending after June 15, 2009. The adoption of this new guidance did not have a material impact on the consolidated financial position and results of operations. See note 3, Investment in Securities, for the required disclosures. | |||
In April 2009, the FASB issued guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. The guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have an impact on the consolidated financial position and results of operations. | |||
In April 2009, the FASB issued guidance to provide additional assistance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance also includes assistance on identifying circumstances that indicate a transaction is not orderly. The guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance had no impact on the consolidated financial position and results of operations. | |||
In May 2009, the FASB issued guidance to establish the general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires disclosure of the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. In February 2010, the FASB issued new guidance to amend these standards. Under this new guidance, the Company is not required to disclose the date through which subsequent events have been evaluated. This guidance is effective upon issuance The adoption of this guidance did not have impact on the Company’s consolidated financial statements. | |||
In August 2009, the FASB issued additional guidance for the fair value measurement of liabilities. The Company had chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP. This guidance is effective for the first reporting period, including interim periods, beginning after issuance. The adoption of this guidance did not have an impact on our consolidated financial statements. | |||
In September 2009, the FASB issued guidance for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this guidance improve financial reporting by permitting use of a practical expedient, with appropriate disclosures, when measuring the fair value of an alternative investment that does not have a readily determinable fair value. The amendments in this guidance also improve transparency by requiring additional disclosures about investments in the scope of the amendments in this guidance to enable users of financial statements to understand the nature and risks of investments and whether the investments are probable of being sold at amounts different from net asset value per share. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. | |||
In January 2010, the FASB issued guidance for the fair value measurement and disclosure; improving disclosures about fair value measurements. This guidance require new disclosures as follows: (1) Disclose separately the amounts of significant transfers in and out of Levels1 and 2 fair value measurements and describe the reasons for the transfers; (2) In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), present separately information about purchases, sales, issuances, and settlements (that is on a gross basis rather than as one net number). This guidance also provides amendments that clarify existing disclosure as follows: (1) Level of disaggregation — provide fair value measurement disclosures for each class of assets and liabilities; (2) Disclosures about inputs and valuation techniques — provide disclosures about the input and valuation techniques used to measure fair value for both recurring and nonrecurring fair |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. This guidance is effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis. That requirement will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This guidance does not require any new fair value measurements. The Company does not expect the adoption of this guidance to have an impact on our financial position or results of operations. | |||
There were no other new accounting pronouncements issued that had or are expected to have a material impact on our financial position, operating results or disclosures. |
3. | Investment in Securities | ||
The amortized cost for debt and equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for trading, available-for-sale, and held-to-maturity securities by major security type and class of security at December 31, 2009 and 2008 were as follows: |
2009 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Trading securities | ||||||||||||||||
Equity securities | $ | 42,075 | $ | 7,064 | $ | (5,230 | ) | $ | 43,909 |
2008 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Trading securities | ||||||||||||||||
Equity securities | $ | 40,847 | $ | 2,781 | $ | (11,444 | ) | $ | 32,184 |
20
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available for sale | ||||||||||||||||
Fixed maturities | ||||||||||||||||
Obligations of government- sponsored enterprises | $ | 252,513 | $ | 2,240 | $ | (3,325 | ) | $ | 251,428 | |||||||
U.S. Treasury securities and obligations of U.S. government instrumentalities | 48,190 | 3,148 | — | 51,338 | ||||||||||||
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | 154,754 | 3,113 | (1,919 | ) | 155,948 | |||||||||||
Municipal securities | 107,441 | 1,117 | (1,851 | ) | 106,707 | |||||||||||
Corporate bonds | 102,547 | 3,546 | (728 | ) | 105,365 | |||||||||||
Residential mortgage-backed securities | 16,605 | 677 | (1 | ) | 17,281 | |||||||||||
Collateralized mortgage obligations | 229,312 | 4,237 | (2,639 | ) | 230,910 | |||||||||||
Total fixed maturities | 911,362 | 18,078 | (10,463 | ) | $ | 918,977 | ||||||||||
Equity securities | ||||||||||||||||
Common stocks | 4,074 | 3,435 | — | 7,509 | ||||||||||||
Preferred stocks | 4,000 | — | (1,325 | ) | 2,675 | |||||||||||
Perpetual preferred stocks | 2,849 | — | (270 | ) | 2,579 | |||||||||||
Mutual funds | 50,608 | 4,150 | (2,832 | ) | 51,926 | |||||||||||
Total equity securities | 61,531 | 7,585 | (4,427 | ) | 64,689 | |||||||||||
Total | $ | 972,893 | $ | 25,663 | $ | (14,890 | ) | $ | 983,666 | |||||||
21
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2008 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available for sale | ||||||||||||||||
Fixed maturities | ||||||||||||||||
Obligations of government- sponsored enterprises | $ | 422,038 | $ | 7,991 | $ | (220 | ) | $ | 429,809 | |||||||
U.S. Treasury securities and obligations of U.S. government instrumentalities | 78,024 | 11,961 | — | 89,985 | ||||||||||||
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | 121,934 | 448 | (6,077 | ) | 116,305 | |||||||||||
Municipal securities | 35,611 | 426 | (116 | ) | 35,921 | |||||||||||
Corporate bonds | 100,745 | 1,625 | (7,399 | ) | 94,971 | |||||||||||
Residential mortgage-backed securities | 17,420 | 425 | (3 | ) | 17,842 | |||||||||||
Collateralized mortgage obligations | 103,891 | 1,287 | (2,327 | ) | 102,851 | |||||||||||
Total fixed maturities | 879,663 | 24,163 | (16,142 | ) | 887,684 | |||||||||||
Equity securities | ||||||||||||||||
Common stocks | 6,651 | 1,541 | (1,185 | ) | 7,007 | |||||||||||
Preferred stocks | 8,746 | — | (406 | ) | 8,340 | |||||||||||
Perpetual preferred stocks | 3,617 | — | (335 | ) | 3,282 | |||||||||||
Mutual funds | 51,040 | 217 | (1,257 | ) | 50,000 | |||||||||||
Total equity securities | 70,054 | 1,758 | (3,183 | ) | 68,629 | |||||||||||
Total | $ | 949,717 | $ | 25,921 | $ | (19,325 | ) | $ | 956,313 | |||||||
2009 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities held to maturity | ||||||||||||||||
Obligations of government- sponsored enterprises | $ | 925 | $ | 6 | $ | — | $ | 931 | ||||||||
U.S. Treasury securities and obligations of U.S. government instrumentalties | 3,786 | 132 | — | 3,918 | ||||||||||||
Corporate bonds | 9,063 | 534 | — | 9,597 | ||||||||||||
Residential mortgage-backed securities | 1,256 | 25 | (1 | ) | 1,280 | |||||||||||
Certificates of deposits | 764 | — | — | 764 | ||||||||||||
$ | 15,794 | $ | 697 | $ | (1 | ) | 16,490 | |||||||||
22
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2008 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities held to maturity | ||||||||||||||||
Obligations of government- sponsored enterprises | $ | 9,082 | $ | 240 | $ | — | $ | 9,322 | ||||||||
U.S. Treasury securities and obligations of U.S. government instrumentalties | 1,488 | 379 | — | 1,867 | ||||||||||||
Corporate bonds | 8,698 | 698 | — | 9,396 | ||||||||||||
Residential mortgage-backed securities | 1,749 | — | (7 | ) | 1,742 | |||||||||||
Certificates of deposits | 736 | — | — | 736 | ||||||||||||
$ | 21,753 | $ | 1,317 | $ | (7 | ) | 23,063 | |||||||||
Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2009 and 2008 were as follows: |
2009 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||||||||||||||
Estimated | Unrealized | Number of | Estimated | Unrealized | Number of | Estimated | Unrealized | Number of | ||||||||||||||||||||||||||||
Fair Value | Loss | Securities | Fair Value | Loss | Securities | Fair Value | Loss | Securities | ||||||||||||||||||||||||||||
Securites available for sale | ||||||||||||||||||||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||||||||||||||
Obligations of government- sponsored enterprises | $ | 110,602 | $ | (2,264 | ) | 21 | $ | 25,468 | $ | (1,061 | ) | 5 | $ | 136,070 | $ | (3,325 | ) | 26 | ||||||||||||||||||
Obligations of the Commonw ealth of Puerto Rico and its instrumentalities | 12,944 | (201 | ) | 10 | 58,866 | (1,718 | ) | 22 | 71,810 | (1,919 | ) | 32 | ||||||||||||||||||||||||
Municipal securities | 62,292 | (1,841 | ) | 39 | 173 | (10 | ) | 1 | 62,465 | (1,851 | ) | 40 | ||||||||||||||||||||||||
Corporate bonds | 10,997 | (215 | ) | 4 | 7,975 | (513 | ) | 6 | 18,972 | (728 | ) | 10 | ||||||||||||||||||||||||
Residential mortgage-backed securities | — | — | — | 36 | (1 | ) | 1 | 36 | (1 | ) | 1 | |||||||||||||||||||||||||
Collateralized mortgage obligations | 101,265 | (1,732 | ) | 21 | 7,171 | (907 | ) | 10 | 108,436 | (2,639 | ) | 31 | ||||||||||||||||||||||||
Total fixed maturities | 298,100 | (6,253 | ) | 95 | 99,689 | (4,210 | ) | 45 | 397,789 | (10,463 | ) | 140 | ||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||||||
Preferred stocks | — | — | — | 2,675 | (1,325 | ) | 1 | 2,675 | (1,325 | ) | 1 | |||||||||||||||||||||||||
Perpetual preferred stocks | — | — | — | 730 | (270 | ) | 1 | 730 | (270 | ) | 1 | |||||||||||||||||||||||||
Mutual funds | 9,994 | (907 | ) | 4 | 21,667 | (1,925 | ) | 15 | 31,661 | (2,832 | ) | 19 | ||||||||||||||||||||||||
Total equity securities | 9,994 | (907 | ) | 4 | 25,072 | (3,520 | ) | 17 | 35,066 | (4,427 | ) | 21 | ||||||||||||||||||||||||
Total for securities available for sale | $ | 308,094 | $ | (7,160 | ) | 99 | $ | 124,761 | $ | (7,730 | ) | 62 | $ | 432,855 | $ | (14,890 | ) | 161 | ||||||||||||||||||
Securities held to maturity Residential mortgage-backed securities | — | — | — | $ | 55 | $ | (1 | ) | 1 | $ | 55 | $ | (1 | ) | 1 | |||||||||||||||||||||
23
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2008 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||||||||||||||
Estimated | Unrealized | Number of | Estimated | Unrealized | Number of | Estimated | Unrealized | Number of | ||||||||||||||||||||||||||||
Fair Value | Loss | Securities | Fair Value | Loss | Securities | Fair Value | Loss | Securities | ||||||||||||||||||||||||||||
Securites available for sale | ||||||||||||||||||||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||||||||||||||
Obligations of government- sponsored enterprises | $ | 16,550 | $ | (191 | ) | 5 | $ | 2,956 | $ | (29 | ) | 1 | $ | 19,506 | $ | (220 | ) | 6 | ||||||||||||||||||
Obligations of the Commonw ealth of Puerto Rico and its instrumentalities | 79,045 | (5,230 | ) | 30 | 8,932 | (847 | ) | 9 | 87,977 | (6,077 | ) | 39 | ||||||||||||||||||||||||
Municipal securities | 2,223 | (75 | ) | 2 | 1,459 | (41 | ) | 3 | 3,682 | (116 | ) | 5 | ||||||||||||||||||||||||
Corporate bonds | 31,324 | (2,688 | ) | 22 | 29,044 | (4,711 | ) | 14 | 60,368 | (7,399 | ) | 36 | ||||||||||||||||||||||||
Residential mortgage-backed securities | 1,374 | (2 | ) | 1 | 36 | (1 | ) | 1 | 1,410 | (3 | ) | 2 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 5,797 | (2,327 | ) | 10 | — | — | 0 | 5,797 | (2,327 | ) | 10 | |||||||||||||||||||||||||
Total fixed maturities | 136,313 | (10,513 | ) | 70 | 42,427 | (5,629 | ) | 28 | 178,740 | (16,142 | ) | 98 | ||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||||||
Common stocks | 3,917 | (1,106 | ) | 6 | 416 | (79 | ) | 1 | 4,333 | (1,185 | ) | 7 | ||||||||||||||||||||||||
Preferred stocks | 3,594 | (406 | ) | 1 | — | — | 0 | 3,594 | (406 | ) | 1 | |||||||||||||||||||||||||
Perpetual preferred stocks | 1,033 | (335 | ) | 2 | — | — | 0 | 1,033 | (335 | ) | 2 | |||||||||||||||||||||||||
Mutual funds | 10,027 | (343 | ) | 6 | 9,235 | (914 | ) | 8 | 19,262 | (1,257 | ) | 14 | ||||||||||||||||||||||||
Total equity securities | 18,571 | (2,190 | ) | 15 | 9,651 | (993 | ) | 9 | 28,222 | (3,183 | ) | 24 | ||||||||||||||||||||||||
Total for securities available for sale | $ | 154,884 | $ | (12,703 | ) | 85 | $ | 52,078 | $ | (6,622 | ) | 37 | $ | 206,962 | $ | (19,325 | ) | 122 | ||||||||||||||||||
Securities held to maturity Residential mortgage-backed securities | $ | — | $ | — | — | $ | 1,741 | $ | (7 | ) | 3 | $ | 1,741 | $ | (7 | ) | 3 | |||||||||||||||||||
The Company regularly monitors and evaluates the difference between the cost and estimated fair value of investments. For investments with a fair value below cost, the process includes evaluating: (1) the length of time and the extent to which the estimated fair value has been less than amortized cost for fixed maturity securities, or cost for equity securities, (2) the financial condition, near-term and long-term prospects for the issuer, including relevant industry conditions and trends, and implications of rating agency actions, (3) the Company’s intent to sell or the likelihood of a required sale prior to recovery, (4) the recoverability of principal and interest for fixed maturity securities, or cost for equity securities, and (5) other factors, as applicable. This process is not exact and further requires consideration of risks such as credit and interest rate risks. Consequently, if an investment’s cost exceeds its estimated fair value solely due to changes in interest rates, other-than temporary impairment may not be appropriate. Due to the subjective nature of the Company’s analysis, along with the judgment that must be applied in the analysis, it is possible that the Company could reach a different conclusion whether or not to impair a security if it had access to additional information about the investee. Additionally, it is possible that the investee’s ability to meet future contractual obligations may be different than what the Company determined during its analysis, which may lead to a different impairment conclusion in future periods. If after monitoring and analyzing impaired securities, the Company determines that a decline in the estimated fair value of any available-for-sale or held-to-maturity security below cost is other-than-temporary, the carrying amount of the security is reduced to its fair value by the credit component of the other-than-temporary impairment. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into |
