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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 | Name of each exchange on which registered | |
Class B common stock, $1.00 par value | New York Stock Exchange |
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Part I | 3 | |||||||
Item 1. | 3 | |||||||
Item 1A. | 3 | |||||||
Item 1B. | 49 | |||||||
Item 2. | 49 | |||||||
Item 3. | 50 | |||||||
Item 4. | 52 | |||||||
Part II | 52 | |||||||
Item 5. | 52 | |||||||
Item 6. | 55 | |||||||
Item 7. | 56 | |||||||
Item 7A. | 83 | |||||||
Item 8. | 87 | |||||||
Item 9. | 87 | |||||||
Item 9A. | 88 | |||||||
Item 9B. | 89 | |||||||
Part III | 89 | |||||||
Item 10. | 89 | |||||||
Item 11. | 90 | |||||||
Item 12. | 90 | |||||||
Item 13. | 90 | |||||||
Item 14. | 90 | |||||||
Part IV | ||||||||
Item 15. | 90 | |||||||
94 | ||||||||
EX-10.8 | ||||||||
EX-10.17 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
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Percentage of Total Segment | ||||
Revenues for the Year Ended | ||||
Line of Business | December 31, 2008 | |||
Commercial multi-peril | 45 | % | ||
Auto | 22 | |||
Dwelling and commercial property mono-line | 19 | |||
Other | 14 |
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Enrollment at | Percentage of | |||||||
Market Sector | December 31, 2008 | Total Enrollment | ||||||
Commercial | 592,723 | 49.6 | % | |||||
Reform | 527,447 | 44.1 | ||||||
Medicare Advantage | 75,280 | 6.3 | ||||||
Total | 1,195,450 | 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 BCBA, 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 |
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• | 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. |
• | initiatives to provide greater access to coverage for uninsured and under-insured populations; | ||
• | initiatives to increase healthcare regulation, including enhanced efforts to expand the tort liability improve quality of health plans care; | ||
• | Reform and Medicare reform legislation; | ||
• | local government plans and initiatives; | ||
• | Reform and Medicare reform legislation; and | ||
• | increased government concerns regarding fraud and abuse.; and | ||
• | initiatives to increase health care regulation, including efforts to expand the tort liability of health plans. |
• | licensure; | • | transactions resulting in a change of control; | |||
• | policy forms, including plan design and disclosures; | • | member rights and responsibilities; | |||
• | premium rates and rating methodologies; | • | fraud and abuse; | |||
• | underwriting rules and procedures; | • | sales and marketing activities; | |||
• | benefit mandates; | • | quality assurance procedures; | |||
• | eligibility requirements; | • | privacy of medical and other information and permitted disclosures; | |||
• | security of electronically transmitted individually identifiable health information; | • | rates of payment to providers of care; | |||
• | geographic service areas; | • | surcharges on payments to providers; | |||
• | market conduct; | • | provider contract forms; | |||
• | delegation of financial risk and other financial |
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• | utilization review; | arrangements in rates paid to providers of care; | ||||
• | payment of claims, including timeliness and accuracy of payment; | • | agent licensing; | |||
• | special rules in contracts to administer government programs; | • | financial condition (including reserves); | |||
• | transactions with affiliated entities; | • | reinsurance; | |||
• | limitations on the ability to pay dividends; | • | issuance of new shares of capital stock; | |||
• | rates of payment to providers of care; | • | 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, 2008, 2007 and 2006, the Reform program has accounted for 20.1%, 22.1% and 30.2%, respectively , of our consolidated premiums earned, net. During the 2008 period, we were the sole Reform provider in two of the eight Reform regions in Puerto Rico on a fully insured basis. One region was awarded to us on an ASO basis for a one year period beginning November 1, 2008. 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 have one-year terms and expire on June 30 of each year, except for the Metro-North region contract. 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. During the year ended December 31, 2006, this region accounted for 10.7% of our consolidated premiums earned, net and 7.4% of our consolidated operating income. 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. | ||
• | Medicare:We provide services through our Medicare Advantage health plans 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 any of these contracts are terminated, our business would be materially impaired. During each of the years ended December 31, 2008, 2007 and 2006, contracts with CMS represented 25.9%, 17.2% and 11.3% of our consolidated premiums earned, net, respectively, and 12.4%, 34.6% and 46.0% of our consolidated operating income, respectively. The Medicare business may in the future represent a greater percentage of our results. | ||
• | 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, 2008, 2007 and 2006 premiums generated under this contract represented 7.3%, 8.2% and 7.5% of our consolidated premiums earned, net, respectively. The operating income generated under this contract represented 1.1% of our consolidated operating income, during each of the years ended December 31, 2008, 2007 and 2006. |
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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. |
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• | identify profitable new geographic markets to enter; | ||
• | 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; | ||
• | enhanced efforts to improve quality of health care; | ||
• | Reform and Medicare reform legislation; | ||
• | local government plans and initiatives; | ||
• | increased government concerns regarding fraud and abuse; and | ||
• | initiatives to increase health care regulation, 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; |
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• | 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 | |||||||
2007 | ||||||||
Fourth quarter (beginning December 7, 2007) | $ | 21.20 | $ | 14.78 | ||||
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 |
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Total Number of | Approximate Dollar | |||||||||||||||
Shares Purchased as | Value of Shares | |||||||||||||||
Part of Publicly | that May Yet Be | |||||||||||||||
Total Number of | Average Price Paid | Announced | Purchased Under the | |||||||||||||
(Dollar amounts in millions, except pershare data) | Shares Purchased | per Share | Programs1 | Programs | ||||||||||||
December 1, 2008 to December 31, 2008 | 1,181,500 | $ | 11.75 | 1,181,500 | $ | 26.1 |
1 | In October 2008, the Board of Directors authorized a $40.0 million share repurchase program, which commenced on December 8, 2008. |
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![](https://capedge.com/proxy/10-K/0000950144-09-002354/g18062g1806201.gif)
Comparison of cumulative return of Class B Common Stock 12/7/2007 $100.00 12/31/2007 $133.40 $97.59 $100.38 3/31/2008 $116.50 $87.91 $65.25 6/30/2008 $107.92 $85.07 $58.66 9/30/2008 $107.52 $77.52 $61.83 12/31/2008 $75.91 $60.03 $45.37 |
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2008 | 2007 | 2006 (1) | 2005 | 2004 | ||||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||||||
Years ended December 31, | �� | |||||||||||||||||||
Premiums earned, net | $ | 1,695.5 | 1,483.6 | 1,511.6 | 1,380.2 | 1,299.0 | ||||||||||||||
Administrative service fees | 19.2 | 14.0 | 14.1 | 14.4 | 9.2 | |||||||||||||||
Net investment income | 56.2 | 47.2 | 42.7 | 29.1 | 26.8 | |||||||||||||||
Total operating revenues | 1,770.9 | 1,544.8 | 1,568.4 | 1,423.7 | 1,335.0 | |||||||||||||||
Net realized investments gains (losses) | (13.9 | ) | 5.9 | 0.8 | 7.2 | 11.0 | ||||||||||||||
Net unrealized investment gain (loss) on trading securities | (21.1 | ) | (4.1 | ) | 7.7 | (4.7 | ) | 3.0 | ||||||||||||
Other income (loss), net | (2.5 | ) | 3.2 | 2.3 | 3.7 | 3.4 | ||||||||||||||
Total revenues | 1,733.4 | 1,549.8 | 1,579.2 | 1,429.9 | 1,352.4 | |||||||||||||||
Benefits and expenses: | ||||||||||||||||||||
Claims incurred | 1,434.9 | 1,223.8 | 1,259.0 | 1,208.3 | 1,115.8 | |||||||||||||||
Operating expenses | 251.9 | 237.5 | 236.1 | 181.7 | 171.9 | |||||||||||||||
Total operating costs | 1,686.8 | 1,461.3 | 1,495.1 | 1,390.0 | 1,287.7 | |||||||||||||||
Interest expense | 14.7 | 15.9 | 16.6 | 7.6 | 4.6 | |||||||||||||||
Total benefits and expenses | 1,701.5 | 1,477.2 | 1,511.7 | 1,397.6 | 1,292.3 | |||||||||||||||
Income before taxes | 31.9 | 72.6 | 67.5 | 32.3 | 60.1 | |||||||||||||||
Income tax expense | 7.1 | 14.1 | 13.0 | 3.9 | 14.3 | |||||||||||||||
Net income | 24.8 | 58.5 | 54.5 | 28.4 | 45.8 | |||||||||||||||
Basic net income per share (2): | $ | 0.77 | 2.15 | 2.04 | 1.06 | 1.71 | ||||||||||||||
Diluted net income per share: | $ | 0.77 | 2.15 | 2.04 | 1.06 | 1.71 | ||||||||||||||
Dividend declared per common share (3): | $ | — | 0.82 | 0.23 | — | — | ||||||||||||||
December 31, | 2008 | 2007 | 2006 (1) | 2005 | 2004 | |||||||||||||||
Cash and cash equivalents | $ | 46.1 | 240.2 | 81.6 | 49.0 | 35.1 | ||||||||||||||
Total assets | $ | 1,548.5 | 1,659.5 | 1,345.5 | 1,137.5 | 919.7 | ||||||||||||||
Long-term borrowings | $ | 169.3 | 170.9 | 183.1 | 150.6 | 95.7 | ||||||||||||||
Total stockholders’ equity | $ | 485.9 | 482.5 | 342.6 | 308.7 | 301.4 | ||||||||||||||
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2008 | 2007 | 2006 (1) | 2005 | 2004 | ||||||||||||||||
Additional Managed Care Data (4) | ||||||||||||||||||||
Years ended December 31, | ||||||||||||||||||||
Medical loss ratio | 88.9 | % | 87.1 | % | 87.6 | % | 90.3 | % | 88.3 | % | ||||||||||
Operating expense ratio | 10.5 | % | 11.2 | % | 11.5 | % | 10.8 | % | 10.8 | % | ||||||||||
Medical membership (period end) | 1,195,450 | 977,190 | 979,506 | 1,252,649 | 1,236,108 | |||||||||||||||
(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. See note 18 to the audited consolidated financial statements for the years ended December 31, 2008, 2007 and 2006. | |
(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, 2008, 2007 and 2006. | |
(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, 2008, 2007 and 2006. | |
(4) | Does not reflect inter-segment eliminations. |
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Years ended December 31, | ||||||||||||
(Dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Premiums earned, net: | ||||||||||||
Managed care | $ | 1,513.0 | 1,301.8 | 1,339.8 | ||||||||
Life insurance | 92.8 | 88.9 | 86.9 | |||||||||
Property and casualty insurance | 93.8 | 96.9 | 88.5 | |||||||||
Intersegment premiums earned | (4.1 | ) | (4.0 | ) | (3.6 | ) | ||||||
Consolidated premiums earned, net | $ | 1,695.5 | 1,483.6 | 1,511.6 | ||||||||
Administrative service fees: | ||||||||||||
Managed care | $ | 22.5 | 17.2 | 16.9 | ||||||||
Intersegment premiums earned | (3.3 | ) | (3.2 | ) | (2.8 | ) | ||||||
Consolidated administrative service fees | $ | 19.2 | 14.0 | 14.1 | ||||||||
Operating income: | ||||||||||||
Managed care | $ | 52.6 | 57.4 | 45.5 | ||||||||
Life insurance | 12.5 | 10.7 | 11.2 | |||||||||
Property and casualty insurance | 13.1 | 10.7 | 11.2 | |||||||||
Intersegment premiums earned | 5.9 | 4.7 | 5.4 | |||||||||
Consolidated operating income | $ | 84.1 | 83.5 | 73.3 | ||||||||
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As of December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Commercial(1) | 592,723 | 574,251 | 580,850 | |||||||||
Reform(2) | 527,447 | 353,694 | 357,515 | |||||||||
Medicare(3) | 75,280 | 49,245 | 41,141 | |||||||||
Total | 1,195,450 | 977,190 | 979,506 | |||||||||
(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) | 2008 | 2007 | 2006 | |||||||||
Years ended December 31, | ||||||||||||
Revenues: | ||||||||||||
Premiums earned, net | $ | 1,695.5 | 1,483.6 | 1,511.6 | ||||||||
Administrative service fees | 19.2 | 14.0 | 14.1 | |||||||||
Net investment income | 56.2 | 47.2 | 42.7 | |||||||||
Total operating revenues | 1,770.9 | 1,544.8 | 1,568.4 | |||||||||
Net realized investment (losses) gains | (13.9 | ) | 5.9 | 0.8 | ||||||||
Net unrealized investment gain (loss) on trading securities | (21.1 | ) | (4.1 | ) | 7.7 | |||||||
Other income (expense), net | (2.5 | ) | 3.2 | 2.3 | ||||||||
Total revenues | 1,733.4 | 1,549.8 | 1,579.2 | |||||||||
Benefits and expenses: | ||||||||||||
Claims incurred | 1,434.9 | 1,223.8 | 1,259.0 | |||||||||
Operating expenses | 251.9 | 237.5 | 236.1 | |||||||||
Total operating costs | 1,686.8 | 1,461.3 | 1,495.1 | |||||||||
Interest expense | 14.7 | 15.9 | 16.6 | |||||||||
Total benefits and expenses | 1,701.5 | 1,477.2 | 1,511.7 | |||||||||
Income before taxes | 31.9 | 72.6 | 67.5 | |||||||||
Income tax expense | 7.1 | 14.1 | 13.0 | |||||||||
Net income | $ | 24.8 | 58.5 | 54.5 | ||||||||
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(Dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Operating revenues: | ||||||||||||
Medical premiums earned, net: | ||||||||||||
Commercial | $ | 734.2 | 718.7 | 713.2 | ||||||||
Reform | 340.1 | 327.5 | 455.8 | |||||||||
Medicare | 438.7 | 255.6 | 170.8 | |||||||||
Medical premiums earned, net | 1,513.0 | 1,301.8 | 1,339.8 | |||||||||
Administrative service fees | 22.5 | 17.2 | 16.9 | |||||||||
Net investment income | 23.1 | 19.7 | 18.8 | |||||||||
Total operating revenues | 1,558.6 | 1,338.7 | 1,375.5 | |||||||||
Medical operating costs: | ||||||||||||
Medical claims incurred | 1,345.4 | 1,133.2 | 1,173.6 | |||||||||
Medical operating expenses | 160.6 | 148.1 | 156.4 | |||||||||
Total medical operating costs | 1,506.0 | 1,281.3 | 1,330.0 | |||||||||
Medical operating income | $ | 52.6 | 57.4 | 45.5 | ||||||||
Additional data: | ||||||||||||
Member months enrollment: | ||||||||||||
Commercial: | ||||||||||||
Fully-insured | 4,947,854 | 4,983,980 | 5,272,987 | |||||||||
Self-funded | 2,049,140 | 1,930,850 | 1,861,833 | |||||||||
Total Commercial member months | 6,996,994 | 6,914,830 | 7,134,820 | |||||||||
Reform: | ||||||||||||
Fully-insured | 4,101,905 | 4,262,248 | 6,484,270 | |||||||||
Self-funded | 376,975 | — | — | |||||||||
Total Reform member months | 4,478,880 | 4,262,248 | 6,484,270 | |||||||||
Medicare: | ||||||||||||
Medicare Advantange | 727,274 | 416,512 | 281,274 | |||||||||
Stand-alone PDP | 127,658 | 137,528 | 180,444 | |||||||||
Total Medicare member months | 854,932 | 554,040 | 461,718 | |||||||||
Total member months | 12,330,806 | 11,731,118 | 14,080,808 | |||||||||
Medical loss ratio | 88.9 | % | 87.0 | % | 87.6 | % | ||||||
Operating expense ratio | 10.5 | % | 11.2 | % | 11.5 | % | ||||||
• | 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 during 2007 of 8.6%, partially offset by a decrease in member months enrollment of 160,343, or 3.8%. |
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• | 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 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. |
• | Medical premiums earned in the Reform business decreased by $128.3 million, or 28.1%, to $327.5 million during the 2007 period. This fluctuation is due to a decrease in member months enrollment in the Reform business by 2,222,022, or 34.3%, mainly as the result of the termination of the contract for the Metro-North region, the tightening of membership restrictions by the Puerto Rico government, and the shift in membership of dual eligibles to Medicare Advantage policies offered by us and our competitors. The member months enrollment of the Metro-North region was 2,040,714 during the year ended December 31, 2006. The effect of this decrease in membership was mitigated by an increase in premium rates, effective July 1, 2007, of approximately 8.7% and a retroactive increase in rates of approximately 6.7% effective November 1, 2006. |
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• | Medical premiums generated by the Medicare business increased during 2007 by $84.8 million, or 49.6%, to $255.6 million, primarily due to an increase in member months enrollment of 92,322, or 20.0%. The increase in member months is the net result of an increase of 135,238, or 48.1%, in the membership of our Medicare Advantage products and a decrease of 42,916, or 23.8%, in the membership of our PDP product. We expect that Medicare Advantage enrollment will continue to experience growth, but at a slower pace than in prior periods. In addition, the segment recognized an additional premium adjustment of $3.2 million related to the 2006 risk scores review performed by CMS. | ||
• | Medical premiums generated by the Commercial business increased by $5.5 million, or 0.8%, to $718.7 million during the 2007 period. This increase is primarily the result of an increase in average premium rates of 6.5%, partially offset by a decrease in member months enrollment of 289,007, or 5.5%. |
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(Dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Years ended December 31, | ||||||||||||
Operating revenues: | ||||||||||||
Premiums earned, net | ||||||||||||