24
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield. |
• | Identification and evaluation of securities that have possible indications of other-than-temporary impairment, which includes an analysis of all investments with gross unrealized investments losses that represent 20% or more of cost. | |
• | Review and evaluation of any other security based on the investee’s current financial condition, liquidity, near-term recovery prospects, implications of rating agency actions, the outlook for the business sectors in which the investee operates and other factors. This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of cost. | |
• | Consideration of evidential matter, including an evaluation of factors or triggers that may or may not cause individual investments to qualify as having other-than-temporary impairments; and | |
• | Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision. |
25
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
26
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Maturities of investment securities classified as available for sale and held to maturity were as follows at December 31, 2009: |
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Securities available for sale | ||||||||
Due in one year or less | $ | 13,800 | $ | 14,172 | ||||
Due after one year through five years | 122,706 | 126,690 | ||||||
Due after five years through ten years | 190,032 | 193,183 | ||||||
Due after ten years | 338,907 | 336,741 | ||||||
Residential mortgage-backed securities | 16,605 | 17,281 | ||||||
Collateralized mortgage obligations | 229,312 | 230,910 | ||||||
$ | 911,362 | $ | 918,977 | |||||
Securities held to maturity | ||||||||
Due in one year or less | $ | 10,752 | $ | 11,291 | ||||
Due after one year through five years | 510 | 524 | ||||||
Due after five years through ten years | 1,793 | 1,800 | ||||||
Due after ten years | 1,483 | 1,595 | ||||||
Residential mortgage-backed securities | 1,256 | 1,280 | ||||||
$ | 15,794 | $ | 16,490 | |||||
Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties. | |||
Investments with an amortized cost of $4,642 and $5,356 (fair value of $4,758 and $5,602) at December 31, 2009 and 2008, respectively, were deposited with the Commissioner of Insurance to comply with the deposit requirements of the Insurance Code of the Commonwealth of Puerto Rico (the Insurance Code). Investment with an amortized cost of $577 and $554 (fair value of $577 and $554) at December 31, 2009 and 2008, respectively, were deposited with the Commissioner of Insurance of the Government of the U.S. Virgin Islands. |
27
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | 2008 | 2007 | ||||||||||
Realized gains (losses) | ||||||||||||
Fixed maturity securities | ||||||||||||
Securities available for sale | ||||||||||||
Gross gains from sales | $ | 5,323 | $ | 1,876 | $ | 1,208 | ||||||
Gross losses from sales | (3 | ) | (225 | ) | (1,797 | ) | ||||||
Gross losses from other-than-temporary impairments | (1,712 | ) | (3,872 | ) | — | |||||||
Total debt securities | 3,608 | (2,221 | ) | (589 | ) | |||||||
Equity securities | ||||||||||||
Trading securities: | ||||||||||||
Gross gains from sales | 717 | 3,358 | 8,873 | |||||||||
Gross losses from sales | (1,381 | ) | (3,160 | ) | (1,558 | ) | ||||||
(664 | ) | 198 | 7,315 | |||||||||
Securities available for sale | ||||||||||||
Gross gains from sales | 3,468 | 881 | 292 | |||||||||
Gross losses from sales | (391 | ) | (176 | ) | — | |||||||
Gross losses from other-than-temporary impairments | (5,407 | ) | (12,622 | ) | (1,087 | ) | ||||||
(2,330 | ) | (11,917 | ) | (795 | ) | |||||||
Total equity securities | (2,994 | ) | (11,719 | ) | 6,520 | |||||||
Net realized gains (losses) on securities | $ | 614 | $ | (13,940 | ) | $ | 5,931 | |||||
2009 | 2008 | 2007 | ||||||||||
Changes in unrealized gains (losses) | ||||||||||||
Recognized in income | ||||||||||||
Equity securities — trading | $ | 10,497 | $ | (21,064 | ) | $ | (4,116 | ) | ||||
Recognized in accumulated other comprehensive loss | ||||||||||||
Fixed maturities — available for sale | (406 | ) | 928 | 18,640 | ||||||||
Equity securities — available for sale | 4,583 | (5,734 | ) | (7,251 | ) | |||||||
$ | 4,177 | $ | (4,806 | ) | $ | 11,389 | ||||||
Not recognized in the consolidated financial statements | ||||||||||||
Fixed maturities — held to maturity | $ | (614 | ) | $ | 1,152 | $ | 1,266 |
28
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
4. | Net Investment Income |
�� | Years ended December 31 | |||||||||||
2009 | 2008 | 2007 | ||||||||||
Fixed maturities | $ | 46,285 | $ | 48,197 | $ | 37,205 | ||||||
Equity securities | 4,077 | 5,451 | 5,271 | |||||||||
Policy loans | 411 | 387 | 394 | |||||||||
Cash equivalents and interest-bearing deposits | 577 | 1,003 | 2,187 | |||||||||
Other | 786 | 1,215 | 2,137 | |||||||||
Total | $ | 52,136 | $ | 56,253 | $ | 47,194 | ||||||
5. | Premium and Other Receivables, Net |
2009 | 2008 | |||||||
Premium | $ | 98,429 | $ | 90,315 | ||||
Self-funded group receivables | 70,315 | 35,749 | ||||||
FEHBP | 10,297 | 9,600 | ||||||
Agent balances | 37,888 | 38,491 | ||||||
Accrued interest | 9,287 | 11,802 | ||||||
Reinsurance recoverable | 43,951 | 42,181 | ||||||
Other | 27,999 | 23,765 | ||||||
298,166 | 251,903 | |||||||
Less allowance for doubtful receivables: | ||||||||
Premium | 20,280 | 10,467 | ||||||
Other | 4,954 | 4,278 | ||||||
25,234 | 14,745 | |||||||
Premium and other receivables, net | $ | 272,932 | $ | 237,158 | ||||
6. | Deferred Policy Acquisition Costs and Value of Business Acquired |
29
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
DPAC | VOBA | Total | ||||||||||
Balance, December 31, 2006 | $ | 38,825 | $ | 72,592 | $ | 111,417 | ||||||
Additions | 46,898 | — | 46,898 | |||||||||
VOBA interest at an average rate of 5.27% | — | 3,874 | 3,874 | |||||||||
Amortization | (32,508 | ) | (12,442 | ) | (44,950 | ) | ||||||
Net change | 14,390 | (8,568 | ) | 5,822 | ||||||||
Balance, December 31, 2007 | 53,215 | 64,024 | 117,239 | |||||||||
Additions | 49,470 | — | 49,470 | |||||||||
VOBA interest at an average rate of 5.40% | — | 3,425 | 3,425 | |||||||||
Amortization | (33,442 | ) | (10,345 | ) | (43,787 | ) | ||||||
Net change | 16,028 | (6,920 | ) | 9,108 | ||||||||
Balance, December 31, 2008 | 69,243 | 57,104 | 126,347 | |||||||||
Additions | 55,632 | — | 55,632 | |||||||||
VOBA interest at an average rate of 5.29% | — | 3,066 | 3,066 | |||||||||
Amortization | (35,923 | ) | (9,205 | ) | (45,128 | ) | ||||||
Net change | 19,709 | (6,139 | ) | 13,570 | ||||||||
Balance, December 31, 2009 | $ | 88,952 | $ | 50,965 | $ | 139,917 | ||||||
Year ending December 31: | ||||
2010 | $ | 8,239 | ||
2011 | 7,397 | |||
2012 | 6,607 | |||
2013 | 5,808 | |||
2014 | 5,159 |
7. | Property and Equipment, Net |
2009 | 2008 | |||||||
Land | $ | 7,309 | $ | 6,531 | ||||
Buildings and leasehold improvements | 45,034 | 44,791 | ||||||
Office furniture and equipment | 16,821 | 16,208 | ||||||
Computer equipment and software | 69,652 | 56,482 | ||||||
Automobiles | 513 | 461 | ||||||
139,329 | 124,473 | |||||||
Less accumulated depreciation and amortization | 70,526 | 66,025 | ||||||
Property and equipment, net | $ | 68,803 | $ | 58,448 | ||||
30
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
8. | Acquired Intangible Asset |
9. | Fair Value Measurements |
Level 1 | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. | |
Level 2 | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. | |
Level 3 | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
31
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity securities held for trading | $ | 43,909 | $ | — | $ | — | $ | 43,909 | ||||||||
Securities available for sale | ||||||||||||||||
Fixed maturity securities | 51,339 | 867,638 | — | 918,977 | ||||||||||||
Equity securities | 19,724 | 44,190 | 775 | 64,689 | ||||||||||||
Derivatives (reported within other assets in the consolidated balance sheets) | — | 1,608 | — | 1,608 | ||||||||||||
$ | 114,972 | $ | 913,436 | $ | 775 | $ | 1,029,183 | |||||||||
2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity securities held for trading | $ | 32,184 | $ | — | $ | — | $ | 32,184 | ||||||||
Securities available for sale | ||||||||||||||||
Fixed maturity securities | 89,985 | 796,418 | 1,281 | 887,684 | ||||||||||||
Equity securities | 18,953 | 48,590 | 1,086 | 68,629 | ||||||||||||
Derivatives (reported within other assets in the consolidated balance sheets) | — | 1,674 | — | 1,674 | ||||||||||||
$ | 141,122 | $ | 846,682 | $ | 2,367 | $ | 990,171 | |||||||||
Fixed | ||||||||||||
Maturity | Equity | |||||||||||
Securities | Securities | Total | ||||||||||
Beginning balance December 31, 2007 | $ | 4,280 | $ | 989 | $ | 5,269 | ||||||
Total gains or (losses) | ||||||||||||
Realized in earnings | (3,883 | ) | — | (3,883 | ) | |||||||
Unrealized in other accumulated comprehensive income | 884 | 97 | 981 | |||||||||
Ending balance December 31, 2008 | $ | 1,281 | $ | 1,086 | $ | 2,367 | ||||||
Total losses realized in earnings | (1,281 | ) | — | (1,281 | ) | |||||||
Sales | — | (1,086 | ) | (1,086 | ) | |||||||
Transfers in to Level 3 | 775 | 775 | ||||||||||
Ending balance December 31, 2009 | $ | — | $ | 775 | $ | 775 | ||||||
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
10. | Claim Liabilities |
2009 | 2008 | 2007 | ||||||||||
Claim liabilities at beginning of year | $ | 323,710 | $ | 353,830 | $ | 314,682 | ||||||
Reinsurance recoverable on claim liabilities | (30,432 | ) | (54,834 | ) | (32,066 | ) | ||||||
Net claim liabilities at beginning of year | 293,278 | 298,996 | 282,616 | |||||||||
Claims incurred | ||||||||||||
Current period insured events | 1,601,802 | 1,432,843 | 1,241,866 | |||||||||
Prior period insured events | (1,887 | ) | (9,918 | ) | (31,007 | ) | ||||||
Total | 1,599,915 | 1,422,925 | 1,210,859 | |||||||||
Payments of losses and loss-adjustment expenses | ||||||||||||
Current period insured events | 1,316,292 | 1,195,414 | 1,004,346 | |||||||||
Prior period insured events | 247,167 | 233,229 | 190,133 | |||||||||
Total | 1,563,459 | 1,428,643 | 1,194,479 | |||||||||
Net claim liabilities at end of year | 329,734 | 293,278 | 298,996 | |||||||||
Reinsurance recoverable on claim liabilities | 30,712 | 30,432 | 54,834 | |||||||||
Claim liabilities at end of year | $ | 360,446 | $ | 323,710 | $ | 353,830 | ||||||
11. | Federal Employees’ Health Benefits Program (FEHBP) |
33
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
12. | Borrowings |
34
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | 2008 | |||||||
Senior unsecured notes payable of $50,000 issued on September 2004; due September 2019. Interest is payable semiannually at a fixed rate of 6.30%. | $ | 50,000 | $ | 50,000 | ||||
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%. | 60,000 | 60,000 | ||||||
Senior unsecured notes payable of $35,000 issued on January 2006; due January 2021. Interest is payable monthly at a fixed rate of 6.70%. | 35,000 | 35,000 | ||||||
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.28% and 2.43% at December 31, 2009, and 2008, respectively). | 22,667 | 24,307 | ||||||
Total borrowings | $ | 167,667 | $ | 169,307 | ||||
Year ending December 31 | ||||
2010 | $ | 1,640 | ||
2011 | 1,640 | |||
2012 | 1,640 | |||
2013 | 1,640 | |||
2014 | 1,640 | |||
Thereafter | 159,467 | |||
$ | 167,667 | |||
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
13. | Derivative Instruments and Hedging Activities |
36
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
amortized cost of the investment component of both structured notes amounted to $9,396 and $8,698, respectively. |
14. | Agency Contract and Expense Reimbursement | |
TSS processed and paid claims as fiscal intermediary for the Medicare — Part B Program until February 2009, the contract termination date. TSS was reimbursed for administrative expenses incurred in performing this service. For the years ended December 31, 2009, 2008, and 2007, TSS was reimbursed by $1,842, $8,678, and $10,783, respectively, for such services, which are deducted from operating expenses in the accompanying consolidated statements of earnings. | ||
The operating expense reimbursements in connection with processing Medicare claims have been audited through 2005 by federal government representatives. Management is of the opinion that no significant adjustments will be made affecting cost reimbursements through December 31, 2009. | ||
On September 12, 2008, the Centers for Medicare and Medicaid Services (CMS) announced that First Coast Service Options (FCSO), a non-affiliated third party organization based in Jacksonville, Florida, was awarded the Medicare Administrative Contract (MAC) for Jurisdiction 9 (Florida, Puerto Rico and the U.S. Virgin Islands). FCSO proposed TSS as a subcontractor in MAC Jurisdiction 9 to perform certain provider customer service functions, subject to terms and conditions negotiated between FSCO and TSS. Pursuant to this, TSS was reimbursed $2,650 for performing the customer service functions during the year ended December 31, 2009. |
15. | Reinsurance Activity | |
The effect of reinsurance on premiums earned and claims incurred is as follows: |
Premiums Earned | Claims Incurred(1) | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
Premiums written | $ | 1,957,085 | $ | 1,780,765 | $ | 1,564,873 | $ | 1,618,663 | $ | 1,443,046 | $ | 1,249,554 | ||||||||||||
Premiums ceded | (81,013 | ) | (85,308 | ) | (81,325 | ) | (18,748 | ) | (20,121 | ) | (38,695 | ) | ||||||||||||
$ | 1,876,072 | $ | 1,695,457 | $ | 1,483,548 | $ | 1,599,915 | $ | 1,422,925 | $ | 1,210,859 | |||||||||||||
(1) | The claims incurred disclosed in this table exclude the change in the liability for future policy benefits amounting to $12,945, $11,989 and $12,916 during the years ended December 31, 2009, 2008 and 2007, respectively. |
TSS, TSP and TSV, in accordance with general industry practices, annually purchase reinsurance to protect them from the impact of large unforeseen losses and prevent sudden and unpredictable changes in net income and stockholders’ equity of the Company. Reinsurance contracts do not relieve any of the subsidiaries from their obligations to policyholders. In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance agreements, the subsidiaries would be liable for such defaulted amounts. During 2009, 2008 and 2007 TSP placed 13.53%, 11.84% and 10.92% of its reinsurance business with one reinsurance company. | ||
TSS has two excess of loss reinsurance treaties whereby it cedes a portion of its premiums to third parties. Reinsurance contracts are primarily for periods of one year, and are subject to modifications and negotiations in each renewal date. Premiums ceded under these contracts amounted to $7,341, $5,623 and $3,349 in 2009, 2008 and 2007, respectively. Claims ceded |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
amounted to $3,870, $8,407 and $2,957 in 2009, 2008 and 2007, respectively. Principal reinsurance agreements are as follows: |
• | Organ transplant excess of loss treaty covering 100% of the claims up to a maximum of $1,000 per person, per life. | ||
• | Routine medical care excess of loss treaty covering 100% of claims from the amount of $100 and up to a maximum of $900 per covered person, per contract year. |
TSP has a number of pro rata and excess of loss reinsurance treaties whereby the subsidiary retains for its own account all loss payments for each occurrence that does not exceed the stated amount in the agreements and a catastrophe cover, whereby it protects itself from a loss or disaster of a catastrophic nature. Under these treaties, TSP ceded premiums of $67,541, $72,115, and $69,137, in 2009, 2008, and 2007, respectively. | ||
Reinsurance cessions are made on excess of loss and on a proportional basis. Principal reinsurance agreements are as follows: |
• | Property quota share treaty covering for a maximum of $20,000 for any one risk. Under this treaty 35% of the risk is ceded to reinsurers. The remaining exposure is covered by a property per risk excess of loss treaty that provides reinsurance in excess of $500 up to a maximum of $10,000, or the remaining 65% for any one risk. In addition, TSP has an additional property catastrophe excess of loss contract that provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $10,000. | ||
• | Personal property catastrophe excess of loss. This treaty provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $80,000. | ||
• | Commercial property catastrophe excess of loss. This treaty provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $205,000. | ||
• | Property catastrophe excess of loss. This treaty provides protection for $185,000 in excess of $80,000 and $205,000 with respect to personal and commercial lines, respectively, resulting from any catastrophe, subject to a maximum loss of $157,500 in respect of the ceded portion of the Commercial Lines Quota Share. | ||
• | Personal lines quota share. This treaty provides protection of 4.5% on all ground-up losses, subject to a limit of $1,000 for any one risk. | ||
• | Reinstatement premium protection. This treaty provides a maximum limit of approximately $5,000 for personal lines and $13,800 in commercial lines to cover the necessity of reinstating the catastrophe program in the event it is activated. | ||
• | Casualty excess of loss treaty. This treaty provides reinsurance for losses in excess of $225 up to a maximum of $12,000. | ||
• | Medical malpractice excess of loss. This treaty provides reinsurance in excess of $150 up to a maximum of $1,500 per incident. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
• | Builders’ risk quota share and first surplus covering contractors’ risk. This treaty provides protection on a 20/80 quota share basis for the initial $2,500 and a first surplus of $10,000 for a maximum of $12,000 for any one risk. | ||
• | Surety quota share treaty covering contract and miscellaneous surety bond business. This treaty provides reinsurance of up to $5,000 for contract surety bonds, subject to an aggregate of $10,000 per contractor and $3,000 per miscellaneous surety bond. |
Facultative reinsurance is obtained when coverage per risk is required. During the year 2007 the ceded claims incurred of TSP include approximately $23.4 million related to one policy ceded under a facultative reinsurance treaty. No individually significant policies were ceded during the years 2009 and 2008. All principal reinsurance contracts are for a period of one year, on a calendar basis, and are subject to modifications and negotiations in each renewal. | ||
The ceded unearned reinsurance premiums on TSP arising from these reinsurance transactions amounted to $16,746 and $20,357 at December 31, 2009 and 2008, respectively, and are reported as other assets in the accompanying consolidated balance sheets. | ||
TSV also cedes insurance with various reinsurance companies under a number of pro rata, excess of loss and catastrophe treaties. Under these treaties, TSV ceded premiums of $6,131, $7,570, and $8,839, in 2009, 2008, and 2007, respectively. Principal reinsurance agreements are as follows: |
• | Group life pro rata agreement, reinsuring 50% of the risk up to $250 on the life of any participating individual of certain groups insured. This contract was cancelled on June 30, 2009. | ||
• | Group life insurance facultative agreement, reinsuring risk in excess of $25 of certain group life policies and a combined pro rata and excess of loss agreement effective July 1, 2008, reinsuring 50% of the risk up to $200 and ceding the excess. | ||
• | Group life insurance facultative excess of loss agreements in which TSV retains a portion of the losses on the life of any participating individual of certain groups insured. Any excess will be recovered from the reinsurer. This agreement provides for various retentions ($25, $50 and $75) of the losses. | ||
• | Facultative pro rata agreements for the long-term disability insurance, reinsuring 65% of the risk. | ||
• | Accidental death catastrophic reinsurance covering each and every accident arising out of one event or occurrence resulting in the death or dismemberment of five or more persons. The retention for each event is $250 with a maximum of $1,000 for each event and $2,000 per year. | ||
• | Several reinsurance agreements, mostly on an excess of loss basis up to a maximum retention of $50. For certain new life products that have been issued after 1999, the retention limit is $175. |
39
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
16. | Income Taxes | |
Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries. The Company and its subsidiaries are subject to Puerto Rico income taxes. The Company’s insurance subsidiaries are also subject to U.S. federal income taxes for foreign source dividend income. As of December 31, 2009, tax years 2004 through 2009 of the Company and its subsidiaries are subject to examination by Puerto Rico taxing authorities. | ||
TSS and TSP are taxed essentially the same as other corporations, with taxable income primarily determined on the basis of the statutory annual statements filed with the insurance regulatory authorities. Also, operations are subject to an alternative minimum income tax, which is calculated based on the formula established by existing tax laws. Any alternative minimum income tax paid may be used as a credit against the excess, if any, of regular income tax over the alternative minimum income tax in future years. | ||
TSV operates as a qualified domestic life insurance company and is subject to the alternative minimum tax and taxes on its capital gains. | ||
Federal income taxes recognized by the Company’s insurance subsidiaries amounted to approximately $125, $112, and $164, in 2009, 2008, and 2007, respectively. | ||
TSM, TC, and ISI are subject to Puerto Rico income taxes as a regular corporation, as defined in the P.R. Internal Revenue Code, as amended. | ||
On July 10, 2009 the Governor of Puerto Rico signed into law Puerto Rico’s Act No. 37, which requires certain corporations to pay a 5% additional special tax over the tax obligation through December 31, 2011. The effective tax rate includes the additional special tax, as enacted. | ||
The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following: |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | 2008 | 2007 | ||||||||||
Income before taxes | $ | 83,651 | $ | 31,944 | $ | 72,645 | ||||||
Statutory tax rate | 40.95 | % | 39.0 | % | 39.0 | % | ||||||
Income tax expense at statutory rate | 34,255 | 12,458 | 28,332 | |||||||||
Increase (decrease) in taxes resulting from | ||||||||||||
Exempt interest income | (13,201 | ) | (13,561 | ) | (9,990 | ) | ||||||
Effect of taxing life insurance operations as a qualified domestic life insurance company instead of as a regular corporation | (4,759 | ) | (1,336 | ) | (1,115 | ) | ||||||
Effect of using earnings under statutory accounting principles instead of GAAP for TSS and TSP | (3,089 | ) | 6,406 | 371 | ||||||||
Effect of taxing capital gains at a preferential rate | 446 | (237 | ) | (1,406 | ) | |||||||
Dividends received deduction | (262 | ) | (810 | ) | (821 | ) | ||||||
Other permanent disallowances, net: | ||||||||||||
Effect of capital gains preferential rate on impairments | 1,385 | 2,916 | 140 | |||||||||
Disallowance of expenses related to exempt interest income | 871 | 1,792 | 603 | |||||||||
Disallowed interest expense | 730 | 1,014 | 1,086 | |||||||||
Other | 1,404 | (158 | ) | 600 | ||||||||
Total other permanent differences | 4,151 | 5,564 | 2,429 | |||||||||
Adjustment to deferred tax assets and liabilities for changes in effective tax rates | (239 | ) | — | (2,131 | ) | |||||||
Other adjustments to deferred tax assets and liabilities | (771 | ) | (300 | ) | (423 | ) | ||||||
Tax credit benefit | (2,386 | ) | (1,286 | ) | — | |||||||
Other | 487 | 256 | (1,119 | ) | ||||||||
Total income tax expense | $ | 14,871 | $ | 7,154 | $ | 14,127 | ||||||
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Deferred income taxes reflect the tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The net deferred tax asset at December 31, 2009 and 2008 of the Company and its subsidiaries is composed of the following: |
2009 | 2008 | |||||||
Deferred tax assets | ||||||||
Allowance for doubtful receivables | $ | 9,869 | $ | 5,325 | ||||
Liability for pension benefits | 13,161 | 14,681 | ||||||
Employee benefits plan | 3,142 | 4,214 | ||||||
Postretirement benefits | 1,668 | 1,454 | ||||||
Deferred compensation | 1,952 | 1,661 | ||||||
Accumulated depreciation | 312 | 334 | ||||||
Impairment loss on investments | 3,654 | 2,816 | ||||||
Contingency reserves | 214 | — | ||||||
Share-based compensation | 592 | — | ||||||
Unrealized loss on trading securities | — | 1,300 | ||||||
Unrealized loss on derivative instruments | 89 | 82 | ||||||
Alternative minimum income tax credit | 955 | 940 | ||||||
Purchased tax credits | 7,388 | 8,337 | ||||||
Other | 754 | 767 | ||||||
Gross deferred tax assets | 43,750 | 41,911 | ||||||
Deferred tax liabilities | ||||||||
Deferred policy acquisition costs | (8,103 | ) | (7,531 | ) | ||||
Catastrophe loss reserve trust fund | (5,935 | ) | (5,495 | ) | ||||
Unrealized gain upon acquisition of GA Life | (982 | ) | (1,753 | ) | ||||
Unrealized gain on trading securities | (285 | ) | — | |||||
Unrealized gain on securities available for sale | (1,626 | ) | (988 | ) | ||||
Unamortized bond issue costs | (318 | ) | (347 | ) | ||||
Contingency reserves | — | (302 | ) | |||||
Other | (38 | ) | (300 | ) | ||||
Gross deferred tax liabilities | (17,287 | ) | (16,716 | ) | ||||
Net deferred tax asset | $ | 26,463 | $ | 25,195 | ||||
The net deferred tax asset shown in the table above at December 31, 2009 and 2008 is reflected in the consolidated balance sheets as $37,551 and $35,926, respectively, in deferred tax assets and $11,088 and $10,731 in deferred tax liabilities, respectively, reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Company. | ||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
17. | Pension Plans | |
Noncontributory Defined-Benefit Pension Plan | ||
The Company sponsors a noncontributory defined-benefit pension plan for all of its employees and for the employees for certain of its subsidiaries. Pension benefits begin to vest after five years of vesting service, as defined, and are based on years of service and final average salary, as defined. The funding policy is to contribute to the plan as necessary to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts as the Company may determine to be appropriate from time to time. The measurement date used to determine pension benefit measures for the pension plan is December 31. | ||
The following table sets forth the plan’s benefit obligations, fair value of plan assets, and funded status as of December 31, 2009 and 2008, accordingly: |
2009 | 2008 | |||||||
Change in benefit obligation | ||||||||
Projected benefit obligation at beginning of year | $ | 84,776 | $ | 89,598 | ||||
Service cost | 4,912 | 5,287 | ||||||
Interest cost | 5,712 | 5,458 | ||||||
Benefit payments | (7,004 | ) | (7,926 | ) | ||||
Actuarial losses (gains) | 2,492 | (7,641 | ) | |||||
Projected benefit obligation at end of year | $ | 90,888 | $ | 84,776 | ||||
Accumulated benefit obligation at end of year | $ | 67,825 | $ | 62,371 | ||||
Change in fair value of plan assets | ||||||||
Fair value of plan assets at beginning of year | $ | 44,100 | $ | 63,614 | ||||
Actual return on assets (net of expenses) | 8,337 | (16,588 | ) | |||||
Employer contributions | 8,000 | 5,000 | ||||||
Benefit payments | (7,004 | ) | (7,926 | ) | ||||
Fair value of plan assets at end of year | $ | 53,433 | $ | 44,100 | ||||