Premiums earned, net | $ | 100.1 | 97.4 | 91.9 | ||||||||
Premiums earned ceded | (7.6 | ) | (8.8 | ) | (9.7 | ) | ||||||
Assumed premiums earned | — | — | 4.4 | |||||||||
Net premiums earned | 92.5 | 88.6 | 86.6 | |||||||||
Commission income on reinsurance | 0.3 | 0.3 | 0.3 | |||||||||
Premiums earned, net | 92.8 | 88.9 | 86.9 | |||||||||
Net investment income | 16.5 | 15.0 | 13.7 | |||||||||
Total operating revenues | 109.3 | 103.9 | 100.6 | |||||||||
Operating costs: | ||||||||||||
Policy benefits and claims incurred | 47.4 | 45.7 | 43.6 | |||||||||
Underwriting and other expenses | 49.4 | 47.5 | 45.8 | |||||||||
Total operating costs | 96.8 | 93.2 | 89.4 | |||||||||
Operating income | $ | 12.5 | 10.7 | 11.2 | ||||||||
Additional data: | ||||||||||||
Loss ratio | 51.1 | % | 51.4 | % | 50.2 | % | ||||||
Expense ratio | 53.2 | % | 53.4 | % | 52.7 | % |
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• | The premiums earned generated by the segment increased by $5.5 million, or 6.0%, to $97.4 million during the 2007 period. Premiums earned by GA Life during the month of January 2006 were $6.6 million, which are not reflected in our consolidated financial statements. Eliminating the effect of GA Life’s premiums for the month of January 2006, the premiums earned in the segment decreased by $1.1 million primarily the result of lower sales in the Group Disability and Group Life businesses offset in part by an increase in the premiums of the Individual Life and Cancer businesses. | ||
• | On December 22, 2005, we entered into a coinsurance funds withheld agreement with GA Life pursuant to which our former subsidiary SVTS assumed 69% of all the business written by GA Life (prior to its acquisition by us) as of and after the effective date of the agreement. Our results reflect premiums assumed under this agreement of $4.4 million, which represents our share of premiums for the month of January 2006 under the coinsurance agreement. The effects of the reinsurance transactions corresponding to this agreement were eliminated for consolidated financial statement purposes for the period following January 31, 2006. |
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(Dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Years ended December 31, | ||||||||||||
Operating revenues: | ||||||||||||
Premiums earned, net: | ||||||||||||
Premiums written | $ | 168.0 | 170.9 | 158.9 | ||||||||
Premiums ceded | (72.1 | ) | (69.1 | ) | (65.7 | ) | ||||||
Change in unearned premiums | (2.1 | ) | (4.9 | ) | (4.7 | ) | ||||||
Premiums earned, net | 93.8 | 96.9 | 88.5 | |||||||||
Net investment income | 12.5 | 11.8 | 9.6 | |||||||||
Total operating revenues | 106.3 | 108.7 | 98.1 | |||||||||
Operating costs: | ||||||||||||
Claims incurred | 42.1 | 44.9 | 41.7 | |||||||||
Underwriting and other operating expenses | 51.1 | 53.1 | 45.2 | |||||||||
Total operating costs | 93.2 | 98.0 | 86.9 | |||||||||
Operating income | $ | 13.1 | 10.7 | 11.2 | ||||||||
Additional data: | ||||||||||||
Loss ratio | 44.9 | % | 46.3 | % | 47.1 | % | ||||||
Expense ratio | 54.5 | % | 54.8 | % | 51.1 | % | ||||||
Combined ratio | 99.4 | % | 101.1 | % | 98.2 | % |
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(dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Years ended December 31, | ||||||||||||
Sources of cash: | ||||||||||||
Cash provided by operating activities | $ | — | 115.9 | 75.6 | ||||||||
Net proceeds from investments sold | — | 1.0 | — | |||||||||
Proceeds from long-term borrowings | — | — | 35.0 | |||||||||
Proceeds from annuity contracts | 8.0 | 6.1 | 6.0 | |||||||||
Net proceeds from initial public offering | — | 70.3 | — | |||||||||
Other | 18.3 | — | — | |||||||||
Total sources of cash | 26.3 | 193.3 | 116.6 | |||||||||
Uses of cash: | ||||||||||||
Cash used in operating activities | (3.0 | ) | — | — | ||||||||
Net purchases of investment securities | (178.6 | ) | — | (9.3 | ) | |||||||
Acquisition of GA Life, net of cash acquired | — | — | (27.8 | ) | ||||||||
Capital expenditures | (22.4 | ) | (9.4 | ) | (11.9 | ) | ||||||
Dividends | — | (2.4 | ) | (6.2 | ) | |||||||
Payments of long-term borrowings | (1.6 | ) | (12.1 | ) | (2.5 | ) | ||||||
Payments of short-term borrowings | — | — | (1.7 | ) | ||||||||
Surrenders of annuity contracts | (7.1 | ) | (7.4 | ) | (16.0 | ) | ||||||
Repurchase and retirement of common stock | (7.6 | ) | — | — | ||||||||
Other | — | (3.4 | ) | (8.7 | ) | |||||||
Total uses of cash | (220.3 | ) | (34.7 | ) | (84.1 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | $ | (194.0 | ) | 158.6 | 32.5 | |||||||
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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. |
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• | 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 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, our managed care subsidiary 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, premium, if any, 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 our managed care subsidiary. 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. |
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• | 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, 2008, we had $110.1 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 no significant policyholder deposits in paying status. As of December 31, 2008, our policyholder deposits had a carrying amount of $48.7 million. | ||
• | Other long-term liabilities — Due to the indeterminate nature of their cash outflows, $64.5 million of other long-term liabilities are not reflected in the following table, including $44.1 million of liability for the pension benefits and $11.2 million in liabilities to the Federal Employees’ Health Benefits Plan Program. |
Contractual obligations by year | ||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||||||||
Long-term borrowings (1) | $ | 283.4 | 11.7 | 11.6 | 11.6 | 11.5 | 11.5 | 225.5 | ||||||||||||||||||||
Operating leases | 16.9 | 6.0 | 4.4 | 2.7 | 1.2 | 0.5 | 2.1 | |||||||||||||||||||||
Purchase obligations (2) | 151.6 | 148.5 | 1.3 | 1.1 | 0.5 | 0.2 | — | |||||||||||||||||||||
Claim liabilities (3) | 293.3 | 206.2 | 52.3 | 11.3 | 10.5 | 5.5 | 7.5 | |||||||||||||||||||||
Estimated obligation for future policy benefits (4) | 994.9 | 70.2 | 61.3 | 57.8 | 55.0 | 52.6 | 698.0 | |||||||||||||||||||||
$ | 1,740.1 | 442.6 | 130.9 | 84.5 | 78.7 | 70.3 | 933.1 | |||||||||||||||||||||
(1) | As of December 31, 2008, 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, 2008. 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 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, 2008. 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 $30.4 million of reserves had been ceded at December 31, 2008. | |
(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 |
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Property and | ||||||||||||||||
Managed | Life | Casualty | ||||||||||||||
(Dollar amounts in millions) | Care | Insurance | Insurance | Consolidated | ||||||||||||
Claims processed and incomplete(1) | $ | 78.2 | 31.3 | 46.6 | 156.1 | |||||||||||
Unreported losses(2) | 119.3 | 8.3 | 22.5 | 150.1 | ||||||||||||
Unpaid loss-adjustment expenses(3) | 4.4 | 0.3 | 12.8 | 17.5 | ||||||||||||
$ | 201.9 | 39.9 | 81.9 | 323.7 | ||||||||||||
(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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(Dollar amounts in millions) | ||||||
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)% | $11.2 | (0.6)% | $6.0 | |||
(0.4)% | 7.5 | (0.4)% | 4.0 | |||
(0.2)% | 3.7 | (0.2)% | 2.0 | |||
0.2% | (3.7) | 0.2% | (2.0) | |||
0.4% | (7.4) | 0.4% | (4.0) | |||
0.6% | (11.0) | 0.6% | (6.0) |
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. |
(Dollar amounts in millions | 2007 | 2006 | 2005 | |||||||||
Years ended December 31, | ||||||||||||
Total incurred claims: | ||||||||||||
As reported(1) | $ | 1,156.8 | 1,184.3 | 1,148.2 | ||||||||
On a retrospective basis | 1,149.2 | 1,160.7 | 1,137.5 | |||||||||
Variance | $ | 7.6 | 23.6 | 10.7 | ||||||||
Variance to total incurred claims as reported | 0.7 | % | 2.0 | % | 0.9 | % | ||||||
(1) | Includes total claims incurred less adjustments for prior year reserve development. |
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• | 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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• | 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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(Dollar amounts in millions) | ||||||||||||
Expected | Amount of | % | ||||||||||
Change in Interest Rates | Fair Value | Decrease | Change | |||||||||
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 | )% | |||||||
December 31, 2007: | ||||||||||||
Base Scenario | $ | 867.5 | ||||||||||
+100 bp | 819.3 | (48.2 | ) | (5.6 | )% | |||||||
+200 bp | 777.3 | (90.2 | ) | (10.4 | )% | |||||||
+300 bp | 732.6 | (134.9 | ) | (15.6 | )% |
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(i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | ||
(ii) | 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 | ||
(iii) | 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. |
1. | Improving the governance process over the Company’s investment activities, by including OTTI analysis as a quarterly agenda at the meetings of our Investment Committee and report at least quarterly at the meetings of our Audit Committee. | ||
2. | Amending and expanding our OTTI evaluation selection criteria for impaired investments to require an individual OTTI analysis for all impaired investments if such investments are impaired for more than one month over a materiality level to be determined. | ||
3. | Preparing more robust supporting documentation and related reports used for the OTTI analysis by including additional information for those impaired investments described in the previous paragraph, addressing the reasons for the decline in value, period for which the decline has been observed, an estimate of the anticipated recovery period and its related probability of recoverability, credit ratings for the issue and issuer (where available) and any changes thereto. | ||
4. | Implementing a procedure designed to effectively disseminate the most recent authoritative accounting pronouncements related to OTTI to ensure that our employees involved in the evaluation receive the information on a timely basis. |
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Triple-S Management Corporation and Subsidiaries:
March 18, 2009
Stamp No. 2376408 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
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Financial Statements | Description | |
F-1 | Report of Independent Registered Public Accounting Firm | |
F-2 | Consolidated Balance Sheets as of December 31, 2008 and 2007 | |
F-3 | Consolidated Statements of Earnings for the years ended December 31, 2008, 2007 and 2006 | |
F-4 | Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006 | |
F-5 | Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 | |
F-7 | Notes to Consolidated Financial Statements — December 31, 2008, 2007 and 2006 |
Financial Statements Schedules | Description | |
S-1 | Schedule II — Condensed Financial Information of the Registrant | |
S-2 | Schedule III — Supplementary Insurance Information |
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Financial Statements Schedules | Description | |
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 Triple-S, Inc. 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 Triple-S, Inc. 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 of TSM’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2008 (File No. 001-33865)). | |
10.3 | 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)). | |
10.4 | 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)). | |
10.5 | 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)). | |
10.6 | Non-Contributory Retirement Program (incorporated herein by reference to Exhibit 10.8 to TSM’s General Form of Registration of |
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Exhibits | Description | |
Securities on Form 10 (File No. 001-33865)). | ||
10.7 | BCBSA Licensure Documents (incorporated herein by reference to Exhibit 10.10 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)). | |
10.8* | Blue Shield License and other Agreements with Blue Cross Blue Shield Association. | |
10.9 | Stock Purchase Agreement by and between Triple-S Management Corporation and Great American Financial Resources, Inc. dated December 15, 2005 (incorporated herein by reference to Exhibit 10.9 to TSM’s Registration Statement on Form S-1 filed on November 16, 2007 (File No. 001-33865)). | |
10.10 | Reinsurance Agreement between Great American Life Assurance Company of Puerto Rico and Seguros de Vida Triple-S, Inc. dated December 15, 2005 (incorporated herein by reference to Exhibit 10.14 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-33865)). | |
10.11 | 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)). | |
10.12 | 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)). | |
10.13 | 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)). | |
10.14 | Triple-S Management Corporation 2007 Incentive Plan, dated October 16, 2007 (incorporated herein by reference to Exhibit C to TSM’s 2007 Proxy Statement (File No. 001-33865)). | |
10.15 | Software License and Maintenance Agreement between Quality Care Solutions, Inc, and Triple-S, Inc. 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)). | |
10.15(a) | Addendum Number One to the Software License and Maintenance Agreement between Quality Care Solutions, Inc, and Triple-S, Inc. (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)). | |
10.15(b) | Addendum Number Two to the Software License and Maintenance |
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Exhibits | Description | |
Agreement between Quality Care Solutions, Inc, and Triple-S, Inc. (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)). | ||
10.15(c) | Addendum Number Three to the Software License and Maintenance Agreement between Quality Care Solutions, Inc, and Triple-S, Inc. (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)). | |
10.16 | Work Order Agreement between Quality Care Solutions, Inc. and Triple-S, Inc. (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)). | |
10.17* | Agreement between the Puerto Rico Health Insurance Administration and Triple-S, Inc. for the provision of act as Third Party Administrator in the Metro-North Region. | |
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. | |
21.1 | List of Subsidiaries of Triple-S Management Corporation (incorporated herein by reference to Exhibit 21 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)). | |
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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Triple-S Management Corporation Registrant | ||||||||||||||
By: | /s/ Ramón M. Ruiz-Comas | Date: | March 18, 2009 | |||||||||||
Ramón M. Ruiz-Comas President and Chief Executive Officer | ||||||||||||||
By: | /s/ Juan J. Román | Date: | March 18, 2009 | |||||||||||
Juan J. Román Vice President of Finance and Chief Financial Officer |
By: | /s/ Luis A. Clavell-Rodríguez | Date: | March 18, 2009 | |||||||||||
Luis A. Clavell-Rodríguez, MD Director and Chairman of the Board | ||||||||||||||
By: | /s/ Vicente J. León-Irizarry | Date: | March 18, 2009 | |||||||||||
Vicente J. León-Irizarry, CPA Director and Vice-Chairman of the Board | ||||||||||||||
By: | /s/ Jesús R. Sánchez-Colón | Date: | March 18, 2009 | |||||||||||
Jesús R. Sánchez-Colón, DMD Director and Secretary of the Board | ||||||||||||||
By: | /s/ Adamina Soto-Martínez | Date: | March 18, 2009 | |||||||||||
Adamina Soto-Martínez, CPA Director | ||||||||||||||
By: | /s/ Ms. Carmen Ana Culpeper-Ramírez | Date: | March 18, 2009 | |||||||||||
Ms. Carmen Ana Culpeper-Ramírez Director |
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By: | /s/ Valeriano Alicea-Cruz | Date: | March 18, 2009 | |||||||||||
Valeriano Alicea-Cruz, MD Director | ||||||||||||||
By: | /s/ Mr. José Arturo Álvarez-Gallardo | Date: | March 18, 2009 | |||||||||||
Mr. José Arturo Álvarez-Gallardo Director | ||||||||||||||
By: | /s/ Porfirio E. Díaz-Torres | Date: | March 18, 2009 | |||||||||||
Porfirio E. Díaz-Torres, MD Director | ||||||||||||||
By: | /s/ Mr. Antonio F. Faría-Soto | Date: | March 18, 2009 | |||||||||||
Mr. Antonio F. Faría-Soto Director | ||||||||||||||
By: | /s/ Manuel Figueroa-Collazo | Date: | March 18, 2009 | |||||||||||
Manuel Figueroa-Collazo, PE, Ph.D. Director | ||||||||||||||
By: | /s/ José Hawayek-Alemañy | Date: | March 18, 2009 | |||||||||||
José Hawayek-Alemañy, MD Director | ||||||||||||||
By: | /s/ Jaime Morgan-Stubbe | Date: | March 18, 2009 | |||||||||||
Jaime Morgan-Stubbe, Esq. Director | ||||||||||||||
By: | /s/ Roberto Muñoz-Zayas | Date: | March 18, 2009 | |||||||||||
Roberto Muñoz-Zayas, MD Director | ||||||||||||||
By: | /s/ Juan E. Rodríguez-Díaz | Date: | March 18, 2009 | |||||||||||
Juan E. Rodríguez-Díaz, Esq. Director |
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Triple-S Management Corporation:
Society of Certified Public Accountants
was affixed to the record copy of this report.