Funded status at end of year | $ | (37,455 | ) | $ | (40,676 | ) | ||
Amounts in accumulated other comprehensive income not yet recognized as a component of net periodic pension cost | ||||||||
Development of prior service credit Balance at beginning of year | $ | (5,372 | ) | $ | (5,822 | ) | ||
Amortization | 450 | 450 | ||||||
Net prior service credit | (4,922 | ) | (5,372 | ) | ||||
Development of actuarial loss | ||||||||
Balance at beginning of year | 42,559 | 30,373 | ||||||
Amortization | (2,487 | ) | (1,788 | ) | ||||
(Gain)/Loss arising during the year | (1,827 | ) | 13,974 | |||||
Actuarial net loss | 38,245 | 42,559 | ||||||
Sum of deferrals | $ | 33,323 | $ | 37,187 | ||||
Net amount recognized | $ | (4,132 | ) | $ | (3,489 | ) |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
The amounts recognized in the balance sheets as of December 31, 2009 and 2008 consist of the following: |
2009 | 2008 | |||||||
Pension liability | $ | 37,455 | $ | 40,676 | ||||
Accumulated other comprehensive loss, net of a deferred tax of $12,944 and $14,383 in 2009 and 2008, respectively | 20,379 | 22,805 |
The components of net periodic benefit cost income for 2009, 2008, and 2007 were as follows: |
2009 | 2008 | 2007 | ||||||||||
Components of net periodic benefit cost | ||||||||||||
Service cost | $ | 4,912 | $ | 5,287 | $ | 5,489 | ||||||
Interest cost | 5,712 | 5,458 | 5,072 | |||||||||
Expected return on assets | (4,018 | ) | (5,027 | ) | (4,383 | ) | ||||||
Amortization of prior service (benefit) cost | (450 | ) | (450 | ) | 58 | |||||||
Amortization of actuarial loss | 2,487 | 1,788 | 1,959 | |||||||||
Net periodic benefit cost | $ | 8,643 | $ | 7,056 | $ | 8,195 | ||||||
Net periodic pension expense may include settlement charges as a result of retirees selecting lump-sum distributions. Settlement charges may increase in the future if the number of eligible participants deciding to receive distributions and the amount of their benefits increases. | ||
The estimated net loss and prior service benefit that will be amortized from accumulated other comprehensive loss into net periodic pension benefits cost during the next twelve months is as follows: |
Prior service cost | $ | (450 | ) | |
Actuarial loss | 2,281 |
The following assumptions were used on a weighted average basis to determine benefit obligations of the plan and in computing the periodic benefit cost as of and for the years ended December 31, 2009, 2008, and 2007: |
2009 | 2008 | 2007 | ||||||||||
Discount rate | 6.75 | % | 6.75 | % | 6.25 | % | ||||||
Expected return on plan assets | 7.75 | % | 8.00 | % | 8.00 | % | ||||||
Rate of compensation increase | Graded; 3.50% | Graded; 3.50% | Graded; 3.50% | |||||||||
to 8.00% | to 8.00% | to 8.00% |
As of December 31, 2009, the basis of the overall expected long-term rate of return on assets assumption is a forward-looking approach based on the current long-term capital market outlook assumptions of the assets categories the trust invests in and the trust’s target asset allocation. At December 31, 2009, the assumed target asset allocation for the program is: 44%-56% equity securities, 35%-45% debt securities, and 6%-14% other securities. Using a mean-variance model to project return over 15-years horizon under the target asset allocation, the 35% to 65% percentile |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
range of annual rates of return is 6.4%-8.4%. The Company selected a rate from within this range of 7.75%, which reflects the Company’s best estimate for this assumption based on the data described above, information on the historical returns on assets invested in the pension trust, and expected future conditions. This rate is net of both investment related expenses and a 0.10% reduction for other administrative expenses charged to the trust. | ||
The assumed discount rate of 6.75% at December 31, 2009 reflects the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants on that date. The Company determined the discount rate based on a range of factors, including a yield curve comprised of the rates of return on high-quality, fixed-income corporate bonds available at the measurement date and the related expected duration for the obligations. | ||
Plan Assets | ||
Plan assets recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For level inputs and input definition, see note 9. | ||
The following table summarizes fair value measurements by level at December 31, 2009 for assets measured at fair value on a recurring basis. |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity Investments | ||||||||||||||||
Domestic Large Cap | $ | 2,557 | $ | 13,624 | $ | 961 | $ | 17,142 | ||||||||
Domestic Small Cap | 107 | 4,204 | — | 4,311 | ||||||||||||
International Large Cap | 2 | 4,198 | — | 4,200 | ||||||||||||
International Small Cap | 717 | — | — | 717 | ||||||||||||
Emerging Markets | — | 2,014 | — | 2,014 | ||||||||||||
Fixed Income Investments | ||||||||||||||||
High Yield | 145 | 2,586 | 277 | 3,008 | ||||||||||||
Core | 989 | 12,594 | 28 | 13,611 | ||||||||||||
Long Duration | 82 | 5,352 | — | 5,434 | ||||||||||||
Real Estate Investments | ||||||||||||||||
REIT | — | 655 | — | 655 | ||||||||||||
Real Estate Assets | 47 | 4 | 2,290 | 2,341 | ||||||||||||
$ | 4,646 | $ | 45,231 | $ | 3,556 | $ | 53,433 | |||||||||
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009 is as follows: |
Domestic | Fixed | |||||||||||||||||||
Large | Fixed Income | Income | Real | |||||||||||||||||
Cap | High Yield | Core | Estate | Total | ||||||||||||||||
Beginning Balance at December 31, 2008 | $ | 695 | $ | 212 | $ | 33 | $ | 3,508 | $ | 4,448 | ||||||||||
Actual return on program assets: | ||||||||||||||||||||
Relating to assets still held at the reporting date | 266 | 52 | — | (1,343 | ) | (1,025 | ) | |||||||||||||
Relating to assets sold during the period | — | 2 | (5 | ) | (23 | ) | (26 | ) | ||||||||||||
Purchases | — | 11 | — | 148 | 159 | |||||||||||||||
Ending balance at December 31, 2009 | $ | 961 | $ | 277 | $ | 28 | $ | 2,290 | $ | 3,556 | ||||||||||
The Company’s plan assets are invested in the National Retirement Trust. The National Retirement Trust was formed to provide financial and legal resources to help members of the BCBSA offer retirement benefits to their employees. |
45
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
The investment program for the National Retirement Trust is based on the precepts of capital market theory that are generally followed by institutional investors, who by definition are long-term oriented investors. This philosophy holds that: |
• | Increasing risk is rewarded with compensating returns over time, and therefore, prudent risk taking is justifiable for long-term investors. | ||
• | Risk can be controlled through diversification of asset classes and investment approaches, as well as diversification of individual securities. | ||
• | Risk is reduced by time, and over time the relative performance of different asset classes is reasonably consistent. Over the long-term, equity investments have provided and should continue to provide superior returns over other security types. Fixed-income securities can dampen volatility and provide liquidity in periods of depressed economic activity. Lengthening duration of fixed income securities may reduce surplus volatility. | ||
• | The strategic or long-term allocation of assets among various asset classes is an important driver of long-term returns. | ||
• | Relative performance of various asset classes is unpredictable in the short-term and attempts to shift tactically between asset classes are unlikely to be rewarded. |
Investments will be made for the sole interest of the participants and beneficiaries of the programs participating in the National Retirement Trust. Accordingly, the assets of the National Retirement Trust shall be invested in accordance with these objectives: |
• | Ensure assets are available to meet current and future obligations of the participating programs when due. | ||
• | Earn a minimum rate of return no less than the actuarial interest rate. | ||
• | Earn the maximum return that can be realistically achieved in the markets over the long-term at a specified and controlled level of risk in order to minimize future contributions. | ||
• | Invest the assets with the care, skill, and diligence that a prudent person acting in a like capacity would undertake. In the process, the Administration of the Trust has the objective of controlling the costs involved with administering and managing the investments of the National Retirement Trust. |
Cash Flows | ||
The Company expects to contribute $7,000 to its pension program in 2010. | ||
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: |
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Note to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Year ending December 31 | ||||
2010 | $ | 3,809 | ||
2011 | 4,145 | |||
2012 | 4,770 | |||
2013 | 5,641 | |||
2014 | 6,236 | |||
2015 — 2019 | 46,530 |
Noncontributory Supplemental Pension Plan | ||
In addition, the Company sponsors a noncontributory supplemental pension plan. This plan covers employees with qualified defined benefit retirement plan benefits limited by the U.S. Internal Revenue Code maximum compensation and benefit limits. At December 31, 2009 and 2008, the Company has recorded a pension liability of $3,033 and $3,426, respectively. The charge to accumulated other comprehensive loss related to the noncontributory pension plan at December 31, 2009 and 2008 amounted to $339 and $464, respectively, net of a deferred tax asset of $217 and $296, respectively. |
18. | Catastrophe Loss Reserve and Trust Fund | |
In accordance with Chapter 25 of the Insurance Code, as amended, TSP is required to record a catastrophe loss reserve. This catastrophe loss reserve is supported by a trust fund for the payment of catastrophe losses. The reserve increases by amounts determined by applying a contribution rate, not in excess of 5%, to catastrophe written premiums as instructed annually by the Commissioner of Insurance, unless the level of the reserve exceeds 8% of catastrophe exposure, as defined. The reserve also increases by an amount equal to the resulting return in the supporting trust fund and decreases by payments on catastrophe losses or authorized withdrawals from the trust fund. Additions to the catastrophe loss reserve are deductible for income tax purposes. | ||
This trust may invest its funds in securities authorized by the Insurance Code, but not in investments whose value may be affected by hazards covered by the catastrophic insurance losses. The interest earned on these investments and any realized gains (loss) on investment transactions are part of the trust fund and are recorded as income (expense) of the Company. An amount equal to the investment returns is recorded as an addition to the catastrophe loss reserve. | ||
The interest earning assets in this fund, which amounted to $33,489 and $31,359 as of December 31, 2009 and 2008, respectively, are to be used solely and exclusively to pay catastrophe losses covered under policies written in Puerto Rico. | ||
TSP is required to make deposits to the trust fund, if any, on or before January 31 of the following year. Contributions are determined by a rate imposed by the Commissioner of Insurance for the catastrophe policies written in that year. Additions in 2009 and 2008, amounting to $810 and $850, respectively, were determined by applying a rate of 1% to catastrophe premiums written. | ||
The amount in the trust fund may be withdrawn or released in the case that TSP ceases to underwrite risks subject to catastrophe losses. Also, authorized withdrawals are allowed when the catastrophe loss reserve exceeds 8% of the catastrophe exposure, as defined. |
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Note to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Retained earnings are restricted in the accompanying consolidated balance sheets by the total catastrophe loss reserve balance, which as of December 31, 2009 and 2008 amounted to $34,411 and $32,200, respectively. |
19. | Stockholders’ Equity |
a. | Common Stock | ||
On April 24, 2007, the Company’s board of directors (the Board) authorized a 3,000-for-one stock split of its Class A common stock effected in the form of a dividend of 2,999 shares for every one share outstanding. This stock split was effective on May 1, 2007 to all stockholders of record at the close of business on April 24, 2007. The total number of authorized shares and par value per share were unchanged by this action. The par value of the additional shares resulting from the stock split was reclassified from additional paid in capital to common stock. All references to the number of shares and per share amounts in this consolidated financial statements are presented after giving retroactive effect to the stock split. | |||
In May 2007, the Company cancelled 24,000 director qualifying shares. Since February 2007, Board members are no longer required to hold qualifying shares to participate in the Board of the Company. | |||
In December 7, 2007, the Company completed the initial public offering (IPO) of its Class B common stock. In this public offering the Company sold 16,100,000 shares, 10,813,191 of which were shares previously owned by selling shareholders. Proceeds received under this public offering amounted to $70,279, net of $6,380 of expenses directly related to the offering. | |||
For a period of five years after the completion of the IPO, subject to the extension or shortening under certain circumstances, each holder of Class B common stock will benefit from anti-dilution protections provided in the Company’s amended and restated certificate of incorporation. | |||
On December 8, 2008, the Company converted 7 million issued and outstanding Class A shares into Class B shares, in conjunction with the expiration of the lockup agreements signed by holders of Class A shares at the time of the Company’s initial public offering. |
b. | Stock Repurchase Program | ||
The Company repurchased shares of its common stock under a $40,000 share repurchase program authorized by the Company’s Board in October 2008. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During 2009 and 2008, the Company repurchased and retired 2,021,960 and 1,181,500 shares at an average per share price of $12.92 and $11.75, for an aggregate cost of $26,120 and $13,880.. The repurchase program was completed during 2009. At December 31, 2008, the Company had unsettled shares repurchases amounting to $6,235 under this program. Such amount is included in the accompanying consolidated balance sheet as account payable and accrued liabilities. | |||
c. | Preferred Stock |
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Note to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Authorized capital stock includes 100,000,000 of preferred stock with a par value of $1.00 per share. As of December 31, 2009 and 2008, there are no issued and outstanding preferred shares. | |||
d. | Dividends | ||
During the years 2009 and 2008 there were no dividends declared or paid to the Company’s stockholders. | |||
On March 12, 2007, the Board declared a cash dividend of $2,448 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding those shares issued to the representatives of the community that were members of the Board (the qualifying shares). All stockholders of record as of the close of business on March 23, 2007, except those who only hold qualifying shares, received a dividend per share of $0.09 for each share held on that date. | |||
e. | Liquidity Requirements | ||
As members of the BCBSA, the Company and TSS are required by membership standards of the association to maintain liquidity as defined by BCBSA. That is, to maintain net worth exceeding the Company Action Level as defined in the National Association of Insurance Commissioners’ (NAIC) Risk-Based Capital for Insurers Model Act. The companies are in compliance with this requirement. |
20. | Comprehensive Income | |
The accumulated balances for each classification of other comprehensive income (loss) are as follows: |
Accumulated | ||||||||||||
Unrealized | Liability | Other | ||||||||||
Gains (Losses) on | for Pension | Comprehensive | ||||||||||
securities | Benefits | Loss | ||||||||||
Beginning balance | $ | 5,602 | $ | (23,267 | ) | $ | (17,665 | ) | ||||
Net current period change | 4,630 | 2,550 | 7,180 | |||||||||
Reclassification adjustments for gains and losses reclassified in income | (1,091 | ) | — | (1,091 | ) | |||||||
Ending balance | $ | 9,141 | $ | (20,717 | ) | $ | (11,576 | ) | ||||
The related deferred tax effects allocated to each component of other comprehensive income in the accompanying consolidated statements of stockholders’ equity and comprehensive income in 2009, 2008 and 2007 are as follows: |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
2009 | ||||||||||||
Deferred Tax | ||||||||||||
Before-Tax | (Expense) | Net-of-Tax | ||||||||||
Amount | Benefit | Amount | ||||||||||
Unrealized holding losses on securities arising during the period | $ | 5,455 | $ | (825 | ) | $ | 4,630 | |||||
Less reclassification adjustment for gains and losses realized in income | (1,278 | ) | 187 | (1,091 | ) | |||||||
Net change in unrealized loss | 4,177 | (638 | ) | 3,539 | ||||||||
Liability for pension benefits | 4,070 | (1,520 | ) | 2,550 | ||||||||
Net current period change | $ | 8,247 | $ | (2,158 | ) | $ | 6,089 | |||||
2008 | ||||||||||||
Deferred Tax | ||||||||||||
Before-Tax | (Expense) | Net-of-Tax | ||||||||||
Amount | Benefit | Amount | ||||||||||
Unrealized holding losses on securities arising during the period | $ | (18,944 | ) | $ | 2,088 | $ | (16,856 | ) | ||||
Less reclassification adjustment for gains and losses realized in income | 14,138 | (1,234 | ) | 12,904 | ||||||||
Net change in unrealized loss | (4,806 | ) | 854 | (3,952 | ) | |||||||
Liability for pension benefits | (12,411 | ) | 4,796 | (7,615 | ) | |||||||
Cash-flow hedges | (93 | ) | 37 | (56 | ) | |||||||
Net current period change | $ | (17,310 | ) | $ | 5,687 | $ | (11,623 | ) | ||||
2007 | ||||||||||||
Deferred Tax | ||||||||||||
Before-Tax | (Expense) | Net-of-Tax | ||||||||||
Amount | Benefit | Amount | ||||||||||
Unrealized holding losses on securities arising during the period | $ | 10,005 | $ | (1,622 | ) | $ | 8,383 | |||||
Less reclassification adjustment for gains and losses realized in income | 1,384 | (218 | ) | 1,166 | ||||||||
Net change in unrealized loss | 11,389 | (1,840 | ) | 9,549 | ||||||||
Liability for pension benefits | 6,697 | (2,607 | ) | 4,090 | ||||||||
Cash-flow hedges | (409 | ) | 159 | (250 | ) | |||||||
Net current period change | $ | 17,677 | $ | (4,288 | ) | $ | 13,389 | |||||
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
21. | Share-Based Compensation | |
In December 2007 the Company adopted the 2007 Incentive Plan (the Plan), which permits the Board the grant of stock options, restricted stock awards and performance awards to eligible officers, directors and key employees. The Plan authorizes grants to issue up to 4,700,000 of Class B common shares of authorized but unissued stock. At December 31, 2009, there were 3,303,963 shares available for the Company to grant under the Plan. Stock options can be granted with an exercise price at least equal the stock’s fair market value at the date of grant. The stock option awards vest in equal annual installments over 3 years and its expiration date cannot exceed 7 years. The restricted stock and performance awards are issued at the fair value of the stock on the grant date with vesting periods ranging from one to three years. Restricted stock awards vest in installments, as stipulated in each restricted stock agreement. Performance awards vest on the last day of the performance period, provided that at least minimum performance standards were achieved. | ||
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted average assumptions in the following table. In absence of adequate historical data, the Company estimates the expected life of the option using the simplified method allowed by Staff Accounting Bulletin (SAB) No. 107. Since the Company was a newly public entity, expected volatility was computed based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option was based on the U.S. Treasury zero-coupon bonds yield curve in effect at the time of grant. | ||
The following assumptions were used in the development of fair value of option awards: |
2009 | 2008 | 2007 | ||||||||||
Expected dividend yield | — | — | — | |||||||||
Expected volatility (per year) | 53.85 | % | — | 33.00 | % | |||||||
Expected term (in years) | 4.50 | — | 4.50 | |||||||||
Risk-free interest rate | 1.47 | % | — | 3.51 | % |
Stock option activity during the year ended December 31, 2009 is as follows: |
Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Term (Years) | Value | |||||||||||||
Outstanding balance at January 1, 2009 | 999,309 | $ | 14.50 | |||||||||||||
Grants | 13,321 | $ | 12.49 | |||||||||||||
Outstanding balance at December 31, 2009 | 1,012,630 | $ | 14.47 | 4.95 | $ | 3,166 | ||||||||||
Exercisable at December 31, 2009 | 666,206 | $ | 14.50 | 4.93 | $ | 2,065 |
The weighted average grant date fair value of options granted during 2009 and 2007 was $5.63 and $4.83, respectively. No options were granted in 2008.There were no options exercised during the years ended December 31, 2009, 2008 and 2007. |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
A summary of the status of the Company’s nonvested restricted and performance shares as of December 31, 2009, and changes during the year ended December 31, 2009, are presented below: |
Restricted Awards | Performance Awards | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Number of | Fair | Number of | Exercise | |||||||||||||
Shares | Value | Shares | Price | |||||||||||||
Outstanding balance at January 1, 2009 | 130,973 | $ | 15.16 | 166,554 | $ | 14.50 | ||||||||||
Granted | 27,362 | 12.33 | 3,002 | 12.49 | ||||||||||||
Vested | (76,660 | ) | 15.62 | — | — | |||||||||||
Forefeited | — | — | (2,414 | ) | 14.50 | |||||||||||
Outstanding balance at December 31, 2009 | 81,675 | $ | 13.77 | 167,142 | $ | 14.46 | ||||||||||
The weighted average grant date fair value of restricted shares granted during the year 2009, 2008 and 2007 were $12.33, $18.81 and $14.50, respectively. Total fair value of restricted stock vested during the year ended December 31, 2009 was $1,158. | ||
At December 31, 2009 there was $2,571 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 0.97 years. The Company currently uses authorized and unissued Class B common shares to satisfy share award exercises. |
22. | Net Income Available to Stockholders and Basic Net Income per Share | |
The following table sets forth the computation of basic and diluted earnings per share for the three-year period ended December 31, 2009. |
2009 | 2008 | 2007 | ||||||||||
Numerator for earnings per share | ||||||||||||
Net income available to stockholders | $ | 68,780 | $ | 24,790 | $ | 58,518 | ||||||
Denominator for basic earnings per share — | ||||||||||||
Weighted average of common shares | 29,494,468 | 32,120,461 | 27,200,067 | |||||||||
Effect of dilutive securities — Nonvested restricted stock awards | 68,862 | 42,094 | 2,038 | |||||||||
Denominator for diluted earnings per share | $ | 29,563,330 | $ | 32,162,555 | 27,202,105 | |||||||
Basic net income per share | $ | 2.33 | $ | 0.77 | $ | 2.15 | ||||||
Diluted net income per share | 2.33 | 0.77 | 2.15 |
During the years ended December 31, 2009, 2008 and 2007, the weighted average of stock option shares of 1,012,594, 999,309 and 83,276, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive. |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
23. | Commitments | |
The Company leases its regional offices, certain equipment, and warehouse facilities under noncancelable operating leases. Minimum annual rental commitments at December 31, 2009 under existing agreements are summarized as follows: |
Year ending December 31 | ||||
2010 | $ | 4,557 | ||
2011 | 3,344 | |||
2012 | 2,243 | |||
2013 | 1,689 | |||
2014 | 1,561 | |||
Thereafter | 6,690 | |||
Total | $ | 20,084 | ||
Rental expense for 2009, 2008, and 2007 was $4,690, $3,532, and $4,007, respectively, after deducting the amount of $132, $265, and $303, respectively, reimbursed by CMS for the administration of the Medicare Part B Program (see note 14). |
24. | Contingencies | |
Legal Proceedings | ||
As of December 31, 2009, the Company is a defendant in various lawsuits arising in the ordinary course of business. The Company is also a defendant in various other claims and proceedings, some of which are described below. Furthermore, the Commissioner of Insurance, as well as other Federal and Puerto Rico government authorities, regularly make inquiries and conduct audits concerning the Company’s compliance with applicable insurance and other laws and regulations. | ||
Management believes that the aggregate liabilities, if any, arising from all such claims, assessments, audits and lawsuits will not have a material adverse effect on the consolidated financial position or results of operations of the Company. However, given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Company’s financial condition, operating results and/or cash flows. Where the Company believes that a loss is both probable and estimable, such amounts have been recorded. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution. | ||
Additionally, the Company may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have contractual rights to acquire shares of the Company on favorable terms or to have inherited such shares notwithstanding applicable transfer and ownership restrictions. | ||
Hau et al Litigation (formerly known as Jordan et al) | ||
On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the Company, TSS and others in the Court of First Instance for San Juan, Superior Section (the “Court”), alleging, among other things, violations by the defendants of provisions of the Puerto Rico Insurance Code, antitrust violations, unfair business practices, RICO violations, breach of contract with providers, and damages in the amount of $12 million. Following years of complaint |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
amendments, motions practice and interim appeals up to the level of the Puerto Rico Supreme Court, the plaintiffs amended their complaint on June 20, 2008 to allege with particularity the same claims initially asserted but on behalf of a more limited group of plaintiffs, and increase their claim for damages to approximately $207 million. Discovery is expected to conclude by March 2010. The Company intends to vigorously defend this claim. | ||
Colón Litigation | ||
On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSS predecessor stock, filed suit against TSS and the Commissioner of Insurance in the Court of First Instance. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner of Insurance in which the sale of 1,582 shares to a number of TSS shareholders was voided. TSS, however, appealed the Commissioner of Insurance’s order before the Puerto Rico Court of Appeals, which upheld the order on March 31, 2000. Plaintiff requests that the court direct TSS to return his share of stock and compensate him for alleged damages in excess of $500,000 plus attorney’s fees. The Company is vigorously contesting this lawsuit because, among other reasons, the Commissioner of Insurance’s order is final and cannot be collaterally attacked in this litigation. | ||
Puerto Rico Center for Municipal Revenue Collection | ||
On March 1, 2006 and March 3, 2006, respectively, the Puerto Rico Center for Municipal Revenue Collection (CRIM) imposed a real property tax assessment of approximately $1.3 million and a personal property tax assessment of approximately $4.0 million upon TSS for fiscal years 1992-1993 through 2002-2003. During that time, TSS qualified as a tax-exempt entity under Puerto Rico law pursuant to rulings issued by the Puerto Rico tax authorities. In imposing the tax assessments, CRIM revoked the tax rulings retroactively, based on its contention that a for-profit corporation such as TSS is not entitled to such an exemption. On March 28, 2006 and March 29, 2006, respectively, TSS challenged the real and personal property tax assessments in the Court of First Instance. The court granted summary judgment affirming the real property and personal property tax assessments on October 29, 2007 and December 5, 2007, respectively. | ||