Table of Contents
2008 | 2007 | |||||||
Assets | ||||||||
Investments and cash: | ||||||||
Equity securities held for trading, at fair value (cost of $40,847 in 2008 and $54,757 in 2007) | $ | 32,184 | 67,158 | |||||
Securities available for sale, at fair value: | ||||||||
Fixed maturities (amortized cost of $879,663 in 2008 and $816,536 in 2007) | 887,684 | 823,629 | ||||||
Equity securities (cost of $70,060 in 2008 and $66,747 in 2007) | 68,629 | 71,050 | ||||||
Securities held to maturity, at amortized cost: | ||||||||
Fixed maturities (fair value of $23,063 in 2008 and $43,849 in 2007) | 21,753 | 43,691 | ||||||
Policy loans | 5,451 | 5,481 | ||||||
Cash and cash equivalents | 46,095 | 240,153 | ||||||
Total investments and cash | 1,061,796 | 1,251,162 | ||||||
Premium and other receivables, net | 237,158 | 202,268 | ||||||
Deferred policy acquisition costs and value of business acquired | 126,347 | 117,239 | ||||||
Property and equipment, net | 58,448 | 43,415 | ||||||
Net deferred tax asset | 25,195 | 6,783 | ||||||
Other assets | 39,515 | 38,675 | ||||||
Total assets | $ | 1,548,459 | 1,659,542 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Claim liabilities: | ||||||||
Claims processed and incomplete | $ | 156,137 | 186,065 | |||||
Unreported losses | 150,079 | 149,996 | ||||||
Unpaid loss-adjustment expenses | 17,494 | 17,769 | ||||||
Total claim liabilities | 323,710 | 353,830 | ||||||
Liability for future policy benefits | 207,545 | 194,131 | ||||||
Unearned premiums | 110,141 | 132,599 | ||||||
Policyholder deposits | 48,684 | 45,959 | ||||||
Liability to Federal Employees’ Health Benefits Program | 11,157 | 21,338 | ||||||
Accounts payable and accrued liabilities | 148,713 | 228,980 | ||||||
Borrowings | 169,307 | 170,946 | ||||||
Liability for pension benefits | 44,103 | 29,221 | ||||||
Total liabilities | 1,063,360 | 1,177,004 | ||||||
Stockholders’ equity: | ||||||||
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 9,042,809 and 16,042,809 at December 31, 2008 and 2007, respectively | 9,043 | 16,043 | ||||||
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 22,104,989 and 16,266,554 shares at December 31, 2008 and 2007, respectively | 22,105 | 16,266 | ||||||
Additional paid-in capital | 179,504 | 188,935 | ||||||
Retained earnings | 292,112 | 267,336 | ||||||
Accumulated other comprehensive loss, net | (17,665 | ) | (6,042 | ) | ||||
485,099 | 482,538 | |||||||
Commitments and contingencies | ||||||||
Total liabilities and stockholders’ equity | $ | 1,548,459 | 1,659,542 | |||||
2
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2008 | 2007 | 2006 | ||||||||||
Revenues: | ||||||||||||
Premiums earned, net | $ | 1,695,457 | 1,483,548 | 1,511,626 | ||||||||
Administrative service fees | 19,187 | 14,018 | 14,089 | |||||||||
Net investment income | 56,253 | 47,194 | 42,657 | |||||||||
Total operating revenues | 1,770,897 | 1,544,760 | 1,568,372 | |||||||||
Net realized investment (losses) gains | (13,940 | ) | 5,931 | 837 | ||||||||
Net unrealized investment (loss) gain on trading securities | (21,064 | ) | (4,116 | ) | 7,699 | |||||||
Other income (loss), net | (2,467 | ) | 3,217 | 2,323 | ||||||||
Total revenues | 1,733,426 | 1,549,792 | 1,579,231 | |||||||||
Benefits and expenses: | ||||||||||||
Claims incurred | 1,434,914 | 1,223,775 | 1,258,981 | |||||||||
Operating expenses | 251,887 | 237,533 | 236,065 | |||||||||
Total operating costs | 1,686,801 | 1,461,308 | 1,495,046 | |||||||||
Interest expense | 14,681 | 15,839 | 16,626 | |||||||||
Total benefits and expenses | 1,701,482 | 1,477,147 | 1,511,672 | |||||||||
Income before taxes | 31,944 | 72,645 | 67,559 | |||||||||
Income tax expense (benefit): | ||||||||||||
Current | 11,542 | 15,906 | 15,407 | |||||||||
Deferred | (4,388 | ) | (1,779 | ) | (2,381 | ) | ||||||
Total income taxes | 7,154 | 14,127 | 13,026 | |||||||||
Net income | $ | 24,790 | 58,518 | 54,533 | ||||||||
Basic net income per share | $ | 0.77 | 2.15 | 2.04 | ||||||||
Diluted net income per share | 0.77 | 2.15 | 2.04 |
3
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and Comprehensive Income
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, 2005 | $ | 26,712 | — | 124,052 | 162,964 | (5,025 | ) | 308,703 | ||||||||||||||||
Dividends declared | — | — | — | (6,231 | ) | — | (6,231 | ) | ||||||||||||||||
Adjustment to initially apply SFAS No. 158, net of tax | — | — | — | — | (16,081 | ) | (16,081 | ) | ||||||||||||||||
Other | 21 | — | (21 | ) | — | — | — | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 54,533 | — | 54,533 | ||||||||||||||||||
Net unrealized change in fair value of available for sale securities | — | — | — | — | (3,212 | ) | (3,212 | ) | ||||||||||||||||
Net change in minimum pension liability | — | — | — | — | 4,952 | 4,952 | ||||||||||||||||||
Net change in fair value of cash flow hedges | — | — | — | — | (65 | ) | (65 | ) | ||||||||||||||||
Total comprehensive income | 56,208 | |||||||||||||||||||||||
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 | ||||||||||||||||
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2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 24,790 | 58,518 | 54,533 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 7,367 | 7,562 | 6,443 | |||||||||
Net amortization of investments | 953 | 354 | 511 | |||||||||
Provision for doubtful receivables | (1,180 | ) | (2,305 | ) | 5,125 | |||||||
Deferred tax benefit | (12,725 | ) | (1,779 | ) | (2,381 | ) | ||||||
Net loss (gain) on sale of securities | 13,940 | (5,931 | ) | (837 | ) | |||||||
Net unrealized (gain) loss on trading securities | 21,063 | 4,116 | (7,699 | ) | ||||||||
Share-based compensation | 3,268 | 200 | — | |||||||||
Proceeds from trading securities sold or matured: | ||||||||||||
Equity securities | 24,640 | 43,614 | 27,919 | |||||||||
Acquisition of securities in trading portfolio: | ||||||||||||
Equity securities | (10,737 | ) | (23,921 | ) | (22,409 | ) | ||||||
Gain on sale of property and equipment | 11 | 28 | 22 | |||||||||
(Increase) decrease in assets: | ||||||||||||
Premiums receivable | (39,788 | ) | (8,458 | ) | (27,951 | ) | ||||||
Agent balances | (5,617 | ) | (4,061 | ) | 395 | |||||||
Accrued interest receivable | (3,439 | ) | (309 | ) | 588 | |||||||
Other receivables | 58 | (3,637 | ) | (4,521 | ) | |||||||
Funds withheld reinsurance receivable | — | — | 118,635 | |||||||||
Reinsurance recoverable on paid losses | 16,576 | (17,872 | ) | (6,147 | ) | |||||||
Deferred policy acquisition costs and value of business acquired | (9,108 | ) | (5,822 | ) | (7,026 | ) | ||||||
Other assets | 4,785 | (3,179 | ) | (4,031 | ) | |||||||
Increase (decrease) in liabilities: | ||||||||||||
Claims processed and incomplete | (29,928 | ) | 38,854 | 2,803 | ||||||||
Unreported losses | 83 | (739 | ) | 3,342 | ||||||||
Loss-adjustment expenses | (275 | ) | 1,033 | 1,791 | ||||||||
Liability for future policy benefits | 13,414 | 13,711 | 14,022 | |||||||||
Liability for future policy benefits related to funds withheld reinsurance | — | — | (118,635 | ) | ||||||||
Unearned premiums | (22,458 | ) | 19,017 | 15,579 | ||||||||
Policyholder deposits | 1,902 | 1,800 | 1,810 | |||||||||
Liability to FEHBP | (10,181 | ) | 7,775 | 9,207 | ||||||||
Accounts payable and accrued liabilities | 15,322 | 7,359 | 1,903 | |||||||||
Income tax payable | (5,718 | ) | (10,034 | ) | 12,595 | |||||||
Net cash (used in) provided by operating activities | (2,982 | ) | 115,894 | 75,586 | ||||||||
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2008 | 2007 | 2006 | ||||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from investments sold or matured: | ||||||||||||
Securities available for sale: | ||||||||||||
Fixed maturities sold | $ | 228,436 | 299,561 | 51,519 | ||||||||
Fixed maturities matured | 91,732 | 41,248 | 32,826 | |||||||||
Equity securities | 4,450 | 1,000 | 1,209 | |||||||||
Securities held to maturity: | ||||||||||||
Fixed maturities matured | 22,875 | 13,246 | 492 | |||||||||
Acquisition of investments: | ||||||||||||
Securities available for sale: | ||||||||||||
Fixed maturities | (505,896 | ) | (327,409 | ) | (81,496 | ) | ||||||
Equity securities | (19,636 | ) | (18,379 | ) | (11,620 | ) | ||||||
Securities held to maturity: | ||||||||||||
Fixed maturities | (554 | ) | (8,244 | ) | (2,197 | ) | ||||||
Acquisition of business, net of $10,403 of cash acquired | — | — | (27,793 | ) | ||||||||
Net repayment (disbursements) for policy loans | 30 | (287 | ) | (415 | ) | |||||||
Capital expenditures | (22,411 | ) | (9,390 | ) | (11,871 | ) | ||||||
Net cash used in investing activities | (200,974 | ) | (8,654 | ) | (49,346 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Net proceeds from initial public offering | — | 70,279 | — | |||||||||
Repurchase and retirement of common stock | (7,645 | ) | — | — | ||||||||
Change in outstanding checks in excess of bank balances | 18,353 | (3,076 | ) | (8,224 | ) | |||||||
Change in short-term borrowings | — | — | (1,740 | ) | ||||||||
Repayments of long-term borrowings | (1,639 | ) | (12,141 | ) | (2,503 | ) | ||||||
Proceeds from long-term borrowings | — | — | 35,000 | |||||||||
Dividends | — | (2,448 | ) | (6,231 | ) | |||||||
Proceeds from annuity contracts | 8,018 | 6,150 | 6,008 | |||||||||
Surrenders of annuity contracts | (7,195 | ) | (7,416 | ) | (16,036 | ) | ||||||
Other | 6 | 1 | — | |||||||||
Net cash provided by financing activities | 9,898 | 51,349 | 6,274 | |||||||||
Net (decrease) increase in cash and cash equivalents | (194,058 | ) | 158,589 | 32,514 | ||||||||
Cash and cash equivalents, beginning of year | 240,153 | 81,564 | 49,050 | |||||||||
Cash and cash equivalents, end of year | $ | 46,095 | 240,153 | 81,564 | ||||||||
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(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, Inc. (TSI) a managed care organization that provides health benefits services to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations located mainly in Puerto Rico; (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) Seguros Triple-S, Inc. (STS), which is engaged in the underwriting of property and casualty insurance policies. Effective February 16, 2009, TSI and STS change their name to Triple-S Salud, Inc. and Triple-S Propiedad, Inc., respectively. The Company and TSI are members of the Blue Cross and Blue Shield Association (BCBSA). | ||
Effective January 31, 2006, the Company completed the acquisition of 100% of the common stock of Great American Life Assurance Company of Puerto Rico (GA Life) (now Triple-S Vida, Inc.) and, effective June 30, 2006, the Company merged the operations of its former life and accident and health insurance subsidiary, Seguros de Vida Triple-S, Inc. (SVTS), into GA Life. The results of operations and financial position of GA Life are included in the Company’s consolidated financial statements for the period following January 31, 2006. Prior to completing the acquisition of GA Life, the operations of SVTS were the sole component of the Company’s life insurance segment. Effective November 1, 2007, GA Life changed its name to Triple-S Vida, Inc. | ||
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 TSI in the administration of the Commonwealth of Puerto Rico Health Care Reform’s (the Reform) business. Also, TC provides healthcare advisory services to TSI 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: |
(a) | Basis of Presentation | ||
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). |
7 | (Continued) |
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The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. | |||
(b) | 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 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 will be revised and reflected in operating results of the period they are determined. Although some variability is inherent in these estimates, the Company believes the amounts provided are adequate. | |||
(c) | Reclassifications | ||
Certain amounts in the 2007 and 2006 consolidated financial statements were reclassified to conform to the 2008 presentation. | |||
(d) | 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 $2,564 and $192,534 at December 31, 2008 and 2007, respectively, consist principally of obligations of government-sponsored enterprises and certificates of deposit with an initial term of less than three months. | |||
(e) | Investments | ||
Investment in securities at December 31, 2008 and 2007 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 |
8 | (Continued) |
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market prices at the reporting date for those or similar investments. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts. Unrealized holding gains and losses on trading securities are included in operations. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from 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 operations for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of other comprehensive income. The unrealized holding gains or losses included in the separate component of other comprehensive income for securities transferred from available for sale to held to maturity, are maintained and amortized into 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. | |||
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. | |||
(f) | Revenue Recognition |
(i) | Managed Care | ||
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. |
9 | (Continued) |
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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 will be revised and reflected in operating results. | |||
TSI 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 TSI or in TSI refunding CMS a portion of the premiums collected. TSI 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 which have 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. |
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The Company also handles the administration of the insurance coverage for the Reform Metro-North region for an administrative fee per member. The Company is not at risk and pays claims from such region from the Commonwealth of Puerto Rico funds. | |||
(ii) | 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 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. | |||
(iii) | Property and Casualty Insurance | ||
Premiums on property and casualty contracts are recognized as earned on a pro rata basis over the policy term. The portion of premiums related to the period prior to the end of coverage is recorded in the consolidated balance sheets as unearned premiums and is transferred to premium revenue as earned. |
(g) | 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. | |||
(h) | Deferred Policy Acquisition Costs and Value of Business Acquired | ||
Certain costs for acquiring life and accident and health, and property and casualty insurance business are deferred by the Company. 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 contracts accounted for under SFAS No. 60,Accounting and Reporting by Insurance Enterprises, interest is considered at a level rate, set at the time of issue |
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of each contract and, in the case of the value of business acquired, at the time of any acquisition. For SFAS No. 60 contract interest is currently set as 5.4%. For contracts accounted for under SFAS No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, deferred amounts are amortized at historical and forecasted credited interest rates, in accordance with the requirements set forth in that statement. 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 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. | |||
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. | |||
(i) | 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 | 20 to 50 years | ||
Building improvements | 3 to 5 years | ||
Leasehold improvements | Shorter of estimated useful life or lease term | ||
Office furniture | 5 years | ||
Computer software | 3 to 10 years | ||
Computer equipment, equipment, and automobiles | 3 years |
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(j) | Software Development Costs | ||
In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidance on accounting for such costs. SOP 98-1 requires computer software costs that are incurred in the preliminary project stage to be expensed as incurred. Once the capitalization criteria of SOP 98-1 have been met, directly attributable development costs should be capitalized. It also provides that upgrade and maintenance costs should be expensed. The Company treatment of such costs is consistent with SOP 98-1, with the costs capitalized being amortized over the expected useful life of the software. During the year ended December 31, 2008 the Company capitalized approximately $16,408 associated with the implementation of new software. No software development costs were capitalized during the year ended December 31, 2007. | |||
(k) | Long-Lived Assets | ||
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of 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 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, in accordance with SFAS No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. | |||
(l) | Claim Liabilities | ||
Claims processed and incomplete and unreported losses 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. |
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TSI 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, TSI retains a portion of the capitation payments to provide for incurred but not reported losses. At December 31, 2008 and 2007, total withholdings and capitation payable amounted to $24,462 and $29,119, respectively, which are recorded as part of the liability for claims processed and incomplete in the accompanying consolidated balance sheets. | |||
Unpaid claims and loss-adjustment expenses of the life and accident and health business are based on a case-basis estimates 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. | |||
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. | |||
(m) | Future Policy Benefits | ||
The liability for future policy benefits has been computed using the level-premium method based on estimated future investment yield, mortality, and withdrawal experience. The interest rate assumption is 5.0% 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. | |||
(n) | Policyholder Deposits | ||
Amounts received for annuity contracts are considered deposits and recorded as a liability. Interest incurred on such deposits, which amounted to $1,902, $1,800, and $1,810, during the years ended December 31, 2008, 2007, and 2006, respectively, is recorded as interest expense in the accompanying consolidated statements of earnings. | |||
(o) | 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 |
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the terms of the reinsurance contracts. Accordingly, reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of insurance protection provided. | |||