After unsuccessfully filing motions for reconsideration in both cases, TSS appealed the court’s decisions before the Puerto Rico Court of Appeals on November 29, 2007 and February 21, 2008, respectively. TSS also requested a consolidation of both cases, which the Court of Appeals approved on April 17, 2008. On June 30, 2008 the Court of Appeals confirmed the summary judgment issued by the Court of First Instance in both property tax cases. On September 29, 2008, TSS timely filed a certiorari petition with the Puerto Rico Supreme Court. The court denied the petition on March 13, 2009. TSS filed a request for reconsideration before the Puerto Rico Supreme Court on March 30, 2009, which was denied on April 29, 2009. TSS filed a second request for reconsideration, which was denied on May 22, 2009. The Company recorded an accrual which is included within accounts payable and accrued liabilities in the accompanying consolidated financial statements. | ||
The Company submitted a petition for certiorari to the U.S. Supreme Court on August 26, 2009, based on its strong belief that CRIM’s retroactive revocation of applicable tax rulings and its imposition of a tax liability reaching back over ten years constituted a violation of the Company’s due process rights. The U.S. Supreme Court has requested that CRIM filed a response on December 2, 2009. On January 11, 2010, the U.S. Supreme Court invited the Solicitor General of the U.S. to file a brief in this case expressing the views of the United States. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Dentists Association Litigation | ||
On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico) filed a complaint in the Court of First Instance against 24 health plans operating in Puerto Rico that offer dental health coverage. The Company and two of its subsidiaries, TSS and TC were included as defendants. This litigation purports to be a class action filed on behalf of Puerto Rico dentists who are similarly situated; however, the complaint does not include a single dentist as a class representative nor a definition of the intended class. | ||
The complaint alleges that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to dentists so that they are not paid in a timely and complete manner for the covered medically necessary services they render. The complaint also alleges, among other things, violations to the Puerto Rico Insurance Code, antitrust laws, the Puerto Rico racketeering statute, unfair business practices, breach of contract with providers, and total damages in the amount of $150 million. In addition, the complaint claims that the Puerto Rico Insurance Companies Association is the hub of an alleged conspiracy concocted by the member plans to defraud dentists. | ||
There are numerous available defenses to oppose both the request for class certification and the merits. The Company intends to vigorously defend this claim. | ||
Two codefendant plans removed the case to federal court, which the plaintiffs and the other codefendants, including the Company, opposed. The federal District Court decided that it lacked jurisdiction under the Class Action Fairness Act (“CAFA”) and remanded the case to state court. The removing defendants petitioned to appeal to the First Circuit Court of Appeals. Having accepted the appeal, the First Circuit Court of Appeals issued an order in late October 2009 which found the lower court’s decision premature. The Court of Appeals remanded the case to the federal District Court and allowed limited discovery to determine whether the case should be heard in federal court pursuant to CAFA. | ||
Claims by Heirs of Former Shareholders | ||
The Company and TSS are defending four individual lawsuits, all filed in state court, from persons who claim to have inherited a total of 90 shares of the Company or one of its predecessors or affiliates (before giving effect to the 3,000-for-one stock split). While each case presents unique facts, the lawsuits generally allege that the redemption of the shares by the Company pursuant to transfer and ownership restrictions contained in the Company’s (or its predecessors’ or affiliates’) articles of incorporation and bylaws was improper. Discovery is underway in each case. Management believes all these claims are time barred under one or more statutes of limitations and is vigorously defending them. | ||
Guarantee Associations | ||
Pursuant to the Insurance Code, TSP is a member of Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de Responsabilidad Professional Médico-Hospitalaria (SIMED) and of the Sindicato de Aseguradores de Responsabilidad Professional para Médicos. Both syndicates were organized for the purpose of underwriting medical-hospital professional liability insurance. As a member, the subsidiary shares risks with other member companies and, accordingly, is contingently liable in the event that the above-mentioned syndicates cannot meet their obligations. During 2009, 2008, and 2007, no assessments or payments were made for this contingency. |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
Additionally, pursuant to Article 12 of Rule LXIX of the Insurance Code, TSP is a member of the Compulsory Vehicle Liability Insurance Joint Underwriting Association (the Association). The Association was organized during 1997 to underwrite insurance coverage of motor vehicle property damage liability risks effective January 1, 1998. As a participant, TSP shares the risk, proportionately with other members, based on a formula established by the Insurance Code. During the three-year period ended December 31, 2009, the Association distributed good experience refunds. TSP received refunds amounting to $1,193, $1,131, and $1,023, in 2009, 2008, and 2007, respectively. | ||
TSP is a member of the Asociación de Garantía de Seguros de Todas Clases, excepto Vida, Incapacidad y Salud and TSS and TSV are members of the Asociación de Garantía de Seguros de Vida, Incapacidad y Salud. As members, they are required to provide funds for the payment of claims and unearned premiums reimbursements for policies issued by insurance companies declared insolvent. During 2009, 2008 and 2007 no assessment or payment was made by TSP in connection with insurance companies declared insolvent. Moreover, no assessments were attributable to TSS and TSV during 2009, 2008, and 2007. |
25. | Statutory Accounting | |
TSS, TSV and TPS (collectively known as the regulated subsidiaries) are regulated by the Commissioner of Insurance. The regulated subsidiaries are required to prepare financial statements using accounting practices prescribed or permitted by the Commissioner of Insurance, which differ from GAAP. | ||
The accumulated earnings of TSS, TSV, and TSP are restricted as to the payment of dividends by statutory limitations applicable to domestic insurance companies. Such limitations restrict the payment of dividends by insurance companies generally to unrestricted unassigned surplus funds reported for statutory purposes. As more fully described in note 18, a portion of the accumulated earnings of TSP are also restricted by the catastrophe loss reserve balance (amounting to $34,411 and $32,200 as of December 31, 2009 and 2008, respectively) as required by the Insurance Code. | ||
The combined net admitted assets, unassigned surplus and net income of the regulated subsidiaries at December 31, 2009, 2008 and 2007 are as follows: |
(dollar amounts in millions) | 2009 | 2008 | 2007 | |||||||||
Net admitted assets | $ | 1,298 | $ | 1,197 | $ | 1,286 | ||||||
Capital and surplus | 416 | 260 | 359 | |||||||||
Net income | 43 | 30 | 64 |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
26. | Supplementary Information on Cash Flow Activities |
2009 | 2008 | 2007 | ||||||||||
Supplementary information | ||||||||||||
Noncash transactions affecting cash flows activities | ||||||||||||
Change in net unrealized gain on securities available for sale, including deferred income tax (asset)/liability of $(638), $854, and $1,840 in 2009, 2008, and 2007, respectively | $ | 3,539 | $ | (3,952 | ) | $ | 9,549 | |||||
Change in cash-flow hedges, including deferred income tax liability of $37 and $159 in 2008 and 2007, respectively | $ | — | $ | (56 | ) | $ | (250 | ) | ||||
Change in liability for pension benefits, and deferred income tax (liability)/asset of $(1,520), $4,796, $2,189, in 2009, 2008, and 2007, respectively | $ | 2,550 | $ | (7,615 | ) | $ | 4,090 | |||||
Unsettled shares repurchases | $ | — | $ | 6,235 | $ | — | ||||||
Unsettled investment acquisitions | $ | — | $ | — | $ | 117,706 | ||||||
Unsettled investment sales | $ | — | $ | (1,500 | ) | $ | — | |||||
Other | ||||||||||||
Income taxes paid | $ | 15,552 | $ | 25,597 | $ | 25,940 | ||||||
Interest paid | $ | 11,605 | $ | 14,330 | $ | 14,102 |
27. | Segment Information | |
The operations of the Company are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance. Business segments were identified according to the type of insurance products offered and consistent with the information provided to the chief operating decision maker. These segments and a description of their respective operations are as follows: |
• | Managed Care segment— TSS is engaged in the sale of managed care products to the Commercial, Medicare and Reform market sectors. The Commercial accounts sector includes corporate accounts, U.S. federal government employees, individual accounts, local government employees, and Medicare supplement. The following represents a description of the major contracts by sector: |
– | TSS is a qualified contractor to provide health coverage to federal government employees within Puerto Rico. Earned premiums revenue related to this contract amounted to $125,994, $124,239, and $121,126 for the three-year period ended December 31, 2009, 2008, and 2007, respectively (see note 11). | ||
– | Under its commercial business, TSS also provides health coverage to certain employees of the Commonwealth of Puerto Rico and its instrumentalities. Earned premium revenue |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(dollar amounts in thousands, except per share data)
related to such health plans amounted to $46,114, $40,686, and $46,649, for the three-year period ended December 31, 2009, 2008, and 2007, respectively. |
– | TSS provides services through its Medicare health plans pursuant to a limited number of contracts with CMS. Earned premium revenue related to the Medicare business amounted to $513,823, $438,723, and $255,570, for the three-year period ended December 31, 2009, 2008, and 2007, respectively. | ||
– | TSS participates in the Reform program to provide health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the Commonwealth of Puerto Rico. TSS provides managed care services to Reform members in the North and Southwest regions on a fully-insured basis and in the Metro-North region on an Administrative Service Only (ASO) basis. Earned premium revenue related to this business amounted to $348,096, $340,123, and $327,544, for three-year period ended December 31, 2009, 2008, and 2007, respectively. Administrative service fee for the Metro-North Region for the year ended December 31, 2009 and 2008 amounted to $23,299 and $2,712; which is included in the Administrative service fee in the accompanying consolidated statement of earnings. |
• | Life Insurance segment— This segment offers primarily life and accident and health insurance coverage, and annuity products. The premiums for this segment are mainly subscribed through TSV’s internal sales force and a network of independent brokers and agents. | ||
• | Property and Casualty Insurance segment—The predominant insurance lines of business of this segment are commercial multiple peril, auto physical damage, auto liability, and dwelling. The premiums for this segment are originated through a network of independent insurance agents and brokers. Agents or general agencies collect the premiums from the insureds, which are subsequently remitted to TSP, net of commissions. Remittances are due 60 days after the closing date of the general agent’s account current. |
The Company evaluates performance based primarily on the operating revenues and operating income of each segment. Operating revenues include premiums earned, net, administrative service fees and net investment income. Operating costs include claims incurred and operating expenses. The Company calculates operating income or loss as operating revenues less operating costs. | ||
The accounting policies for the segments are the same as those described in the summary of significant accounting policies included in the notes to consolidated financial statements. The financial data of each segment is accounted for separately; therefore no segment allocation is necessary. However, certain operating expenses are centrally managed, therefore requiring an allocation to each segment. Most of these expenses are distributed to each segment based on different parameters, such as payroll hours, processed claims, or square footage, among others. In addition, some depreciable assets are kept by one segment, while allocating the depreciation expense to other segments. The allocation of the depreciation expense is based on the proportion of asset used by each segment. Certain expenses are not allocated to the segments and are kept within TSM’s operations. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
The following tables summarize the operations by operating segment for each of the years in the three-year period ended December 31, 2009, 2008, and 2007. |
2009 | 2008 | 2007 | ||||||||||
Operating revenues | ||||||||||||
Managed care | ||||||||||||
Premiums earned, net | $ | 1,680,750 | $ | 1,509,778 | $ | 1,298,776 | ||||||
Fee revenue | 48,643 | 19,187 | 14,018 | |||||||||
Intersegment premiums/fee revenue | 5,995 | 6,538 | 6,229 | |||||||||
Net investment income | 21,641 | 23,091 | 19,673 | |||||||||
Total managed care | $ | 1,757,029 | 1,558,594 | 1,338,696 | ||||||||
Life | ||||||||||||
Premiums earned, net | 99,726 | 92,469 | 88,505 | |||||||||
Intersegment premiums | 386 | 374 | 356 | |||||||||
Net investment income | 16,763 | 16,482 | 15,016 | |||||||||
Total life | 116,875 | 109,325 | 103,877 | |||||||||
Property and casualty | ||||||||||||
Premiums earned, net | 95,596 | 93,211 | 96,267 | |||||||||
Intersegment premiums | 613 | 610 | 616 | |||||||||
Net investment income | 11,679 | 12,545 | 11,849 | |||||||||