Premiums ceded and recoveries of losses and loss-adjustment expenses have been reported as a reduction of premiums earned and losses and loss-adjustment expenses incurred, respectively. Commission and expense allowances received by STS in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. | |||
(p) | Derivative Instruments and Hedging Activities | ||
The Company accounts for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities in accordance with the provisions of Statement of SFAS No. 133,Accounting for Derivative Instruments and Certain Hedging Activities, as amended, which requires entities to recognize all derivative instruments, 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. | |||
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 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 |
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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. | |||
(q) | 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. Beginning with the adoption of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48) as of January 1, 2007, 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. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained. |
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The Company records any interest and penalties related to unrecognized tax benefits within the operating expenses in our consolidated statement of earnings. | |||
(r) | Insurance-Related Assessments | ||
The Company accounts for insurance-related assessments in accordance with the provisions of SOP No. 97-3,Accounting by Insurance and Other Enterprises for Insurance-related Assessments. This SOP prescribes liability recognition when the following three conditions are met: (1) the assessment has been imposed or the information available prior to the issuance of the financial statements indicates it is probable that an assessment will be imposed; (2) the event obligating an entity to pay (underlying cause of) an imposed or probable assessment has occurred on or before the date of the financial statements; and (3) the amount of the assessment can be reasonably estimated. Also, this SOP provides for the recognition of an asset when the paid or accrued assessment is recoverable through either premium taxes or policy surcharges. | |||
(s) | 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. | |||
(t) | Share-Based Compensation | ||
The Company accounts for share-based compensation in accordance with the provisions of SFAS No. 123 (R),Share-Based Payment. This statement requires that all share-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. The Company recognizes compensation expense based on estimated grant date fair value using the Black-Scholes option-pricing model. | |||
(u) | Earnings Per Share | ||
The Company calculates and presents earnings per share in accordance with SFAS No. 128,Earnings per Share. Basic earnings per share excludes dilution and is computed by dividing 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 nonvested 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. See note 22 for additional earnings per share information. As disclosed in note 19, the accompanying consolidated financial statements gave retroactive effect to the 3,000-for-one stock split of shares of common stock effected on May 1, 2007. |
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(v) | Fair Value | ||
We adopted FAS 157,Fair Value Measurements,on January 1, 2008. This adoption did not have an impact on the Company’s financial position or results of operations. Additional information pertinent to the fair value measurement is included in note 8. | |||
In February 2008, the FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157, or FSP 157-2. FSP 157-2 defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008 for certain nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Therefore, disclosures related to the nonfinancial assets and nonfinancial liabilities that are measured at fair value on a nonrecurring basis have not been included. | |||
In February 2007, the FASB issued FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115. FAS 159 allows entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under the fair value option. We adopted FAS 159 on January 1, 2008. The Corporation has 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. Accordingly, the adoption of FAS 159 did not have an impact on the Company’s financial position or operating results. | |||
The fair value information of financial instruments in the accompanying consolidated financial statements was determined as follows: |
(i) | Cash and Cash Equivalents | ||
The carrying amount approximates fair value because of the short-term nature of such instruments. | |||
(ii) | 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. | |||
(iii) | 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. | |||
(iv) | 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. |
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(v) | 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. | |||
(vi) | Borrowings | ||
The carrying amounts and fair value of the Company’s borrowings are as follows: |
2008 | 2007 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
amount | value | amount | value | |||||||||||||
Loans payable to bank | $ | 24,307 | 24,307 | 25,946 | 25,946 | |||||||||||
6.3% senior unsecured notes payable | 50,000 | 46,250 | 50,000 | 47,625 | ||||||||||||
6.6% senior unsecured notes payable | 60,000 | 55,800 | 60,000 | 57,825 | ||||||||||||
6.7% senior unsecured notes payable | 35,000 | 34,059 | 35,000 | 33,950 | ||||||||||||
Totals | $ | 169,307 | 160,416 | 170,946 | 165,346 | |||||||||||
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 long-term borrowings is included in note 11. | |||
(vii) | Derivative Instruments | ||
Current market pricing models were used to estimate fair value of interest-rate swap agreement and 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. |
(w) | Recently Issued Accounting Standards | ||
In December 2007, the FASB issued SFAS No. 141R,Business Combinations(Statement 141R) and SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51(Statement 160). Statements 141R and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date. Statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company currently does not expect the adoption of Statement 141R and Statement 160 to have an impact on its results of operations and financial position. |
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In March 2008, the FASB issued FAS 161,Disclosures about Derivative Instruments and Hedging Activities. FAS 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133,Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. This statement expands the current disclosure framework in FAS 133. FAS 161 is effective prospectively for periods beginning on or after November 15, 2008. We do not expect the adoption of FAS 161 to have a material impact on the Company’s consolidated financial statements. | |||
In May 2008, the FASB issued FAS 163,Accounting for Financial Guarantee Insurance Contracts — an Interpretation of FASB Statement No. 60. FAS 163 prescribes the accounting for premium revenue and claims liabilities by insurers of financial obligations, and requires expanded disclosures about financial guarantee insurance contracts. FAS 163 applies to financial guarantee insurance and reinsurance contracts issued by insurers subject to FAS 60,Accounting and Reporting by Insurance Enterprises. The Statement does not apply to insurance contracts that are similar to financial guarantee insurance contracts such as mortgage guaranty or trade-receivable insurance, financial guarantee contracts issued by noninsurance entities, or financial guarantee contracts that are derivative instruments within the scope of FAS 133. Statement 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, except for certain disclosure requirements about the risk-management activities of the insurance enterprise that are effective for the first quarter beginning after the Statement was issued. Except for those disclosures, early application is prohibited. This standard has no impact on the Company’s consolidated financial statements. | |||
In April 2008, the FASB issued a FASB Staff Position (FSP) amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007),Business Combinations,and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of the FSP did not have a material impact on the Company’s consolidated financial statements. | |||
In December 2008, the FASB issued a FSP amending FASB 132 (revised 2003),Employers’ Disclosures about Pensions and Other Postretirement Benefits,to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP requires employers to disclose information about fair value measurements of plan assets that would be similar to the disclosures about fair value measurements required by FAS 157,Fair Value Measurements.The disclosures about plan assets required by this FSP are required for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. Earlier application of the |
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provisions of this FSP is permitted. The adoption of the FSP did not have a material impact on the Company’s consolidated financial statements. |
(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, 2008 and 2007 were as follows: |
2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
Trading securities: | ||||||||||||||||
Equity securities | $ | 40,847 | 2,781 | (11,444 | ) | 32,184 |
2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
Trading securities: | ||||||||||||||||
Equity securities | $ | 54,757 | 15,170 | (2,769 | ) | 67,158 |
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2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
Securities available for sale: | ||||||||||||||||
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 | 31,415 | 390 | (6 | ) | 31,799 | |||||||||||
Obligations of states of the United States and political subdivisions of the states | 4,196 | 36 | (110 | ) | 4,122 | |||||||||||
Corporate bonds | 100,745 | 1,625 | (7,399 | ) | 94,971 | |||||||||||
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 | 70,060 | 1,752 | (3,183 | ) | 68,629 | |||||||||||
Total | $ | 949,723 | 25,915 | (19,325 | ) | 956,313 | ||||||||||
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2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
Securities available for sale: | ||||||||||||||||
Obligations of government-sponsored enterprises | $ | 479,525 | 7,311 | (238 | ) | 486,598 | ||||||||||
U.S. Treasury securities and obligations of U.S. government instrumentalities | 85,396 | 3,034 | — | 88,430 | ||||||||||||
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | 75,951 | 254 | (1,176 | ) | 75,029 | |||||||||||
Municipal securities | 15,223 | 228 | (16 | ) | 15,435 | |||||||||||
Obligations of states of the United States and political subdivisions of the states | 2,116 | 19 | (2 | ) | 2,133 | |||||||||||
Corporate bonds | 86,061 | 246 | (2,717 | ) | 83,590 | |||||||||||
Mortgage-backed securities | 14,138 | 75 | (85 | ) | 14,128 | |||||||||||
Collateralized mortgage obligations | 58,126 | 416 | (256 | ) | 58,286 | |||||||||||
Total fixed maturities | 816,536 | 11,583 | (4,490 | ) | 823,629 | |||||||||||
Equity securities | 66,747 | 7,354 | (3,051 | ) | 71,050 | |||||||||||
Total | $ | 883,283 | 18,937 | (7,541 | ) | 894,679 | ||||||||||
2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
Securities held to maturity: | ||||||||||||||||
Obligations of government-sponsored enterprises | $ | 9,082 | 240 | — | 9,322 | |||||||||||
Mortgage-backed securities | 1,749 | — | (7 | ) | 1,742 | |||||||||||
U.S. Treasury securities and obligations of U.S. government instrumentalities | 1,488 | 379 | — | 1,867 | ||||||||||||
Corporate bonds | 8,698 | 698 | — | 9,396 | ||||||||||||
Certificates of deposit | 736 | — | — | 736 | ||||||||||||
Total | $ | 21,753 | 1,317 | (7 | ) | 23,063 | ||||||||||
23 | (Continued) |
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2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
Securities held to maturity: | ||||||||||||||||
Obligations of government-sponsored enterprises | $ | 31,507 | 227 | (20 | ) | 31,714 | ||||||||||
Mortgage-backed securities | 3,134 | — | (48 | ) | 3,086 | |||||||||||
Corporate bonds | 8,348 | — | (1 | ) | 8,347 | |||||||||||
Certificates of deposit | 702 | — | — | 702 | ||||||||||||
Total | $ | 43,691 | 227 | (69 | ) | 43,849 | ||||||||||
2008 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | unrealized | Estimated | unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | losses | fair value | losses | fair value | losses | |||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Obligations of government-sponsored enterprises | $ | 16,550 | (191 | ) | 2,956 | (29 | ) | 19,506 | (220 | ) | ||||||||||||||
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | 79,045 | (5,230 | ) | 8,932 | (847 | ) | 87,977 | (6,077 | ) | |||||||||||||||
Municipal securities | — | — | 1,276 | (6 | ) | 1,276 | (6 | ) | ||||||||||||||||
Obligations of states of the United States and political subdivisions of the states | 2,223 | (75 | ) | 183 | (35 | ) | 2,406 | (110 | ) | |||||||||||||||
Corporate bonds | 31,324 | (2,688 | ) | 29,044 | (4,711 | ) | 60,368 | (7,399 | ) | |||||||||||||||
Mortgage-backed securities | 1,374 | (2 | ) | 36 | (1 | ) | 1,410 | (3 | ) | |||||||||||||||
Collateralized mortgage obligations | 5,797 | (2,327 | ) | — | — | 5,797 | (2,327 | ) | ||||||||||||||||
Total fixed maturities | 136,313 | (10,513 | ) | 42,427 | (5,629 | ) | 178,740 | (16,142 | ) | |||||||||||||||
Equity securities | 18,571 | (2,190 | ) | 9,651 | (993 | ) | 28,222 | (3,183 | ) | |||||||||||||||
Total for securities available for sale | $ | 154,884 | (12,703 | ) | 52,078 | (6,622 | ) | 206,962 | (19,325 | ) | ||||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Mortgage-backed securities | $ | — | — | 1,741 | (7 | ) | 1,741 | (7 | ) | |||||||||||||||
24 | (Continued) |
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2007 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | unrealized | Estimated | unrealized | Estimated | unrealized | |||||||||||||||||||
fair value | losses | fair value | losses | fair value | losses | |||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Obligations of government- sponsored enterprises | $ | 12,875 | (134 | ) | 34,957 | (104 | ) | 47,832 | (238 | ) | ||||||||||||||
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | — | — | 28,841 | (1,176 | ) | 28,841 | (1,176 | ) | ||||||||||||||||
Municipal securities | 1,259 | (16 | ) | — | — | 1,259 | (16 | ) | ||||||||||||||||
Obligations of states of the United States and political subdivisions of the states | 1,214 | (2 | ) | — | — | 1,214 | (2 | ) | ||||||||||||||||
Corporate bonds | 56,185 | (1,398 | ) | 10,654 | (1,319 | ) | 66,839 | (2,717 | ) | |||||||||||||||
Mortgage-backed securities | — | — | 8,265 | (85 | ) | 8,265 | (85 | ) | ||||||||||||||||
Collateralized mortgage obligations | 6,718 | (104 | ) | 16,528 | (152 | ) | 23,246 | (256 | ) | |||||||||||||||
Total fixed maturities | 78,251 | (1,654 | ) | 99,245 | (2,836 | ) | 177,496 | (4,490 | ) | |||||||||||||||
Equity securities | 14,454 | (1,408 | ) | 17,911 | (1,643 | ) | 32,365 | (3,051 | ) | |||||||||||||||
Total for securities available for sale | $ | 92,705 | (3,062 | ) | 117,156 | (4,479 | ) | 209,861 | (7,541 | ) | ||||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Obligations of government- sponsored enterprises | $ | — | — | 10,831 | (20 | ) | 10,831 | (20 | ) | |||||||||||||||
Mortgage-backed securities | — | — | 3,086 | (48 | ) | 3,086 | (48 | ) | ||||||||||||||||
Corporate bonds | — | — | 8,347 | (1 | ) | 8,347 | (1 | ) | ||||||||||||||||
Total for securities held to maturity | $ | — | — | 22,264 | (69 | ) | 22,264 | (69 | ) | |||||||||||||||
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 the length of time and the extent to which cost exceeds fair value, the prospects and financial condition of the issuer, and the Company’s intent and ability to retain the investment to allow for recovery in fair value, among other factors. 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 fair value solely due to changes in interest rates, impairment may not be appropriate. If after monitoring and analyzing, 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. The impairment is charged to operations and a new cost basis for the security is established. During the three year-period ended December 31, 2008, 2007, and 2006, the Company recognized other-than-temporary impairments amounting to $16,522, $1,087, and $2,098, respectively, on some of its fixed maturities and equity securities classified as available for sale. |
25 | (Continued) |
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We continue to review the investment portfolios under the Company’s impairment review policy. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods. | ||
Obligations of Government-sponsored Enterprises, U.S. Treasury Securities and Obligations of U.S. Government Instrumentalities, Obligations of States of the United States and Political Subdivisions of the States, and Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: The unrealized losses on the Company’s investments in obligations of government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, obligations of states of the United States and political subdivisions of the states, and in obligations of the Commonwealth of Puerto Rico and its instrumentalities were mainly caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. | ||
Corporate Bonds: The Company’s unrealized losses on investments in corporate bonds are comprised of small unrealized losses in most of the corporate bonds. Unrealized losses of these bonds were principally caused by interest rate increases. Because the decline in fair value is principally attributable to changes in interest rates and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. | ||
Mortgage-Backed Securities and Collateralized Mortgage Obligations: The unrealized losses on investments in mortgage-backed securities and collateralized mortgage obligations were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by a U.S. government-sponsored enterprise. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. | ||
Equity Securities: The Company’s investment in equity securities classified as available for sale consist mainly of investments in common and preferred stock of domestic banking institutions and investments in several mutual funds. The unrealized loss experienced in the investment in common stocks of domestic banking institutions is mainly due to the general economic conditions in the past three years. The unrealized loss related to the Company’s investments in preferred stock of domestic banking institutions and in investments in several mutual funds investing in fixed income securities is mainly caused by interest rate increases. Because the unrealized losses on equity securities were mainly caused by interest rate increases and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery, these investments are not considered other-than-temporarily impaired. |
26 | (Continued) |
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Maturities of investment securities classified as available for sale and held to maturity were as follows at December 31, 2008: |
Amortized | Estimated | |||||||
cost | fair value | |||||||
Securities available for sale: | ||||||||
Due in one year or less | $ | 5,423 | 5,423 | |||||
Due after one year through five years | 74,981 | 70,489 | ||||||
Due after five years through ten years | 245,224 | 252,822 | ||||||
Due after ten years | 432,724 | 438,257 | ||||||
Collateralized mortgage obligations | 103,891 | 102,851 | ||||||
Mortgage-backed securities | 17,420 | 17,842 | ||||||
$ | 879,663 | 887,684 | ||||||
Securities held to maturity: | ||||||||
Due in one year or less | $ | 1,601 | 1,606 | |||||
Due after one year through five years | 11,322 | 12,058 | ||||||
Due after five years through ten years | 3,799 | 3,850 | ||||||
Due after ten years | 3,282 | 3,807 | ||||||
Mortgage-backed securities | 1,749 | 1,742 | ||||||
$ | 21,753 | 23,063 | ||||||
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 $5,356 and $5,249 (fair value of $5,602 and $5,220) at December 31, 2008 and 2007, 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 $554 and $527 (fair value of $554 and $527) at December 31, 2008 and 2007, respectively, were deposited with the Commissioner of Insurance of the Government of the U.S. Virgin Islands. | ||
Investments with a face value of $510 (fair value of $508) at December 31, 2007, were held by a financial institution as collateral for the Company’s interest-rate swap agreement (see note 12). |
27 | (Continued) |
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Information regarding realized and unrealized gains and losses from investments for the years ended December 31, 2008, 2007, and 2006 is as follows: |
2008 | 2007 | 2006 | ||||||||||
Realized gains (losses): | ||||||||||||
Fixed maturity securities: | ||||||||||||
Securities available for sale: | ||||||||||||
Gross gains from sales | $ | 1,876 | 1,208 | — | ||||||||
Gross losses from sales | (225 | ) | (1,797 | ) | (687 | ) | ||||||
Gross losses from other-than-temporary impairments | (3,872 | ) | — | — | ||||||||
Total debt securities | (2,221 | ) | (589 | ) | (687 | ) | ||||||
Equity securities: | ||||||||||||
Trading securities: | ||||||||||||
Gross gains from sales | 3,358 | 8,873 | 4,318 | |||||||||
Gross losses from sales | (3,132 | ) | (1,558 | ) | (1,488 | ) | ||||||
Gross losses from other-than-temporary impairments | (28 | ) | — | — | ||||||||
198 | 7,315 | 2,830 | ||||||||||
Securities available for sale: | ||||||||||||
Gross gains from sales | 881 | 292 | 792 | |||||||||
Gross losses from sales | (176 | ) | — | — | ||||||||
Gross losses from other-than-temporary impairments | (12,622 | ) | (1,087 | ) | (2,098 | ) | ||||||
(11,917 | ) | (795 | ) | (1,306 | ) | |||||||
Total equity securities | (11,719 | ) | 6,520 | 1,524 | ||||||||
Net realized gains (losses) on securities | $ | (13,940 | ) | 5,931 | 837 | |||||||
28 | (Continued) |
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2008 | 2007 | 2006 | ||||||||||
Changes in unrealized gains (losses): | ||||||||||||
Recognized in income: | ||||||||||||
Equity securities — trading | $ | (21,064 | ) | (4,116 | ) | 7,699 | ||||||
Recognized in accumulated other comprehensive loss: | ||||||||||||
Fixed maturities — available for sale | $ | 928 | 18,640 | (2,434 | ) | |||||||
Equity securities — available for sale | (5,734 | ) | (7,251 | ) | (1,581 | ) | ||||||
$ | (4,806 | ) | 11,389 | (4,015 | ) | |||||||
Not recognized in the consolidated financial statements: | ||||||||||||
Fixed maturities — held to maturity | $ | 1,152 | 1,266 | (114 | ) |
The deferred tax liability on unrealized gains and losses recognized in accumulated other comprehensive income during the years 2008, 2007, and 2006 aggregated $854, $1,840, and $803, respectively. | ||
As of December 31, 2007, investments in obligations that are payable from and secured by the same source of revenue or taxing authority, other than investment instruments of the U.S. and the Commonwealth of Puerto Rico governments, did not exceed 10% of stockholders’ equity. As of December 31, 2008 and 2007, no investment in equity securities individually exceeded 10% of stockholders’ equity. |
(4) | Net Investment Income | |
Components of net investment income were as follows: |
Years ended December 31 | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Fixed maturities | $ | 48,197 | 37,205 | 35,217 | ||||||||
Equity securities | 5,451 | 5,271 | 3,821 | |||||||||
Policy loans | 387 | 394 | 336 | |||||||||
Cash equivalents and interest-bearing deposits | 1,003 | 2,187 | 1,903 | |||||||||
Other | 1,215 | 2,137 | 1,380 | |||||||||
Total | $ | 56,253 | 47,194 | 42,657 | ||||||||
29 | (Continued) |
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(5) | Premium and Other Receivables, Net | |
Premium and other receivables as of December 31 were as follows: |
2008 | 2007 | |||||||
Premium | $ | 90,315 | 54,330 | |||||
Self-funded group receivables | 35,749 | 31,344 | ||||||
FEHBP | 9,600 | 10,202 | ||||||
Agent balances | 38,491 | 34,164 | ||||||
Accrued interest | 11,802 | 8,363 | ||||||
Reinsurance recoverable on paid losses | 42,181 | 58,757 | ||||||
Other | 23,765 | 21,033 | ||||||
251,903 | 218,193 | |||||||
Less allowance for doubtful receivables: | ||||||||
Premium | 10,467 | 11,753 | ||||||
Other | 4,278 | 4,172 | ||||||
14,745 | 15,925 | |||||||
Premium and other receivables, net | $ | 237,158 | 202,268 | |||||
30 | (Continued) |
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(6) | Deferred Policy Acquisition Costs and Value of Business Acquired | |
The movement of deferred policy acquisition costs (DPAC) and value of business acquired (VOBA) for the years ended December 31, 2008, 2007, and 2006 is summarized as follows: |
DPAC | VOBA | Total | ||||||||||
Balance, December 31, 2005 | $ | 81,568 | — | 81,568 | ||||||||
Capitalization upon acquisition of GA Life | — | 22,823 | 22,823 | |||||||||
Termination of coinsurance funds withheld agreement | (60,000 | ) | — | (60,000 | ) | |||||||
Acquisition of business ceded in coinsurance funds withheld agreement | — | 60,000 | 60,000 | |||||||||
Additions | 44,056 | — | 44,056 | |||||||||
VOBA interest at an average rate of 5.29% | — | 4,427 | 4,427 | |||||||||
Amortization | (26,799 | ) | (14,658 | ) | (41,457 | ) | ||||||
Net change | (42,743 | ) | 72,592 | 29,849 | ||||||||
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 | ||||||||
The amortization expense of the deferred policy acquisition costs and value of business acquired is included within the operating expenses in the accompanying consolidated statement of earnings. |
31 | (Continued) |
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The estimated amount of the year-end VOBA balance expected to be amortized during the next five years is as follows: |
Year ending December 31: | ||||
2009 | $ | 9,428 | ||
2010 | 8,116 | |||
2011 | 7,273 | |||
2012 | 6,493 | |||
2013 | 5,805 |
(7) | Property and Equipment, Net | |
Property and equipment as of December 31 are composed of the following: |
2008 | 2007 | |||||||
Land | $ | 6,531 | 6,531 | |||||
Buildings and leasehold improvements | 44,791 | 43,664 | ||||||
Office furniture and equipment | 16,208 | 15,868 | ||||||
Computer equipment and software | 56,482 | 36,361 | ||||||
Automobiles | 461 | 539 | ||||||
124,473 | 102,963 | |||||||
Less accumulated depreciation and amortization | 66,025 | 59,548 | ||||||
Property and equipment, net | $ | 58,448 | 43,415 | |||||
(8) | Fair Value Measurements | |
The Corporation adopted FAS 157 on January 1, 2008. Beginning on this date, assets recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FAS 157, are as follows: |
Level Input: | Input Definition: | |
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 I 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. |
32 | (Continued) |
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The following table summarizes fair value measurements by level at December 31, 2008 for assets measured at fair value on a recurring basis: |
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 | 31,506 | 36,037 | 1,086 | 68,629 | ||||||||||||
Derivatives (reported within other assets in the consolidated balance sheets) | — | 1,674 | — | 1,674 | ||||||||||||
Total | $ | 153,675 | 834,129 | 2,367 | 990,171 | |||||||||||
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, 2008 is as follows: |
Fixed | ||||||||||||
Maturity | Equity | |||||||||||
Securities | Securities | Total | ||||||||||
Beginning balance | $ | 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 | |||||||||
Purchases and sales | — | — | — | |||||||||
Transfers in and/or out of Level 3 | — | — | — | |||||||||
Ending balance | $ | 1,281 | 1,086 | 2,367 | ||||||||
During the year ended December 31, 2008, certain debt securities were thinly traded due to issuer liquidity concerns. Consequently, broker quotes or other observable inputs were not always available and the fair value of these securities was estimated using internal estimates for inputs including, but not limited to, credit spreads, default rates and benchmark yields. An other-than-temporary impairment was recorded on these securities during the year ended December 31, 2008. |
33 | (Continued) |
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(9) | Claim Liabilities | |
The activity in claim liabilities during 2008, 2007, and 2006 is as follows: |
2008 | 2007 | 2006 | ||||||||||
Claim liabilities at beginning of year | $ | 353,830 | 314,682 | 297,563 | ||||||||
Reinsurance recoverable on claim liabilities | (54,834 | ) | (32,066 | ) | (28,720 | ) | ||||||
Net claim liabilities at beginning of year | 298,996 | 282,616 | 268,843 | |||||||||
Claim liabilities acquired from GA Life | — | — | 8,771 | |||||||||
Claims incurred: | ||||||||||||
Current period insured events | 1,432,843 | 1,241,866 | 1,264,871 | |||||||||
Prior period insured events | (9,918 | ) | (31,007 | ) | (19,669 | ) | ||||||
Total | 1,422,925 | 1,210,859 | 1,245,202 | |||||||||
Payments of losses and loss-adjustment expenses: | ||||||||||||
Current period insured events | 1,195,414 | 1,004,346 | 1,045,771 | |||||||||
Prior period insured events | 233,229 | 190,133 | 194,429 | |||||||||
Total | 1,428,643 | 1,194,479 | 1,240,200 | |||||||||
Net claim liabilities at end of year | 293,278 | 298,996 | 282,616 | |||||||||
Reinsurance recoverable on claim liabilities | 30,432 | 54,834 | 32,066 | |||||||||
Claim liabilities at end of year | $ | 323,710 | 353,830 | 314,682 | ||||||||
As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred. | ||
The credits in the claims incurred and loss-adjustment expenses for prior period insured events for 2008, 2007 and 2008 are due primarily to better than expected utilization trends. Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements. | ||
The claims incurred disclosed in this table exclude the change in the liability for future policy benefits amounting to $11,989, $12,916 and $13,779 during the years ended December 31, 2008, 2007 and 2006, respectively. |
(10) | Federal Employees’ Health Benefits Program (FEHBP) | |
TSI entered into a contract, renewable annually, with OPM as authorized by the Federal Employees’ Health Benefits Act of 1959, as amended, to provide health benefits under the FEHBP. The FEHBP covers postal and federal employees resident in the Commonwealth of Puerto Rico and the United States Virgin |
34 | (Continued) |
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Islands as well as retirees and eligible dependents. The FEHBP is financed through a negotiated contribution made by the federal government and employees’ payroll deductions. | ||
The accounting policies for the FEHBP are the same as those described in the Company’s summary of significant accounting policies. Premium rates are determined annually by TSI and approved by the federal government. Claims are paid to providers based on the guidelines determined by the federal government. Operating expenses are allocated from TSI’s operations to the FEHBP based on applicable allocation guidelines (such as, the number of claims processed for each program). | ||
The operations of the FEHBP do not result in any excess or deficiency of revenue or expense as this program has a special account available to compensate any excess or deficiency on its operations to the benefit or detriment of the federal government. Any transfer to/from the special account necessary to cover any excess or deficiency in the operations of the FEHBP is recorded as a reduction/increment to the premiums earned. The contract with OPM provides that the cumulative excess of the FEHBP earned income over health benefits charges and expenses represents a restricted fund balance denoted as the special account. Upon termination of the contract and satisfaction of all the FEHBP’s obligations, any unused remainder of the special reserve would revert to the Federal Employees Health Benefit Fund. In the event that the contract terminates and the special reserve is not sufficient to meet the FEHBP’s obligations, the FEHBP contingency reserve will be used to meet such obligations. If the contingency reserve is not sufficient to meet such obligations, the Company is at risk for the amount not covered by the contingency reserve. | ||
The contract with OPM allows for the payment of service fees as negotiated between TSI and OPM. Service fees, which are included within the other income, net in the accompanying consolidated statements of earnings, amounted to $931, $895, and $861, respectively, for each of the years in the three-year period ended December 31, 2008. | ||
A contingency reserve is maintained by the OPM at the U.S. Treasury, and is available to the Company under certain conditions as specified in government regulations. Accordingly, such reserve is not reflected in the accompanying consolidated balance sheets. The balance of such reserve as of December 31, 2008 and 2007 was $23,365 and $18,004, respectively. The Company received $2,540, $5,512, and $4,850, of payments made from the contingency reserve fund of OPM during 2008, 2007, and 2006, respectively. | ||
The claim payments and operating expenses charged to the FEHBP are subject to audit by the U.S. government. Management is of the opinion that an adjustment, if any, resulting from such audits will not have a significant effect on the accompanying financial statements. The claim payments and operating expenses reimbursed in connection with the FEHBP have been audited through 2004 by OPM. |
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(11) | Borrowings | |
A summary of the borrowings entered by the Company at December 31, 2008 and 2007 is as follows: |
2008 | 2007 | |||||||
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 2.43% and 6.24% at December 31, 2008 and 2007, respectively) | 24,307 | 25,946 | ||||||
Total borrowings | $ | 169,307 | 170,946 | |||||
Aggregate maturities of the Company’s borrowings as of December 31, 2008 are summarized as follows: |
Year ending December 31: | ||||
2009 | $ | 1,640 | ||
2010 | 1,640 | |||
2011 | 1,640 | |||
2012 | 1,640 | |||
2013 | 1,640 | |||
Thereafter | 161,107 | |||
$ | 169,307 | |||
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. The Company’s senior unsecured notes contain certain covenants with which TSI and the Company have complied with at December 31, 2008. | ||
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, 2008 and 2007 amounted to $1,140 and $1,239, respectively, and are included within the other assets in the accompanying consolidated balance sheets. | ||
The secured loan payable previously described is guaranteed by a first position held by the bank on the Company’s land, building, and substantially all leasehold improvements, as collateral for the term of the |
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loan under a continuing general security agreement. This secured loan contains certain covenants, which are customary for this type of facility, including but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control. The Company was also a party to another secured loan whose outstanding balance of $10,500 was repaid upon its maturity on August 1, 2007. | ||
Interest expense on the above borrowings amounted to $10,451, $11,565, and $11,695, for the years ended December 31, 2008, 2007, and 2006, respectively. |
(12) | Derivative Instruments and Hedging Activities | |
The Company uses derivative instruments to manage the risks associated with changes in interest rates and to diversify the composition of its investment in securities. | ||
By using derivative financial instruments the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty is obligated to the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties. | ||
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, commodity prices, or market indexes. The market risk associated with derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. |
(a) | Cash Flow Hedge | ||
The Company had invested in an interest-rate related derivative hedging instrument to manage its exposure on its debt instruments. | |||
The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques to estimate the expected impact of changes in interest rates on the Company’s future cash flows. | |||
The Company had a variable-rate debt that was used to finance the acquisition of real estate from subsidiaries (see note 11). The debt obligations expose the Company to variability in interest payments due to changes in interest rates. On December 6, 2002, management entered into an interest-rate swap agreement, with an effective date of April 1, 2003, to manage fluctuations in cash flows resulting from interest rate risk. The interest-rate swap agreement matured on March 30, 2008. Changes in the fair value of the interest-rate swap, designated as a hedging instrument that effectively offsets the variability of cash flows associated with the variable-rate of the long-term debt |
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obligation, was reported in accumulated other comprehensive income, net of the related tax effect. This amount was subsequently reclassified into interest expense as a yield adjustment of the hedged debt obligation in the same period in which the related interest affects earnings. During the year ended December 31, 2008, the Company recorded $2 of interest expense related to this agreement. During the years ended December 31, 2007 and 2006 the Company’s interest expense was reduced by $419 and $379, respectively, of interest received related to this agreement. No amount representing cash-flow hedge ineffectiveness was recorded since the terms of the swap agreement allow the Company to assume no ineffectiveness in the agreement. | |||