Total property and casualty | 107,888 | 106,366 | 108,732 | |||||||||
Other segments — intersegment service revenues* | 52,997 | 46,578 | 44,971 | |||||||||
Total business segments | 2,034,789 | 1,820,863 | 1,596,276 | |||||||||
TSM operating revenues from external sources | 2,053 | 4,135 | 656 | |||||||||
Elimination of intersegment premiums | (6,994 | ) | (7,523 | ) | (7,201 | ) | ||||||
Elimination of intersegment service revenue | (52,997 | ) | (46,578 | ) | (44,971 | ) | ||||||
Consolidated operating revenues | $ | 1,976,851 | $ | 1,770,897 | $ | 1,544,760 | ||||||
* | Includes segments that are not required to be reported separately. These segments include the data processing services organization as well as the third-party administrator of health insurance services. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
Operating income | ||||||||||||
Managed care | $ | 57,193 | $ | 52,632 | $ | 57,392 | ||||||
Life | 14,555 | 12,489 | 10,716 | |||||||||
Property and casualty | 8,746 | 13,147 | 10,740 | |||||||||
Other segments* | 1,482 | 985 | 891 | |||||||||
Total business segments | 81,976 | 79,253 | 79,739 | |||||||||
TSM operating revenues from external sources | 2,053 | 4,135 | 656 | |||||||||
TSM unallocated operating expenses | (9,004 | ) | (9,283 | ) | (7,846 | ) | ||||||
Elimination of TSM charges | 9,548 | 9,991 | 10,903 | |||||||||
Consolidated operating income | 84,573 | 84,096 | 83,452 | |||||||||
Consolidated net realized investment gains (losses) | 614 | (13,940 | ) | 5,931 | ||||||||
Consolidated net unrealized gain (loss) on trading securities | 10,497 | (21,064 | ) | (4,116 | ) | |||||||
Consolidated interest expense | (13,270 | ) | (14,681 | ) | (15,839 | ) | ||||||
Consolidated other income (expense), net | 1,237 | (2,467 | ) | 3,217 | ||||||||
Consolidated income before taxes | $ | 83,651 | $ | 31,944 | $ | 72,645 | ||||||
2009 | 2008 | 2007 | ||||||||||
Depreciation expense | ||||||||||||
Managed care | $ | 6,640 | $ | 4,339 | $ | 4,277 | ||||||
Life | 663 | 656 | 677 | |||||||||
Property and casualty | 1,477 | 1,450 | 1,488 | |||||||||
Total business segments | 8,780 | 6,445 | 6,442 | |||||||||
TSM depreciation expense | $ | 863 | 922 | 1,120 | ||||||||
Consolidated depreciation expense | $ | 9,643 | $ | 7,367 | $ | 7,562 | ||||||
* | Includes segments that are not required to be reported separately. These segments include the data processing services organization as well as the third-party administrator of health insurance services. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
2009 | 2008 | |||||||
Assets | ||||||||
Managed care | $ | 746,674 | $ | 678,889 | ||||
Life | 487,290 | 460,109 | ||||||
Property and casualty | 351,793 | 337,869 | ||||||
Other segments* | 14,193 | 12,620 | ||||||
Total business segments | 1,599,950 | 1,489,487 | ||||||
Unallocated amounts related to TSM | ||||||||
Cash, cash equivalents, and investments | 39,029 | 58,480 | ||||||
Property and equipment, net | 21,577 | 21,648 | ||||||
Other assets | 4,780 | 4,079 | ||||||
65,386 | 84,207 | |||||||
Elimination entries — intersegment receivables and others | (16,632 | ) | (14,504 | ) | ||||
Consolidated total assets | $ | 1,648,704 | $ | 1,559,190 | ||||
2009 | 2008 | |||||||
Significant noncash items | ||||||||
Net change in unrealized gain on securities available for sale | ||||||||
Managed care | $ | (282 | ) | $ | (4,359 | ) | ||
Life | (2,427 | ) | 538 | |||||
Property and casualty | (489 | ) | 1,139 | |||||
Total business segments | (3,198 | ) | (2,682 | ) | ||||
Amount related to TSM | (341 | ) | (1,270 | ) | ||||
Consolidated net change in unrealized gain on securities available for sale | $ | (3,539 | ) | $ | (3,952 | ) | ||
Net change in liability for pension benefits | ||||||||
Managed care | $ | 2,254 | $ | (4,946 | ) | |||
Life | 212 | (81 | ) | |||||
Property and casualty | (78 | ) | (490 | ) | ||||
Other segments* | 74 | (1,948 | ) | |||||
Total business segments | 2,462 | (7,465 | ) | |||||
Amount related to TSM | 88 | (150 | ) | |||||
Consolidated net change in liability for pension benefits | $ | 2,550 | $ | (7,615 | ) | |||
* | Includes segments that are not required to be reported separately. These segments include the data processing services organization as well as the third-party administrator of health insurance services. |
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Table of Contents
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
28. | Quarterly Financial Information (Unaudited) |
2009 | ||||||||||||||||||||
March 31 | June 30 | September 30 | December 31 | Total | ||||||||||||||||
Revenues | ||||||||||||||||||||
Premiums earned, net | $ | 452,484 | $ | 466,221 | $ | 477,503 | $ | 479,864 | $ | 1,876,072 | ||||||||||
Administrative service fees | 8,866 | 11,319 | 9,797 | 18,661 | 48,643 | |||||||||||||||
Net investment income | 12,541 | 13,360 | 12,955 | 13,280 | 52,136 | |||||||||||||||
Total operating revenues | 473,891 | 490,900 | 500,255 | 511,805 | 1,976,851 | |||||||||||||||
Net realized investment (losses) gains | (1,727 | ) | (1,625 | ) | 2,150 | 1,816 | 614 | |||||||||||||
Net unrealized investment (losses) gains on trading securities | (2,476 | ) | 5,652 | 4,860 | 2,461 | 10,497 | ||||||||||||||
Other (loss) income, net | (379 | ) | 704 | 67 | 845 | 1,237 | ||||||||||||||
Total revenues | 469,309 | 495,631 | 507,332 | 516,927 | 1,989,199 | |||||||||||||||
Benefits and expenses | ||||||||||||||||||||
Claims incurred | 394,532 | 398,420 | 413,626 | 406,282 | 1,612,860 | |||||||||||||||
Operating expenses | 68,252 | 68,603 | 71,205 | 71,358 | 279,418 | |||||||||||||||
Total operating costs | 462,784 | 467,023 | 484,831 | 477,640 | 1,892,278 | |||||||||||||||
Interest expense | 3,264 | 3,357 | 3,338 | 3,311 | 13,270 | |||||||||||||||
Total benefits and expenses | 466,048 | 470,380 | 488,169 | 480,951 | 1,905,548 | |||||||||||||||
Income before taxes | 3,261 | 25,251 | 19,163 | 35,976 | 83,651 | |||||||||||||||
Income tax expense (benefit) | ||||||||||||||||||||
Current | 451 | 9,090 | 2,096 | 7,560 | 19,197 | |||||||||||||||
Deferred | (1,122 | ) | (2,499 | ) | (1,017 | ) | 312 | (4,326 | ) | |||||||||||
Total income taxes | (671 | ) | 6,591 | 1,079 | 7,872 | 14,871 | ||||||||||||||
Net income | $ | 3,932 | $ | 18,660 | $ | 18,084 | $ | 28,104 | $ | 68,780 | ||||||||||
Basic net income per share | $ | 0.13 | $ | 0.64 | $ | 0.62 | $ | 0.96 | $ | 2.33 | ||||||||||
Diluted net income per share | 0.13 | 0.63 | 0.62 | 0.96 | 2.33 |
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Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
2008 | ||||||||||||||||||||
March 31 | June 30 | September 30 | December 31 | Total | ||||||||||||||||
Revenues | ||||||||||||||||||||
Premiums earned, net | $ | 404,399 | $ | 419,157 | $ | 433,219 | $ | 438,682 | $ | 1,695,457 | ||||||||||
Administrative service fees | 3,713 | 3,920 | 4,448 | 7,106 | 19,187 | |||||||||||||||
Net investment income | 13,432 | 14,302 | 14,072 | 14,447 | 56,253 | |||||||||||||||
Total operating revenues | 421,544 | 437,379 | 451,739 | 460,235 | 1,770,897 | |||||||||||||||
Net realized investment gains (losses) | 609 | (1,741 | ) | (1,101 | ) | (11,707 | ) | (13,940 | ) | |||||||||||
Net unrealized investment loss on trading securities | (6,250 | ) | (951 | ) | (3,605 | ) | (10,258 | ) | (21,064 | ) | ||||||||||
Other (loss) income, net | (1,521 | ) | 1,360 | (1,147 | ) | (1,159 | ) | (2,467 | ) | |||||||||||
Total revenues | 414,382 | 436,047 | 445,886 | 437,111 | 1,733,426 | |||||||||||||||
Benefits and expenses | ||||||||||||||||||||
Claims incurred | 350,207 | 354,780 | 365,585 | 364,342 | 1,434,914 | |||||||||||||||
Operating expenses | 60,031 | 61,399 | 63,572 | 66,885 | 251,887 | |||||||||||||||
Total operating costs | 410,238 | 416,179 | 429,157 | 431,227 | 1,686,801 | |||||||||||||||
Interest expense | 3,673 | 3,926 | 3,749 | 3,333 | 14,681 | |||||||||||||||
Total benefits and expenses | 413,911 | 420,105 | 432,906 | 434,560 | 1,701,482 | |||||||||||||||
Income before taxes | 471 | 15,942 | 12,980 | 2,551 | 31,944 | |||||||||||||||
Income tax expense (benefit) | ||||||||||||||||||||
Current | (184 | ) | 4,291 | 4,580 | 2,855 | 11,542 | ||||||||||||||
Deferred | (547 | ) | (486 | ) | (1,071 | ) | (2,284 | ) | (4,388 | ) | ||||||||||
Total income taxes | (731 | ) | 3,805 | 3,509 | 571 | 7,154 | ||||||||||||||
Net income | $ | 1,202 | $ | 12,137 | $ | 9,471 | $ | 1,980 | $ | 24,790 | ||||||||||
Basic net income per share | $ | 0.04 | $ | 0.38 | $ | 0.29 | $ | 0.06 | $ | 0.77 | ||||||||||
Diluted net income per share | 0.04 | 0.38 | 0.29 | 0.06 | 0.77 |
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Table of Contents
Schedule II
Condensed Financial Information of Triple-S Management Corporation
(Registrant)
Balance Sheets
(in thousands)
As of December 31, | ||||||||
2009 | 2008 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 361 | $ | 1,952 | ||||
Investment securities available for sale, at fair value (amortized cost $39,713 and $57,975 in 2009 and 2008, respectively) | 38,668 | 56,528 | ||||||
Investment in subsidiaries | 560,448 | 484,535 | ||||||
Note receivable and accrued interest from subsidiary | 46,354 | 48,339 | ||||||
Due from subsidiaries | 2,552 | 8,956 | ||||||
Other assets | 26,357 | 25,727 | ||||||
Total assets | $ | 674,740 | $ | 626,037 | ||||
Liabilities: | ||||||||
Due to subsidiary | 4,335 | 197 | ||||||
Borrowings | 117,667 | 119,307 | ||||||
Other liabilities | 14,966 | 21,434 | ||||||
Total liabilities | 136,968 | 140,938 | ||||||
Stockholders’ equity: | ||||||||
Common stock, class A | 9,043 | 9,043 | ||||||
Common stock, class B | 20,110 | 22,105 | ||||||
Additional paid-in-capital | 159,303 | 179,504 | ||||||
Retained earnings | 360,892 | 292,112 | ||||||
Accumulated other comprehensive loss, net | (11,576 | ) | (17,665 | ) | ||||
Total stockholder’s equity | 537,772 | 485,099 | ||||||
Total liabilities and stockholder’s equity | $ | 674,740 | $ | 626,037 | ||||
Table of Contents
Schedule II
Condensed Financial Information of Triple-S Management Corporation
Triple-S Management Corporation
Statements of Earnings
(in thousands)
2009 | 2008 | 2007 | ||||||||||
Investment income | $ | 5,068 | $ | 7,324 | $ | 5,477 | ||||||
Other revenues | 8,690 | 8,215 | 11,373 | |||||||||
Total revenues | 13,758 | 15,539 | 16,850 | |||||||||
Operating expenses: | ||||||||||||
General and administrative expenses | 9,004 | 9,283 | 7,846 | |||||||||
Interest expense | 6,693 | 7,301 | 8,034 | |||||||||
Total operating expenses | 15,697 | 16,584 | 15,880 | |||||||||
(Loss) income before income taxes | (1,939 | ) | (1,045 | ) | 970 | |||||||
Income tax (benefit) expense | (463 | ) | 268 | 432 | ||||||||
(Loss) Income of parent company | (1,476 | ) | (1,313 | ) | 538 | |||||||
Equity in income of subsidiaries | 70,256 | 26,103 | 57,980 | |||||||||
Net income | $ | 68,780 | $ | 24,790 | $ | 58,518 | ||||||
Table of Contents
Schedule II
Condensed Financial Information of Triple-S Management Corporation
(Registrant)
Statements of Cash Flows
(in thousands)
12/31/2009 | 12/31/2008 | 12/31/2007 | ||||||||||
Net income | $ | 68,780 | $ | 24,790 | $ | 58,518 | ||||||
Adjustment to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||
Equity in net income of subsidiaries | (70,256 | ) | (26,103 | ) | (57,980 | ) | ||||||
Depreciation and amortization | 863 | 922 | 1,120 | |||||||||
Shared- based compensation | 3,924 | 3,268 | 200 | |||||||||
Deferred income tax benefit | (644 | ) | (363 | ) | (88 | ) | ||||||
Other | 934 | 1,965 | (394 | ) | ||||||||
Changes in assets and liabilities: | ||||||||||||
Accrued interest from subisidiary | 1,985 | (3,188 | ) | (4,150 | ) | |||||||
Due from subsidiaries | 6,404 | (8,359 | ) | (237 | ) | |||||||
Other assets | (175 | ) | (1,173 | ) | (236 | ) | ||||||
Due to subsidiary | 4,138 | (5,818 | ) | (9,144 | ) | |||||||
Other liabilities | (85 | ) | 2,343 | 4,908 | ||||||||
Net cash provided by (used in) operating activities | 15,868 | (11,716 | ) | (7,483 | ) | |||||||
Cash flows from investing activities: | ||||||||||||
Acquisition of investment in securities classified as available for sale | (40,996 | ) | (70,684 | ) | (28,202 | ) | ||||||
Proceeds from sale and maturities of investment in securities classified as available for sale | 58,324 | 45,905 | 4,393 | |||||||||
Notes receivable from subsidiaries | — | — | 22,000 | |||||||||
Net (acquisition) retirement of property and equipment | (792 | ) | (47 | ) | 149 | |||||||
Net cash provided by (used in) investing activities | 16,536 | (24,826 | ) | (1,660 | ) | |||||||
Cash flow from financing activities: | ||||||||||||
Repayments of borrowings | (1,640 | ) | (1,639 | ) | (12,141 | ) | ||||||
Net proceeds from initial public offering | — | — | 70,279 | |||||||||
Dividends | — | — | (2,448 | ) | ||||||||
Repurchase of common stock | (32,355 | ) | (7,645 | ) | — | |||||||
Other | — | 6 | 1 | |||||||||
Net cash (used in) provided by financing activities | (33,995 | ) | (9,278 | ) | 55,691 | |||||||
Net increase (decrease) in cash and cash equivalents | (1,591 | ) | (45,820 | ) | 46,548 | |||||||
Cash and cash equivalents, beginning of year | 1,952 | 47,772 | 1,224 | |||||||||
Cash and cash equivalents, end of year | $ | 361 | $ | 1,952 | $ | 47,772 | ||||||
Table of Contents
(Parent Company Only)
Notes to Condensed Financial Statements
December 31, 2009, 2008 and 2007
The accompanying notes to the condensed financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included in Item 15 to the Annual Report on Form 10-K. |
(1) | For purposes of these condensed financial statements, Triple-S Management Corporation’s (the Company or TSM) investment in its wholly owned subsidiaries is recorded using the equity basis accounting. |
(2) | Significant Accounting Policies |
The significant accounting policies followed by the Company are set forth in the notes to the consolidated financial statements and the accompanying notes thereto. Refer to Item 15 to the Annual Report of Form 10-K. |
(3) | Long-Term Borrowings |
A summary of the long-term borrowings entered into by the Company at December 31, 2009 and 2008 follows: |
2009 | 2008 | |||||||
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%. | $ | 60,000 | $ | 60,000 | ||||
Senior unsecured notes payable of $35,000 issued on January 2006; due January 2021. Interest is payable monthly at a fixed rate of 6.70%. | 35,000 | 35,000 | ||||||