As of December 31, 2007, the fair value of the interest rate swap amounted to $93 and was included within the other assets in the accompanying consolidated balance sheets. |
(b) | Other Derivative Instruments | ||
The Company has invested in other derivative instruments in order to diversify its investment in securities and participate in the foreign stock market. | |||
During 2005 the Company invested in two structured note agreements amounting to $5,000 each, where the interest income received is linked to the performance of the Dow Jones Euro STOXX 50 and Nikkei 225 Equity Indexes (the Indexes). Under these agreements the principal invested by the Company is protected, the only amount that varies according to the performance of the Indexes is the interest to be received upon the maturity of the instruments. Should the Indexes experience a negative performance during the holding period of the structured notes, no interest will be received and no amount will be paid to the issuer of the structured notes. The contingent interest payment component within the structured note agreements meets the definition of an embedded derivative. In accordance with the provisions of SFAS No. 133, as amended, the embedded derivative component of the structured notes is separated from the structured notes and accounted for separately as a derivative instrument. | |||
The changes in the fair value of the embedded derivative component are recorded as gains or losses in earnings in the period of change. During the years ended December 31, 2008 and 2007 the Company recorded a loss associated with the change in the fair value of this derivative component of $4,658 and $45, respectively. During the year ended December 31, 2006 the Company recorded a gain associated with the change in the fair value of this derivative component of $1,046. The change in the fair value of the embedded derivative component is included within the other income, net in the accompanying consolidated statement of earnings. | |||
As of December 31, 2008 and 2007, the fair value of the derivative component of the structured notes amounted to $1,674 and $6,332, respectively, and is included within the Company’s other assets in the accompanying consolidated balance sheets. The investment component of the structured notes is accounted for as held-to-maturity debt securities and is included within the investment in securities in the accompanying consolidated balance sheets. As of December 31, 2008 the fair value and amortized cost of the investment component of both structured notes amounted to $9,396 and $8,698, respectively. As of December 31, 2007 the fair value and amortized cost of the investment component of both structured notes amounted to $8,347 and $8,348, respectively. |
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(13) | Agency Contract and Expense Reimbursement | |
TSI processes and pays claims as fiscal intermediary for the Medicare — Part B Program. Claims from this program, which are excluded from the accompanying consolidated statements of earnings, amounted to $312,358, $322,930, and $413,806, for each of the years in the three-year period ended December 31, 2008. | ||
TSI is reimbursed for administrative expenses incurred in performing this service. For the years ended December 31, 2008, 2007, and 2006, TSI was reimbursed by $8,678, $10,783, and $13,073, 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 2002 by federal government representatives. Management is of the opinion that no significant adjustments will be made affecting cost reimbursements through December 31, 2008. | ||
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 TSM subsidiary, TSI as a subcontractor in MAC Jurisdiction 9 to perform certain provider customer service functions, among others, in Puerto Rico, effective March 1, 2009. |
(14) | Reinsurance Activity | |
The effect of reinsurance on premiums earned and claims incurred is as follows: |
Premiums earned | Claims incurred(1) | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Gross | $ | 1,780,765 | 1,564,873 | 1,584,857 | 1,443,046 | 1,249,554 | 1,266,610 | |||||||||||||||||
Ceded | (85,308 | ) | (81,325 | ) | (77,644 | ) | (20,121 | ) | (38,695 | ) | (22,869 | ) | ||||||||||||
Assumed | — | 4,413 | — | 1,461 | ||||||||||||||||||||
Net | $ | 1,695,457 | 1,483,548 | 1,511,626 | 1,422,925 | 1,210,859 | 1,245,202 | |||||||||||||||||
(1) | The claims incurred disclosed in this table exclude the change in the liability for future policy benefits amounting to $11,989, $12,916 and $13,779 during the years ended December 31, 2008, 2007 and 2006, respectively. |
(a) | Reinsurance Ceded Activity | ||
TSI, STS 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 |
39 | (Continued) |
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• | 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. |
• | Property quota share treaty covering for a maximum of $20,000 for any one risk. Under this treaty 40% 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 $12,000, or the remaining 60% for any one risk. In addition, STS 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 $70,000. | ||
• | 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 $195,000. | ||
• | Property catastrophe excess of loss. This treaty provides protection for losses in excess of $70,000 and $195,000 with respect to personal and commercial lines, respectively, resulting from any catastrophe, subject to a maximum of $175,000. | ||
• | Personal lines quota share. This treaty provides protection of 11.75% on all ground-up losses, subject to a limit of $1,000 for any one risk. |
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• | Reinstatement premium protection. This treaty provides a maximum limit of approximately $4,700 for personal lines and $13,700 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. | ||
• | 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. |
• | Group life pro rata agreement, reinsuring 50% of the risk up to $250 on the life of any participating individual of certain groups insured. | ||
• | 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. |
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• | 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. | ||
• | TSV assumes 100% of the organ transplant risk, since January 31, 2007. Based on the experience of relatively low claims for this risk, the Company believes any single event of this nature will not have a significant adverse effect on the consolidated financial statements. |
(b) | Reinsurance Assumed Activity | ||
On December 22, 2005, the Company’s former life insurance subsidiary SVTS entered into a coinsurance funds withheld agreement with GA Life. Under the terms of this agreement SVTS assumed 69% of all the business written as of and after the effective date of the agreement. On the effective date of the agreement, SVTS paid an initial ceding commission of $60,000 for its participation in the business written by GA Life as of and after the effective date of the agreement. This amount was considered a policy acquisition cost and was included within the deferred policy acquisition costs as of December 31, 2005. This amount, upon the acquisition of GA Life, was transferred to the value of business acquired when the agreement was canceled. | |||
As in other coinsurance funds withheld agreements, GA Life invests the premiums received from policyholders, pays commissions, processes claims and engages in other administrative activities. GA Life also carries the reserves for the policies written as well as the underlying investments purchased with the premiums received from policyholders. | |||
On January 31, 2006 the Company completed the acquisition of 100% of the common stock of GA Life. The results of operations and financial position of GA Life are included in the Company’s consolidated financial statements for the period following January 31, 2006. Effective June 30, 2006, the Company merged the operations of its former life insurance subsidiary, SVTS, into GA Life after receiving required regulatory approvals. The coinsurance funds withheld agreement was canceled effective February 1, 2006, subsequent to the acquisition of GA Life. Premiums earned and claims incurred assumed during the month ended January 31, 2006 amounted to $4,413 and $1,461, respectively. |
(15) | 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, 2008, tax years 2004 through 2007 of the Company and its subsidiaries are subject to examination by Puerto Rico taxing authorities. |
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On January 1, 2007, the Company adopted the provisions of FIN 48, no adjustment was required upon the adoption of this accounting pronouncement. | ||
TSI and STS are taxed essentially the same as other corporations, with taxable income determined on the basis of the statutory annual statements filed with the insurance regulatory authorities. Also, operations are subject to an alternative minimum income tax, which is calculated based on the formula established by existing tax laws. Any alternative minimum income tax paid may be used as a credit against the excess, if any, of regular income tax over the alternative minimum income tax in future years. | ||
TSV operates as a qualified domestic life insurance company and is subject to the alternative minimum tax and taxes on its capital gains. After the merger of GA Life and SVTS, SVTS ceased to exist and its tax responsibilities are now assumed by TSV. | ||
Federal income taxes were recognized by the Company’s insurance subsidiaries amounted to approximately $112, $164, and $148, in 2008, 2007, and 2006, respectively. | ||
TSM, TCI, and ISI are subject to Puerto Rico income taxes as a regular corporation, as defined in the P.R. Internal Revenue Code, as amended. |
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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: |
2008 | 2007 | 2006 | ||||||||||
Income before taxes | $ | 31,944 | 72,645 | 67,559 | ||||||||
Statutory tax rate | 39.0 | % | 39.0 | % | 39.0 | % | ||||||
Income tax expense at statutory rate of 39% | 12,458 | 28,332 | 26,348 | |||||||||
Increase (decrease) in taxes resulting from: | ||||||||||||
Exempt interest income | (13,561 | ) | (9,990 | ) | (9,196 | ) | ||||||
Effect of taxing life insurance operations as a qualified domestic life insurance company instead of as a regular corporation | (1,336 | ) | (1,115 | ) | (1,674 | ) | ||||||
Effect of using earnings under statutory accounting principles instead of | ||||||||||||
GAAP for TSI and STS | 6,406 | 371 | (1,718 | ) | ||||||||
Effect of taxing capital gains at a preferential rate | (237 | ) | (1,406 | ) | (541 | ) | ||||||
Dividends received deduction | (810 | ) | (821 | ) | (325 | ) | ||||||
Other permanent disallowances, net | 5,564 | 2,308 | 2,626 | |||||||||
Adjustment to deferred tax assets and liabilities for changes in effective tax rates | — | (2,131 | ) | (2,009 | ) | |||||||
Other adjustments to deferred tax assets and liabilities | (300 | ) | (423 | ) | (399 | ) | ||||||
Tax credit benefit | (1,286 | ) | — | — | ||||||||
Other | 256 | (998 | ) | (86 | ) | |||||||
Total income tax expense | $ | 7,154 | 14,127 | 13,026 | ||||||||
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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, 2008 and 2007 of the Company and its subsidiaries is composed of the following: |
2008 | 2007 | |||||||
Deferred tax assets: | ||||||||
Allowance for doubtful receivables | $ | 5,325 | 5,422 | |||||
Liability for pension benefits | 14,681 | 9,885 | ||||||
Employee benefits plan | 4,214 | 4,856 | ||||||
Postretirement benefits | 1,454 | 1,789 | ||||||
Deferred compensation | 1,661 | 1,519 | ||||||
Accumulated depreciation | 334 | 356 | ||||||
Impairment loss on investments | 2,816 | 565 | ||||||
Contingency reserves | — | 50 | ||||||
Unrealized loss on trading securities | 1,300 | — | ||||||
Unrealized loss on derivative instruments | 82 | — | ||||||
Alternative minimum income tax credit | 940 | 830 | ||||||
Purchased tax credits | 8,337 | — | ||||||
Other | 767 | 544 | ||||||
Gross deferred tax assets | 41,911 | 25,816 | ||||||
Deferred tax liabilities: | ||||||||
Deferred policy acquisition costs | (7,531 | ) | (7,102 | ) | ||||
Catastrophe loss reserve trust fund | (5,495 | ) | (5,035 | ) | ||||
Unrealized gain upon acquisition of GA Life | (1,753 | ) | (2,092 | ) | ||||
Unrealized gain on trading securities | — | (1,859 | ) | |||||
Unrealized gain on securities available for sale | (988 | ) | (1,842 | ) | ||||
Unrealized gain on derivative instruments | — | (383 | ) | |||||
Unamortized bond issue costs | (347 | ) | (383 | ) | ||||
Cash-flow hedges | — | (37 | ) | |||||
Contingency reserves | (302 | ) | — | |||||
Other | (300 | ) | (300 | ) | ||||
Gross deferred tax liabilities | (16,716 | ) | (19,033 | ) | ||||
Net deferred tax asset | $ | 25,195 | 6,783 | |||||
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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(16) | Pension Plans | |
On December 31, 2006, the Company adopted the recognition and disclosures provisions of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post Retirement 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 who are age 21 or older and have completed one year of service. Pension benefits begin to vest after five years of vesting service, as defined, and are based on years of service and final average salary, as defined. The funding policy is to contribute to the plan as necessary to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts as the Company may determine to be appropriate from time to time. The measurement date used to determine pension benefit measures for the pension plan is December 31. |
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2008 | 2007 | |||||||
Change in benefit obligation: | ||||||||
Projected benefit obligation at beginning of year | $ | 89,598 | 88,774 | |||||
Service cost | 5,287 | 5,489 | ||||||
Interest cost | 5,458 | 5,072 | ||||||
Benefit payments | (7,926 | ) | (5,141 | ) | ||||
Actuarial losses (gains) | (7,641 | ) | 1,774 | |||||
Plan amendments | — | (6,370 | ) | |||||
Projected benefit obligation at end of year | $ | 84,776 | 89,598 | |||||
Accumulated benefit obligation at end of year | $ | 62,371 | 66,042 | |||||
Change in fair value of plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 63,614 | 59,520 | |||||
Actual return on assets (net of expenses) | (16,588 | ) | 4,234 | |||||
Employer contributions | 5,000 | 5,000 | ||||||
Benefit payments | (7,926 | ) | (5,140 | ) | ||||
Fair value of plan assets at end of year | $ | 44,100 | 63,614 | |||||
Funded status at end of year | $ | (40,677 | ) | (25,984 | ) | |||
Amounts in accumulated other comprehensive income not yet recognized as a component of net periodic pension cost: | ||||||||
Development of prior service cost (credit): | ||||||||
Balance at beginning of year | $ | (5,822 | ) | 606 | ||||
Amortization | 450 | (58 | ) | |||||
Prior service cost (credit) arising during the year | — | (6,370 | ) | |||||
Unrecognized net prior service cost (credit) | (5,372 | ) | (5,822 | ) | ||||
Development of actuarial loss: | ||||||||
Balance at beginning of year | 30,373 | 30,409 | ||||||
Amortization | (1,788 | ) | (1,959 | ) | ||||
Loss arising during the year | 13,975 | 1,923 | ||||||
Unrecognized actuarial loss | 42,560 | 30,373 | ||||||
Sum of deferrals | $ | 37,188 | 24,551 | |||||
Net amount recognized | $ | (3,489 | ) | (1,433 | ) |
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2008 | 2007 | |||||||
Pension liability | $ | 40,676 | 25,984 | |||||
Accumulated other comprehensive loss, net of a deferred tax of $14,383 and $9,501 in 2008 and 2007, respectively | 22,805 | 15,050 |
2008 | 2007 | 2006 | ||||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 5,287 | 5,489 | 5,459 | ||||||||
Interest cost | 5,458 | 5,072 | 4,655 | |||||||||
Expected return on assets | (5,027 | ) | (4,383 | ) | (3,858 | ) | ||||||
Amortization of prior service cost (benefit) | (450 | ) | 58 | 48 | ||||||||
Amortization of actuarial loss | 1,788 | 1,959 | 2,435 | |||||||||
Net periodic benefit cost | $ | 7,056 | 8,195 | 8,739 | ||||||||
Prior service cost | $ | (449 | ) | |
Actuarial loss | 2,291 |
2008 | 2007 | 2006 | ||||||||||
Discount rate | 6.75 | % | 6.25 | % | 5.75 | % | ||||||
Expected return on plan assets | 8.00 | 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% |
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(a) | Plan Assets | ||
The Company’s weighted average asset allocations at December 31, 2008 and 2007 were as follows: |
Asset category | 2008 | 2007 | ||||||
Equity securities | 58 | % | 59 | % | ||||
Debt securities | 31 | 31 | ||||||
Real estate | 9 | 9 | ||||||
Other | 2 | 1 | ||||||
Total | 100 | % | 100 | % | ||||
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. | |||
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. |
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• | 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. |
• | 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. |
(b) | Cash Flows | ||
The Company expects to contribute $7,000 to its pension program in 2009. | |||
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: |
Year ending December 31: | ||||
2009 | $ | 3,726 | ||
2010 | 4,143 | |||
2011 | 4,408 | |||
2012 | 5,008 | |||
2013 | 6,244 | |||
2014 — 2018 | 42,060 |
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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, 2008 and 2007, the Company has recorded a pension liability of $3,426 and $3,237, respectively. The charge to accumulated other comprehensive loss related to the noncontributory pension plan at December 31, 2008 and 2007 amounted to $464 and $602, respectively, net of a deferred tax asset of $296 and $384, respectively. | ||
(17) | Catastrophe Loss Reserve and Trust Fund | |
In accordance with Chapter 25 of the Insurance Code, as amended, STS 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 assets in this fund, which amounted to $31,349 and $29,096 as of December 31, 2008 and 2007, respectively, are to be used solely and exclusively to pay catastrophe losses covered under policies written in Puerto Rico. | ||
STS is required to make deposits to the trust fund, if any, on or before January 30 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 2008 and 2007, amounting to $850 and $822, 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 STS 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. | ||
Retained earnings are restricted in the accompanying consolidated balance sheets by the total catastrophe loss reserve balance, which as of December 31, 2008 and 2007 amounted to $32,200 and $29,918, respectively. |
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(18) | Business Combinations | |