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.28% and 2.43% at December 31, 2009, and 2008, respectively). | 22,667 | 24,307 | ||||||
Total borrowings | $ | 117,667 | $ | 119,307 | ||||
Aggregate maturities of the Company’s long term borrowings as of December 31, 2009 are summarized as follows: |
Year ending December 31 | ||||
2010 | $ | 1,640 | ||
2011 | 1,640 | |||
2012 | 1,640 | |||
2013 | 1,640 | |||
2014 | 1,640 | |||
Thereafter | 109,467 | |||
$ | 117,667 | |||
All of the Company’s senior notes can be prepaid at par, in total or partially, five years after issuance as determined by the Company. |
1
Table of Contents
(Parent Company Only)
Notes to Condensed Financial Statements
December 31, 2009, 2008 and 2007
Debt issuance costs related to each of the Company’s senior unsecured notes were deferred and are being amortized over the term of its respective senior note. Unamortized debt issuance costs related to these senior unsecured notes as of December 31, 2009 and 2008 amounted to $651 and $710, respectively, and are included within the other assets in the accompanying condensed balance sheets. |
The secured loan note payable previously described is guaranteed by a first position held by the bank on the Company’s and its subsidiaries land, building, and substantially all leasehold improvements, as collateral for the term of the loans under a continuing general security agreement. This secured loan contains certain non-financial covenants, which are customary in this type of facility, including but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitation on changes in control. |
The following are the significant related-party transactions made for the three-year period ended December 31, 2009, 2008 and 2007: |
2009 | 2008 | 2007 | ||||||||||
Rent charges to subsidiaries | $ | 7,422 | $ | 7,286 | $ | 7,023 | ||||||
Interest charged to subsidiary on note receivable | 3,015 | 3,189 | 4,821 |
As of December 31, 2009 the Company has a note receivable from a subsidiary pursuant to the provisions of Article 29.30 of the Puerto Rico Insurance Code. |
• | On December 22, 2005, TSV borrowed $57,000 from TSM. This note receivable has a balance of $37,000 as of December 31, 2009 and 2008 and bears interest at an annual rate 6.6%. Accrued interest at December 31, 2009 and 2008 amounted to $9,354 and $11,339, respectively. |
The note receivable from subsidiary is due on demand; however, pursuant to the requirements established by the Commissioner of Insurance, the parties agreed that no payment of the total principal nor the interest due on the loan will be made without first obtaining written authorization from the Commissioner of Insurance within at least 60 days prior to the proposed payment date. Written authorization to convert $20,000 of the TSV’s note receivable into a capital contribution was obtained from the Commissioner of Insurance during 2008. | ||
(5) | Contingencies |
At December 31, 2009 and 2008, the Company is defendant in various lawsuits in the ordinary course of business. In the opinion of management, with the advice of its legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the position and results of operations of the Company. |
Hau et al Litigation (formerly known as Jordan et al) |
On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the Company, TSS and others in the Court of First Instance for San Juan, Superior Section (the “Court”), alleging, among other things, violations by the defendants of provisions of the Puerto Rico Insurance Code, antitrust violations, unfair business practices, RICO violations, breach of contract with providers, and damages in the amount of $12 million. Following years of complaint amendments, motions practice and interim appeals up to the level of the Puerto Rico Supreme Court, the plaintiffs amended their complaint on |
2
Table of Contents
(Parent Company Only)
Notes to Condensed Financial Statements
December 31, 2009, 2008 and 2007
June 20, 2008 to allege with particularity the same claims initially asserted but on behalf of a more limited group of plaintiffs, and increase their claim for damages to approximately $207 million. Discovery is expected to conclude by March 2010. The Company intends to vigorously defend this claim. |
Dentists Association Litigation |
On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico) filed a complaint in the Court of First Instance against 24 health plans operating in Puerto Rico that offer dental health coverage. The Company and two of its subsidiaries, TSS and TC were included as defendants. This litigation purports to be a class action filed on behalf of Puerto Rico dentists who are similarly situated; however, the complaint does not include a single dentist as a class representative nor a definition of the intended class. |
The complaint alleges that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to dentists so that they are not paid in a timely and complete manner for the covered medically necessary services they render. The complaint also alleges, among other things, violations to the Puerto Rico Insurance Code, antitrust laws, the Puerto Rico racketeering statute, unfair business practices, breach of contract with providers, and total damages in the amount of $150 million. In addition, the complaint claims that the Puerto Rico Insurance Companies Association is the hub of an alleged conspiracy concocted by the member plans to defraud dentists. |
There are numerous available defenses to oppose both the request for class certification and the merits. The Company intends to vigorously defend this claim. |
Two codefendant plans removed the case to federal court, which the plaintiffs and the other codefendants, including the Company, opposed. The federal District Court decided that it lacked jurisdiction under the Class Action Fairness Act (“CAFA”) and remanded the case to state court. The removing defendants petitioned to appeal to the First Circuit Court of Appeals. Having accepted the appeal, the First Circuit Court of Appeals issued an order in late October 2009 which found the lower court’s decision premature. The Court of Appeals remanded the case to the federal District Court and allowed limited discovery to determine whether the case should be heard in federal court pursuant to CAFA. |
Claims by Heirs of Former Shareholders |
The Company and TSS are defending four individual lawsuits, all filed in state court, from persons who claim to have inherited a total of 90 shares of the Company or one of its predecessors or affiliates (before giving effect to the 3,000-for-one stock split). While each case presents unique facts, the lawsuits generally allege that the redemption of the shares by the Company pursuant to transfer and ownership restrictions contained in the Company’s (or its predecessors’ or affiliates’) articles of incorporation and bylaws was improper. Discovery is underway in each case. Management believes all these claims are time barred under one or more statutes of limitations and is vigorously defending them. | ||
(6) | Stockholders’ Equity |
Dividends |
On March 12, 2007, the Board declared a cash dividend of $2,448 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding those shares issued to the representatives of the community that are members of the Board (the qualifying shares). All stockholders of record as of the close of business on March 23, 2007, except those who only hold qualifying shares, received a dividend per share of $0.09 for each share held on that date. |
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Table of Contents
Schedule III — Supplementary Insurance Information
For the years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands)
Deferred | Amortization of | |||||||||||||||||||||||||||||||||||||||||||
Policy | Deferred Policy | |||||||||||||||||||||||||||||||||||||||||||
Acquisition | Liability for | Other | Acquisition | |||||||||||||||||||||||||||||||||||||||||
Costs and Value | Future | Policy Claims | Net | Costs and Value | Other | Net | ||||||||||||||||||||||||||||||||||||||
of Business | Claim | Policy | Unearned | and Benefits | Premium | Investment | Claims | of Business | Operating | Premiums | ||||||||||||||||||||||||||||||||||
Segment | Acquired | Liabilities | Benefits | Premiums | Payable | Revenue | Income | Incurred | Acquired | Expenses | Written | |||||||||||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||||||||||||||||||
Managed care | $ | — | $ | 236,366 | $ | — | $ | 6,996 | $ | — | $ | 1,684,068 | $ | 21,641 | $ | 1,515,173 | $ | — | $ | 184,663 | $ | 1,684,068 | ||||||||||||||||||||||
Life insurance | 112,908 | 40,100 | 222,619 | 4,163 | — | 100,112 | 16,763 | 50,353 | 16,844 | 35,123 | 100,112 | |||||||||||||||||||||||||||||||||
Property and casualty insurance | 27,009 | 83,980 | — | 97,183 | — | 96,209 | 11,679 | 47,334 | 28,284 | 23,524 | 95,817 | |||||||||||||||||||||||||||||||||
Other non-reportable segments, parent company operations and net | — | |||||||||||||||||||||||||||||||||||||||||||
consolidating entries | — | — | — | — | — | (4,317 | ) | 2,053 | — | — | (9,020 | ) | — | |||||||||||||||||||||||||||||||
Total | $ | 139,917 | $ | 360,446 | $ | 222,619 | $ | 108,342 | $ | — | $ | 1,876,072 | $ | 52,136 | $ | 1,612,860 | $ | 45,128 | $ | 234,290 | $ | 1,879,997 | ||||||||||||||||||||||
2008 | ||||||||||||||||||||||||||||||||||||||||||||
Managed care | $ | — | $ | 201,849 | $ | — | $ | 5,585 | $ | — | $ | 1,513,025 | $ | 23,091 | $ | 1,345,371 | $ | — | $ | 160,591 | $ | 1,513,025 | ||||||||||||||||||||||
Life insurance | 101,243 | 39,948 | 207,545 | 3,370 | — | 92,843 | 16,482 | 47,432 | 16,404 | 33,000 | 92,843 | |||||||||||||||||||||||||||||||||
Property and casualty insurance | 25,104 | 81,913 | — | 101,186 | — | 93,821 | 12,546 | 42,111 | 27,383 | 23,725 | 95,867 | |||||||||||||||||||||||||||||||||
Other non-reportable segments, parent | — | |||||||||||||||||||||||||||||||||||||||||||
company operations and net | — | |||||||||||||||||||||||||||||||||||||||||||
consolidating entries | — | — | — | — | — | (4,232 | ) | 4,134 | — | — | (9,216 | ) | — | |||||||||||||||||||||||||||||||
Total | $ | 126,347 | $ | 323,710 | $ | 207,545 | $ | 110,141 | $ | — | $ | 1,695,457 | $ | 56,253 | $ | 1,434,914 | $ | 43,787 | $ | 208,100 | $ | 1,701,735 | ||||||||||||||||||||||
2007 | ||||||||||||||||||||||||||||||||||||||||||||
Managed care | $ | — | $ | 201,604 | $ | — | $ | 27,923 | $ | — | $ | 1,301,792 | $ | 19,673 | $ | 1,133,241 | $ | — | $ | 148,063 | $ | 1,301,792 | ||||||||||||||||||||||
Life insurance | 93,564 | 35,485 | 194,131 | 2,931 | — | 88,861 | 15,016 | 45,669 | 16,033 | 31,459 | 88,861 | |||||||||||||||||||||||||||||||||
Property and casualty insurance | 23,675 | 116,741 | — | 101,745 | — | 96,883 | 11,849 | 44,865 | 28,917 | 24,210 | 101,747 | |||||||||||||||||||||||||||||||||
Other non-reportable segments, parent | ||||||||||||||||||||||||||||||||||||||||||||
company operations and net | ||||||||||||||||||||||||||||||||||||||||||||
consolidating entries | — | — | — | — | — | (3,988 | ) | 656 | — | — | (11,149 | ) | — | |||||||||||||||||||||||||||||||
Total | $ | 117,239 | $ | 353,830 | $ | 194,131 | $ | 132,599 | $ | — | $ | 1,483,548 | $ | 47,194 | $ | 1,223,775 | $ | 44,950 | $ | 192,583 | $ | 1,492,400 | ||||||||||||||||||||||
Table of Contents
Schedule IV — Reinsurance
For the years ended December 31, 2009, 2008 and 2007
Percentage | ||||||||||||||||||||
Ceded to | Assumed | of Amount | ||||||||||||||||||
Gross | Other | from Other | Net | Assumed | ||||||||||||||||
Amount | Companies (1) | Companies | Amount | to Net | ||||||||||||||||
2009 | ||||||||||||||||||||
Life insurance in force | $ | 10,714,252 | $ | 2,937,377 | �� | $ | — | $ | 7,776,875 | 0.0 | % | |||||||||
Premiums: | ||||||||||||||||||||
Life insurance | $ | 106,243 | $ | 6,131 | $ | — | $ | 100,112 | 0.0 | % | ||||||||||
Accident and health insurance | 1,691,409 | 7,341 | — | 1,684,068 | 0.0 | % | ||||||||||||||
Property and casualty insurance | 163,358 | 67,541 | — | 95,817 | 0.0 | % | ||||||||||||||
Total premiums | $ | 1,961,010 | $ | 81,013 | $ | — | $ | 1,879,997 | 0.0 | % | ||||||||||
2008 | ||||||||||||||||||||
Life insurance in force | $ | 10,503,170 | $ | 2,823,647 | $ | — | $ | 7,679,523 | 0.0 | % | ||||||||||
Premiums: | ||||||||||||||||||||
Life insurance | $ | 100,413 | $ | 7,570 | $ | — | $ | 92,843 | 0.0 | % | ||||||||||
Accident and health insurance | 1,518,648 | 5,623 | — | 1,513,025 | 0.0 | % | ||||||||||||||
Property and casualty insurance | 167,982 | 72,115 | — | 95,867 | 0.0 | % | ||||||||||||||
Total premiums | $ | 1,787,043 | $ | 85,308 | $ | — | $ | 1,701,735 | 0.0 | % | ||||||||||
2007 | ||||||||||||||||||||
Life insurance in force | $ | 10,321,749 | $ | 2,459,100 | $ | — | $ | 7,862,649 | 0.0 | % | ||||||||||
Premiums: | ||||||||||||||||||||
Life insurance | $ | 97,700 | $ | 8,839 | $ | — | $ | 88,861 | 0.0 | % | ||||||||||
Accident and health insurance | 1,305,141 | 3,349 | — | 1,301,792 | 0.0 | % | ||||||||||||||
Property and casualty insurance | 170,884 | 69,137 | — | 101,747 | 0.0 | % | ||||||||||||||
Total premiums | $ | 1,573,725 | $ | 81,325 | $ | — | $ | 1,492,400 | 0.0 | % | ||||||||||
(1) | Premiums ceded on the life insurance business are net of commission income on reinsurance amounting to $42, $287 and $258 for the years ended December 31, 2009, 2008 and 2007. |
Table of Contents
Schedule V — Valuation and Qualifying Accounts
For the years ended December 31, 2009, 2008 and 2007
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
Beginning of | Costs and | Other Accounts | Deductions - | End of | ||||||||||||||||
Period | Expenses | - Describe (1) | Describe (2) | Period | ||||||||||||||||
2009 | ||||||||||||||||||||
Allowance for doubtful receivables | $ | 14,745 | 2,149 | 10,065 | (1,725 | ) | 25,234 | |||||||||||||
2008 | ||||||||||||||||||||
Allowance for doubtful receivables | $ | 15,925 | 821 | — | (2,001 | ) | 14,745 | |||||||||||||
2007 | ||||||||||||||||||||
Allowance for doubtful receivables | $ | 18,230 | 6,661 | — | (8,966 | ) | 15,925 | |||||||||||||
(1) | Represents premiums adjustment to provide for unresolved reconciliation items with the Government of Puerto Rico and other entities. | |
(2) | Deductions represent the write-off of accounts deemed uncollectible. |