Effective January 31, 2006, the Company acquired 100% of the common stock of GA Life. As a result of this acquisition, the Corporation became one of the leading providers of life insurance policies in Puerto Rico. The acquisition was accounted by the Company in accordance with the provisions of SFAS No. 141,Business Combinations. The results of operations and financial condition of GA Life are included in the accompanying consolidated financial statements for the period following the effective date of the acquisition. The aggregate purchase price of the acquired entity amounted to $38,196; of this amount $37,500 was paid in cash on January 31, 2006 and $696 was direct costs related to the acquisition. | ||
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. |
Current assets | $ | 219,747 | ||
Property and equipment | 1,500 | |||
Value of business acquired | 22,823 | |||
Total assets acquired | 244,070 | |||
Total liabilities assumed | (205,874 | ) | ||
Net assets acquired | $ | 38,196 | ||
The estimated fair value of the value of business acquired was actuarially determined by discounting after-tax profits at a risk rate of return equal to approximately 12%. After-tax profits were forecasted based upon models of the insurance in-force, actual invested assets as of acquisition date and best-estimate actuarial assumptions regarding premium income, claims, persistency, expenses and investment income accruing from invested assets plus reinvestment of positive cash flows. The best-estimate actuarial assumptions were based upon GA Life’s recent experience in each of its major life and health insurance product lines. The amount of value of business acquired is to be amortized, considering interest, over the anticipated premium-paying period of the related policies in proportion to the ratio of annual premium revenue to the expected total premium revenue to be received over the life of the policies. | ||
The following unaudited pro forma financial information presents the combined results of operations of the Company and GA Life as if the acquisition had occurred at the beginning of 2006. The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the acquisition been completed as of the beginning of the 2006 period presented and should not be taken as indicative of the Company’s future consolidated results of operations. |
Operating revenues | $ | 1,576,492 | ||
Net income | 54,850 | |||
Basic net income per share | 2.05 |
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(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 directors 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 may repurchase its common stock under a $40,000 share repurchase program authorized by the Company’s Board of Directors in October 2008. Repurchases may be conducted through open-market purchases and privately-negotiated transactions of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During 2008, the Company repurchased and retired approximately 1,181,500 shares at an average per share price of $11.75, for an aggregate cost of $13,880. Therefore, as of December 31, 2008, $26,120 remained authorized by the Company’s Board of Directors for future repurchases. At December 31, 2008, the Company had unsettled shares repurchases amounting to $6,235. Such amount is included in the accompanying consolidated balance sheet as account payable and accrued liabilities. The timing and extent of any purchases under the program will depend on market conditions, the trading price of the shares and other considerations, and the program may be suspended or terminated at any time. |
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(c) | Preferred Stock | ||
Authorized capital stock includes 100,000,000 of preferred stock with a par value of $1.00 per share. As of December 31, 2008 and 2007, there are no issued and outstanding preferred shares. | |||
(d) | 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. | |||
On January 13, 2006, the Board declared a cash dividend of $6,231 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding qualifying shares. All stockholders of record as of the close of business on January 16, 2006, except those who only hold qualifying shares, received a dividend per share of $0.23 for each share held on that date. | |||
(e) | Liquidity Requirements | ||
As members of the BCBSA, the Company and TSI are required by membership standards of the association to maintain liquidity as defined by BCBSA. That is, to maintain net worth exceeding the Company Action Level as defined in the 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 are as follows: |
Accumulated | ||||||||||||||||
Unrealized | Liability | other | ||||||||||||||
gains (losess) on | for pension | Cash-flow | comprehensive | |||||||||||||
securities | benefits | hedges | loss | |||||||||||||
Beginning balance | $ | 9,554 | (15,652 | ) | 56 | (6,042 | ) | |||||||||
Net current period change | (16,856 | ) | (7,615 | ) | (56 | ) | (24,527 | ) | ||||||||
Reclassification adjustments for gains and losses reclassified in income | 12,904 | — | — | 12,904 | ||||||||||||
Ending balance | $ | 5,602 | (23,267 | ) | — | (17,665 | ) | |||||||||
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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 2008 and 2007 are as follows: |
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 gains 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 gain | 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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2006 | ||||||||||||
Deferred tax | ||||||||||||
Before-tax | (expense) | Net-of-tax | ||||||||||
amount | benefit | amount | ||||||||||
Unrealized holding losses on securities arising during the period | $ | (6,008 | ) | 1,201 | (4,807 | ) | ||||||
Less reclassification adjustment for gains and losses realized in income | 1,993 | (398 | ) | 1,595 | ||||||||
Net change in unrealized loss | (4,015 | ) | 803 | (3,212 | ) | |||||||
Liability for pension benefits | 7,915 | (2,963 | ) | 4,952 | ||||||||
Cash-flow hedges | (105 | ) | 40 | (65 | ) | |||||||
Adjustment to initially apply SFAS No.158 | (26,233 | ) | 10,152 | (16,081 | ) | |||||||
Net current period change | $ | (22,438 | ) | 8,032 | (14,406 | ) | ||||||
(21) | Share-Based Compensation | |
In December 2007 the Company adopted the 2007 Incentive Plan (the Plan), which permits the board of directors 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, 2008, there were 3,367,583 additional 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. Restricted stock awards vest in equal annual installments over 3 years. Performance awards vest on the last day of the performance period, provided that at least minimum performance standards were achieved. |
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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 shortcut 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: |
2007 | ||||
Expected dividend yield | 0.00 | % | ||
Expected volatility (per year) | 33.00 | % | ||
Expected term (in years) | 4.50 | |||
Risk-free interest rate | 3.51 | % |
Stock option activity during the periods indicated is as follows: |
Weighted | Weighted | |||||||||||||||
average | average | Aggregate | ||||||||||||||
Number of | exercise | contractual | intrinsic | |||||||||||||
shares | price | term (years) | value | |||||||||||||
Outstanding balance at January 1, 2008 | 999,309 | $ | 14.50 | |||||||||||||
Grants | — | |||||||||||||||
Outstanding balance at December 31, 2008 | 999,309 | $ | 14.50 | 5.93 | $ | — | ||||||||||
Exercisable at December 31, 2008 | 333,100 | $ | 14.50 | 5.93 | $ | — |
During 2007, 999,309 options were granted. The weighted average grant date fair value of options granted during the year 2007 was $14.50. There were no options exercised during the year ended December 31, 2008 and 2007. No options were granted in 2008. |
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A summary of the status of the Company’s nonvested restricted and performance shares as of December 31, 2008, and changes during the year ended December 31, 2008, are presented below: |
Restricted awards | Performance awards | |||||||||||||||
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
Number of | exercise | Number of | exercise | |||||||||||||
shares | price | shares | price | |||||||||||||
Outstanding balance at January 1, 2008 | 166,554 | $ | 14.50 | 166,554 | $ | 14.50 | ||||||||||
Granted | 19,935 | 18.81 | — | |||||||||||||
Lapsed | (55,516 | ) | 14.50 | — | ||||||||||||
Outstanding balance at December 31, 2008 | 130,973 | $ | 15.16 | 166,554 | $ | 14.50 | ||||||||||
Excercisable at end of year | 55,516 | $ | 14.50 | — | $ | — |
The weighted average grant date fair value of restricted shares granted during the year 2008 and 2007 were $18.81 and $14.50, respectively. There were no restricted shares exercised during the year ended December 31, 2008 and 2007. | ||
At December 31, 2008 and 2007, there was $5,956 and $8,590, respectively, 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 1.92 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, 2008. |
2008 | 2007 | 2006 | ||||||||||
Numerator for earnings per share: | ||||||||||||
Net income available to stockholders | $ | 24,790 | 58,518 | 54,533 | ||||||||
Denominator for basic earnings per share — Weighted average of common shares | $ | 32,120,461 | 27,200,067 | 26,729,500 | ||||||||
Effect of dilutive securities — Nonvested restricted stock awards | 42,094 | 2,038 | — | |||||||||
Denominator for diluted earnings per share | 32,162,555 | 27,202,105 | 26,729,500 | |||||||||
Basic net income per share | $ | 0.77 | 2.15 | 2.04 | ||||||||
Diluted net income per share | 0.77 | 2.15 | 2.04 |
During the years ended December 31, 2008 and 2007, the weighted average of stock option shares of 999,309 and 83,276, respectively, were excluded from the denominator for diluted earnings per share |
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because the stock options were anti-dilutive. There were no anti-dilutive stock options during the year ended December 31, 2006. | ||
(23) | Commitments | |
The Company leases its regional offices, certain equipment, and warehouse facilities under noncancelable operating leases. Minimum annual rental commitments at December 31, 2008 under existing agreements are summarized as follows: |
Year ending December 31: | ||||
2009 | $ | 6,039 | ||
2010 | 4,408 | |||
2011 | 2,731 | |||
2012 | 1,119 | |||
2013 | 473 | |||
Thereafter | 2,134 | |||
Total | $ | 16,904 | ||
Rental expense for 2008, 2007, and 2006 was $3,532, $4,007, and $3,962, respectively, after deducting the amount of $265, $303, and $348, respectively, reimbursed by CMS for the administration of the Medicare Part B Program (see note 13). | ||
(24) | Contingencies |
(a) | Legal Proceedings | ||
As of December 31, 2008, the Company is a defendant in various lawsuits arising in the ordinary course of business. We are also defendants 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 Corporation’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 Corporation. 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 Corporation 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 Corporation may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Corporation is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution. |
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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 Corporation, TSI 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 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. At a status conference held on August 18, 2008, the parties informed the Court that they had reached an agreement to try to simplify the case. Based on the agreement, which was approved by the Court, the defendants sent a letter to the plaintiffs on September 19, 2008 explaining the reasons why the allegations of the amended complaint should be dismissed. We are currently waiting for the plaintiffs to reply. | |||
Thomas Litigation | |||
On May 22, 2003, Kenneth A. Thomas, M.D. and Michael Kutell, M.D. filed a putative class action suit against the Blue Cross Blue Shield Association and substantially all of the other Blue Cross and Blue Shield plans in the United States, including TSI. 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 doctors so that they are not paid in a timely manner for the covered medically necessary services they render. TSI, along with the other defendants, moved to dismiss the complaint on multiple grounds, including but not limited an arbitration right and the applicability of the McCarran Ferguson Act. The parties announced a Settlement Agreement on April 27, 2007 and on April 19, 2008, the Court granted final approval of the settlement. A small group of physicians filed an appeal of the settlement that is pending in the Eleventh Circuit. The Company recorded an accrual for the settlement that is included within accounts payable and accrued liabilities in the accompanying consolidated financial statements. | |||
Colón Litigation | |||
On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSI predecessor stock, filed suit against TSI and the Puerto Rico Commissioner of Insurance (the Commissioner) in the Court of First Instance for San Juan, Superior Section. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner in which the sale of 1,582 shares to a number of TSI shareholders was voided. The Puerto Rico Court of Appeals upheld the order on March 31, 2000. The plaintiff requests that the court direct TSI to return his share of stock and pay damages in excess of $500,000 and attorney’s fees. Management plans to vigorously contest this lawsuit because, among other reasons, the Commissioner’s order is final and cannot be collaterally attacked in this litigation. |
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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 TSI for fiscal years 1992-1993 through 2002-2003. During that time, TSI 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 TSI is not entitled to such an exemption. On March 28, 2006 and March 29, 2006, respectively, TSI challenged the real and personal property tax assessments in the Court of First Instance for San Juan, Superior Section. 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, TSI appealed the court’s decisions before the Puerto Rico Court of Appeals on November 29, 2007 and February 21, 2008, respectively. TSI also requested a consolidation of both cases, which the Court of Appeals approved on April 17, 2008. On May 27, 2008, TSI submitted a motion to the Court of Appeals requesting the Court to take notice of a recent decision of the Puerto Rico Supreme Court that addresses administrative law issues involving other parties and which TSI believes confirms its position that the rulings issued by the Puerto Rico tax authorities may not be revoked on a retroactive basis. 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, TSI timely filed a certiorari petition with the Puerto Rico Supreme Court, which is currently pending. Management believes that these municipal tax assessments are improper and expects to prevail in this litigation. | |||
Dentists Association Litigation | |||
On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico, or “CCD”) filed a complaint in the Puerto Rico Court of First Instance for San Juan against 24 health plans operating in Puerto Rico that offer dental health coverage. The Company, TSI, and Triple-C, Inc., a Company subsidiary, 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 damages in the amount of $150 million. In addition, the complaint claims that the Puerto Rico Insurance Companies Association (“ACODESE” for its Spanish acronym) is the hub of an alleged conspiracy concocted by the member plans to defraud dentists. |
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There are numerous available defenses to oppose both the request for class certification and the merits. The Company intends to vigorously defend this claim. | |||
Claims by Heirs of Former Shareholders | |||
The Company and TSI are also defending four individual lawsuits and one purported class action, 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 (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 predecessor’s) articles of incorporation and bylaws was improper. On February 18, 2009, the Court of First Instance for San Juan, Superior Section, issued an order granting our motion to dismiss the purported class action suit, on grounds that the claim was time barred under the Puerto Rico Securities Act. Motions to dismiss are pending in a majority of the remaining cases and discovery has begun in all of them. Management believes all these claims are time barred under one or more statutes of limitations, and intends to vigorously defend against them. | |||
(b) | Guarantee Associations | ||
Pursuant to the Insurance Code, STS 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 2008, 2007, and 2006, no assessments or payments were made for this contingency. | |||
Additionally, pursuant to Article 12 of Rule LXIX of the Insurance Code, STS 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, STS shares the risk, proportionately with other members, based on a formula established by the Insurance Code. During the three-year period ended December 31, 2008, the Association distributed good experience refunds. STS received refunds amounting to $1,131, $1,023, and $769, in 2008, 2007, and 2006, respectively. | |||
STS is a member of the Asociación de Garantía de Seguros de Todas Clases, excepto Vida, Incapacidad y Salud and TSI, 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 2008 and 2007 no assessment or payment was made by STS in connection with insurance companies declared insolvent. During 2006, STS paid assessments of $995. Moreover, no assessments were attributable to TSI and Triple-S Vida, Inc. during 2008, 2007, and 2006. |
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(25) | Statutory Accounting | |
TSI, TSV and STS (collectively known as the regulated subsidiaries) are regulated by the Commissioner of Insurance. The regulated subsidiaries are required to prepare financial statements using accounting practices prescribed or permitted by the Commissioner of Insurance, which differ from GAAP. | ||
The accumulated earnings of TSI, TSV, and STS 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 17, a portion of the accumulated earnings of STS are also restricted by the catastrophe loss reserve balance (amounting to $31,349 and $29,918 as of December 31, 2008 and 2007, respectively) as required by the Insurance Code. | ||
The net admitted assets, unassigned surplus, and capital and surplus of the insurance subsidiaries at December 31, 2008 (preliminary) and 2007 are as follows: |
2008 | ||||||||||||
TSI | STS | TSV | ||||||||||
Net admitted assets | $ | 593,781 | 270,684 | 332,041 | ||||||||
Unassigned surplus | 62,089 | 57,508 | (13,318 | ) | ||||||||
Capital and surplus | 212,089 | 96,525 | 48,742 |
2007 | ||||||||||||
TSI | STS | TSV | ||||||||||
Net admitted assets | $ | 702,125 | 273,601 | 310,428 | ||||||||
Unassigned surplus | 67,768 | 57,346 | (17,021 | ) | ||||||||
Capital and surplus | 217,768 | 95,765 | 45,039 |
The statutory net income of the insurance subsidiaries for the years ended December 31, 2008 (preliminary), 2007, and 2006 is as follows: |
TSI | STS | TSV | ||||||||||
2008 | $ | 26,838 | 4,767 | 2,624 | ||||||||
2007 | 41,742 | 14,608 | 7,736 | |||||||||
2006 | 24,723 | 9,270 | 7,077 |
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(26) | Supplementary Information on Noncash Transactions Affecting Cash Flow Activities |
2008 | 2007 | 2006 | ||||||||||
Supplementary information: | ||||||||||||
Noncash transactions affecting cash flows activities: | ||||||||||||
Change in net unrealized gain on securities available for sale, including deferred income tax liability of $854, $1,840, and $803 in 2008, 2007, and 2006, respectively | $ | (3,952 | ) | 9,549 | (3,212 | ) | ||||||
Change in cash-flow hedges, including deferred income tax liability of $37, $159 and $40 in 2008, 2007, and 2006, respectively | (56 | ) | (250 | ) | (65 | ) | ||||||
Change in liability for pension benefits, and deferred income tax asset of $4,796, $2,189, and $7,189, in 2008, 2007, and 2006, respectively | (7,615 | ) | 4,090 | 4,952 | ||||||||
Adjustment to initially apply SFAS No. 158, including deferred income tax effect of $10,152 in 2006. | — | (16,081 | ) | |||||||||
Unsettled shares repurchases | 6,235 | — | — | |||||||||
Unsettled investment acquisitions | — | 117,706 | 226 | |||||||||
Unsettled investment sales | (1,500 | ) | — | (13 | ) | |||||||
Other: | ||||||||||||
Income taxes paid | 25,597 | 25,940 | 2,813 | |||||||||
Interest paid | 14,330 | 14,102 | 14,215 |
On January 31, 2006, the Company acquired GA Life (now TSV). Refer to note 18 for a summary of assets acquired and liabilities assumed as part of the acquisition. |
64 | (Continued) |
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(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. These segments and a description of their respective operations are as follows: |
• | Managed Care segment — TSI is engaged in the sale of managed care products to the commercial market sector (including corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare supplement) as well as to the Medicare Advantage, the Commonwealth of Puerto Rico Health Reform (the Reform) and stand-alone PDP. The following represents a description of the major contracts by sector: |
• | Commercial— The premiums for this business are mainly originated through TSI’s internal sales force and a network of brokers and independent agents. TSI is a qualified contractor to provide health coverage to federal government employees within Puerto Rico. Earned premiums revenue related to this contract amounted to $124,239, $121,126, and $113,355 for the three-year period ended December 31, 2008, 2007, and 2006, respectively (see note 10). Under its commercial business, TSI also provides health coverage to certain employees of the Commonwealth of Puerto Rico and its instrumentalities. Earned premium revenue related to such health plans amounted to $40,686, $46,649, and $54,143, for the three-year period ended December 31, 2008, 2007, and 2006, respectively. TSI also processes and pays claims as fiscal intermediary for the Medicare — Part B Program in Puerto Rico and is reimbursed for operating expenses (see note 13). | ||
• | Medicare— TSI provides services through its Medicare health plans 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 TSI breaches a material provision of the contract or violate relevant laws or regulations. The premiums for this business are mainly originated through TSI’s internal sales force and a network of brokers and independent agents. Earned premium revenue related to the Medicare business amounted to $438,723, $255,570, and $170,820 the three-year period ended December 31, 2008, 2007, and 2006, respectively. | ||
• | Reform— TSI participates in the Reform to provide health coverage to medically indigent citizens in Puerto Rico. The Reform program provides health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the Commonwealth of Puerto Rico. The Reform consists of a single policy with the same benefits for each qualified medically indigent citizen. Earned premium revenue related to this business amounted to $340,123, $327,544, and $455,891, for three-year period ended December 31, 2008, 2007, and 2006, respectively. Since the Reform’s inception in 1995, TSI had 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 noncompliance by the insurance company, which is not corrected or cured to the satisfaction of the government entity overseeing the Reform, or on ninety days’ prior written notice in the event that the government determines that there is an insufficiency of funds to finance the Reform. These contracts usually have one-year terms and expire on June 30. Upon the |
65 | (Continued) |
Table of Contents
expiration of the contract for a geographical area, of the Commonwealth of Puerto Rico usually commences an open bidding process to select the carrier for each area. In October 2006, TSI was informed that the new contract to serve one of these regions, Metro-North, had been awarded to another managed care company effective November 1, 2006. The contracts for the other two areas were renewed for additional terms ending June 30, 2009. Effective November 2008, the Company was awarded with the Metro-North Region as an Administrative Service Only (ASO) contract for the term of one year. Administrative service fee for the Metro-North Region for the year ended December 31, 2008 amounted to $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 STS, 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. Services provided between reportable segments are done at transfer prices which approximate fair value. The financial data of each segment is accounted for separately; therefore no segment allocation is necessary. 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. | ||
The following tables summarize the operations by operating segment for each of the years in the three-year period ended December 31, 2008, 2007, and 2006. |
66 | (Continued) |
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2008 | 2007 | 2006 | ||||||||||
Operating revenues: | ||||||||||||
Managed care: | ||||||||||||
Premiums earned, net | $ | 1,509,778 | 1,298,776 | 1,337,070 | ||||||||
Fee revenue | 19,187 | 14,018 | 14,089 | |||||||||
Intersegment premiums/fee revenue | 6,538 | 6,229 | 5,531 | |||||||||
Net investment income | 23,091 | 19,673 | 18,852 | |||||||||
Total managed care | 1,558,594 | 1,338,696 | 1,375,542 | |||||||||
Life: | ||||||||||||
Premiums earned, net | 92,469 | 88,505 | 86,595 | |||||||||
Intersegment premiums | 374 | 356 | 293 | |||||||||
Net investment income | 16,482 | 15,016 | 13,749 | |||||||||
Total life | 109,325 | 103,877 | 100,637 | |||||||||
Property and casualty: | ||||||||||||
Premiums earned, net | 93,211 | 96,267 | 87,961 | |||||||||
Intersegment premiums | 610 | 616 | 591 | |||||||||
Net investment income | 12,545 | 11,849 | 9,589 | |||||||||
Total property and casualty | 106,366 | 108,732 | 98,141 | |||||||||
Other segments — intersegment service revenues* | 46,578 | 44,971 | 53,375 | |||||||||
Total business segments | 1,820,863 | 1,596,276 | 1,627,695 | |||||||||
TSM operating revenues from external sources | 4,135 | 656 | 467 | |||||||||
Elimination of intersegment premiums | (7,523 | ) | (7,201 | ) | (6,415 | ) | ||||||
Elimination of intersegment service revenue | (46,578 | ) | (44,971 | ) | (53,375 | ) | ||||||
Consolidated operating revenues | $ | 1,770,897 | 1,544,760 | 1,568,372 | ||||||||
* | 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. |
67 | (Continued) |
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2008 | 2007 | 2006 | ||||||||||
Operating income: | ||||||||||||
Managed care | $ | 52,632 | 57,392 | 45,472 | ||||||||
Life | 12,489 | 10,716 | 11,196 | |||||||||
Property and casualty | 13,147 | 10,740 | 11,250 | |||||||||
Other segments* | 985 | 891 | 1,115 | |||||||||
Total business segments | 79,253 | 79,739 | 69,033 | |||||||||
TSM operating revenues from external sources | 4,135 | 656 | 467 | |||||||||
TSM unallocated operating expenses | (9,283 | ) | (7,846 | ) | (6,648 | ) | ||||||
Elimination of TSM charges | 9,991 | 10,903 | 10,474 | |||||||||
Consolidated operating income | 84,096 | 83,452 | 73,326 | |||||||||
Consolidated net realized investment gains (losses) | (13,940 | ) | 5,931 | 837 | ||||||||
Consolidated net unrealized gain (loss) on trading securities | (21,063 | ) | (4,116 | ) | 7,699 | |||||||
Consolidated interest expense | (14,681 | ) | (15,839 | ) | (16,626 | ) | ||||||
Consolidated other income, net | (2,468 | ) | 3,217 | 2,323 | ||||||||
Consolidated income before taxes | $ | 31,944 | 72,645 | 67,559 | ||||||||
2008 | 2007 | 2006 | ||||||||||
Depreciation expense: | ||||||||||||
Managed care | $ | 4,339 | 4,277 | 3,788 | ||||||||
Life | 656 | 677 | 750 | |||||||||
Property and casualty | 1,450 | 1,488 | 775 | |||||||||
Total business segments | 6,445 | 6,442 | 5,313 | |||||||||
TSM depreciation expense | 922 | 1,120 | 1,130 | |||||||||
Consolidated depreciation expense | $ | 7,367 | 7,562 | 6,443 | ||||||||
* | 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 |
68 | (Continued) |
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2008 | 2007 | |||||||
Assets: | ||||||||
Managed care | $ | 678,889 | 762,422 | |||||
Life | 460,109 | 430,807 | ||||||
Property and casualty | 337,869 | 375,415 | ||||||
Other segments* | 12,620 | 11,255 | ||||||
Total business segments | 1,489,487 | 1,579,899 | ||||||
Unallocated amounts related to TSM: | ||||||||
Cash, cash equivalents, and investments | 58,480 | 82,980 | ||||||
Property and equipment, net | 21,648 | 22,523 | ||||||
Other assets | 4,079 | 2,280 | ||||||
84,207 | 107,783 | |||||||
Elimination entries — intersegment receivables and others | (25,235 | ) | (28,140 | ) | ||||
Consolidated total assets | $ | 1,548,459 | 1,659,542 | |||||
2008 | 2007 | |||||||
Significant noncash items: | ||||||||
Net change in unrealized gain on securities available for sale: | ||||||||
Managed care | $ | (4,359 | ) | 2,928 | ||||
Life | 538 | 3,253 | ||||||
Property and casualty | 1,139 | 3,085 | ||||||
Total business segments | (2,682 | ) | 9,266 | |||||
Amount related to TSM | (1,270 | ) | 283 | |||||
Consolidated net change in unrealized gain on securities available for sale | $ | (3,952 | ) | 9,549 | ||||
Net change in liability for pension benefits: | ||||||||
Managed care | $ | (4,946 | ) | 2,838 | ||||
Life | (81 | ) | 35 | |||||
Property and casualty | (490 | ) | 275 | |||||
Other segments* | (1,948 | ) | 844 | |||||
Total business segments | (7,465 | ) | 3,992 | |||||
Amount related to TSM | (150 | ) | 98 | |||||
Consolidated net change in liability for pension benefits | $ | (7,615 | ) | 4,090 | ||||
* | 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. |
69 | (Continued) |
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(28) | Quarterly Financial Information (Unaudited) |
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 | ) | (10,257 | ) | (21,063 | ) | ||||||||||
Other income (loss), net | (1,521 | ) | 1,360 | (1,147 | ) | (1,160 | ) | (2,468 | ) | |||||||||||
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 |
70 | (Continued) |
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2007 | ||||||||||||||||||||
March 31 | June 30 | September 30 | December 31 | Total | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Premiums earned, net | $ | 348,465 | 377,346 | 375,803 | 381,934 | 1,483,548 | ||||||||||||||
Administrative service fees | 3,509 | 3,617 | 3,908 | 2,984 | 14,018 | |||||||||||||||
Net investment income | 11,121 | 11,047 | 11,229 | 13,797 | 47,194 | |||||||||||||||
Total operating revenues | 363,095 | 392,010 | 390,940 | 398,715 | 1,544,760 | |||||||||||||||
Net realized investment gains (losses) | 1,196 | 3,784 | 1,183 | (232 | ) | 5,931 | ||||||||||||||
Net unrealized investment gain (loss) on trading securities | (1,925 | ) | 573 | 588 | (3,352 | ) | (4,116 | ) | ||||||||||||
Other income (loss), net | 209 | 2,158 | (525 | ) | 1,375 | 3,217 | ||||||||||||||
Total revenues | 362,575 | 398,525 | 392,186 | 396,506 | 1,549,792 | |||||||||||||||
Benefits and expenses: | ||||||||||||||||||||
Claims incurred | 297,318 | 308,023 | 310,033 | 308,401 | 1,223,775 | |||||||||||||||
Operating expenses | 56,137 | 59,358 | 57,944 | 64,094 | 237,533 | |||||||||||||||
Total operating costs | 353,455 | 367,381 | 367,977 | 372,495 | 1,461,308 | |||||||||||||||
Interest expense | 3,952 | 4,058 | 3,938 | 3,891 | 15,839 | |||||||||||||||
Total benefits and expenses | 357,407 | 371,439 | 371,915 | 376,386 | 1,477,147 | |||||||||||||||
Income before taxes | 5,168 | 27,086 | 20,271 | 20,120 | 72,645 | |||||||||||||||
Income tax expense (benefit): | ||||||||||||||||||||
Current | 1,060 | 5,938 | 4,575 | 4,333 | 15,906 | |||||||||||||||
Deferred | (397 | ) | 343 | 206 | (1,931 | ) | (1,779 | ) | ||||||||||||
Total income taxes | 663 | 6,281 | 4,781 | 2,402 | 14,127 | |||||||||||||||
Net income | $ | 4,505 | 20,805 | 15,490 | 17,718 | 58,518 | ||||||||||||||
Basic net income per share | $ | 0.17 | 0.78 | 0.58 | 0.62 | 2.15 | ||||||||||||||
Diluted net income per share | 0.17 | 0.78 | 0.58 | 0.62 | 2.15 |
71
Table of Contents
Schedule III — Supplementary Insurance Information
For the years ended December 31, 2008, 2007 and 2006
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 | �� | ||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||||||||||||||
Managed care | $ | — | $ | 185,249 | $ | — | $ | 17,812 | $ | — | $ | 1,339,807 | $ | 18,852 | $ | 1,173,622 | $ | — | $ | 156,448 | $ | 1,339,807 | ||||||||||||||||||||||
Life insurance | 88,590 | 35,164 | 180,420 | 1,960 | — | 86,888 | 13,749 | 43,619 | 16,339 | 29,483 | 84,752 | |||||||||||||||||||||||||||||||||
Property and casualty insurance | 22,827 | 94,269 | — | 93,810 | — | 88,552 | 9,589 | 41,740 | 25,118 | 20,033 | 93,252 | |||||||||||||||||||||||||||||||||
Other non-reportable segments, parent company operations and net consolidating entries. | — | — | — | — | — | (3,621 | ) | 467 | — | — | (11,356 | ) | — | |||||||||||||||||||||||||||||||
Total | $ | 111,417 | $ | 314,682 | $ | 180,420 | $ | 113,582 | $ | — | $ | 1,511,626 | $ | 42,657 | $ | 1,258,981 | $ | 41,457 | $ | 194,608 | $ | 1,517,811 | ||||||||||||||||||||||
Table of Contents
Schedule IV — Reinsurance
For the years ended December 31, 2008, 2007 and 2006
Percentage | ||||||||||||||||||||
Ceded to | Assumed | of Amount | ||||||||||||||||||
Gross | Other | from Other | Net | Assumed | ||||||||||||||||
Amount | Companies (1) | Companies | Amount | to Net | ||||||||||||||||
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 | % | |||||||||||||
2006 | ||||||||||||||||||||
Life insurance in force | $ | 10,433,690 | 6,957,946 | — | 3,475,744 | 0.0 | % | |||||||||||||
Premiums: | ||||||||||||||||||||
Life insurance | $ | 89,736 | 9,397 | 4,413 | 84,752 | 5.2 | % | |||||||||||||
Accident and health insurance | 1,341,952 | 2,145 | — | 1,339,807 | 0.0 | % | ||||||||||||||
Property and casualty insurance | 158,975 | 65,723 | — | 93,252 | 0.0 | % | ||||||||||||||
Total premiums | $ | 1,590,663 | 77,265 | 4,413 | 1,517,811 | 0.3 | % | |||||||||||||
(1) | Premiums ceded on the life insurance business are net of commission income on reinsurance amounting to $287, $258 and $275 for the years ended December 31, 2008, 2007 and 2006. |
Table of Contents
Schedule V — Valuation and Qualifying Accounts
For the years ended December 31, 2008, 2007 and 2006
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 | ||||||||||||||||
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 | |||||||||||||
2006 | ||||||||||||||||||||
Allowance for doubtful receivables | $ | 12,240 | 8,570 | 1,380 | (3,960 | ) | 18,230 | |||||||||||||
(1) | Represents amount of allowance for doubtful accounts acquired upon the purchase of GA Life and other adjustments. | |
(2) | Deductions represent the write-off of accounts deemed uncollectible. |
Table of Contents
(Parent Company Only)
Table of Contents
Triple-S Management Corporation:
March 18, 2009
Society of Certified Public Accountants
was affixed to the record copy of this report.
Table of Contents
(Parent Company Only)
2008 | 2007 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,952 | 47,772 | |||||
Receivables: | ||||||||
Due from subsidiaries | 8,956 | 597 | ||||||
Other | 70 | 25 | ||||||
Total receivables | 9,026 | 622 | ||||||
Investment in securities | 56,528 | 35,208 | ||||||
Prepaid income tax | 385 | 111 | ||||||
Net deferred tax assets | 414 | 367 | ||||||
Accrued interest | 868 | 173 | ||||||
Other assets | 115 | 198 | ||||||
Total current assets | 69,288 | 84,451 | ||||||
Note receivable from subsidiary | 37,000 | 57,000 | ||||||
Accrued interest on note receivable from subsidiary | 11,339 | 8,151 | ||||||
Net deferred tax assets | 1,459 | 543 | ||||||
Investments in wholly owned subsidiaries | 484,535 | 448,579 | ||||||
Property and equipment, net | 21,648 | 22,523 | ||||||
Other assets | 768 | 863 | ||||||
Total assets | $ | 626,037 | 622,110 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 1,640 | 1,640 | |||||
Due to subsidiary | 197 | 6,015 | ||||||
Accounts payable and accrued expenses | 14,154 | 8,045 | ||||||
Total current liabilities | 15,991 | 15,700 | ||||||
Long-term debt | 117,667 | 119,306 | ||||||
Liability for pension benefits | 7,280 | 4,566 | ||||||
Total liabilities | 140,938 | 139,572 | ||||||
Stockholders’ equity: | ||||||||
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issue and outstanding 9,042,809 and 16,042,809 shares at December 31, 2008 and 2007 | 9,043 | 16,043 | ||||||
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issue and outstanding 22,104,989 and 16,266,554 at December 31, 2008 and December 31, 2007 | 22,105 | 16,266 | ||||||
Additional paid-in capital | 179,504 | 188,935 | ||||||
Retained earnings | 292,112 | 267,336 | ||||||
Accumulated other comprehensive loss, net | (17,665 | ) | (6,042 | ) | ||||
485,099 | 482,538 | |||||||
Commitments and contingencies | ||||||||
Total liabilities and stockholders’ equity | $ | 626,037 | 622,110 | |||||
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(Parent Company Only)
2008 | 2007 | 2006 | ||||||||||
Rental income | $ | 7,361 | 7,096 | 6,897 | ||||||||
Management fees | 2,805 | 3,880 | 3,650 | |||||||||
General and administrative expenses | (9,283 | ) | (7,846 | ) | (6,648 | ) | ||||||
Operating income | 883 | 3,130 | 3,899 | |||||||||
Other revenue (expenses): | ||||||||||||
Equity in net income of subsidiaries | 26,103 | 57,980 | 53,632 | |||||||||
Interest expense, net of interest income of $6,093, $5,477, and $6,088, in 2008, 2007, and 2006, respectively | (1,941 | ) | (2,557 | ) | (2,078 | ) | ||||||
Other income | 13 | 397 | — | |||||||||
Total other revenue, net | 24,175 | 55,820 | 51,554 | |||||||||
Income before income taxes | 25,058 | 58,950 | 55,453 | |||||||||
Income tax expense (benefit): | ||||||||||||
Current | 631 | 520 | 772 | |||||||||
Deferred | (363 | ) | (88 | ) | 148 | |||||||
Total income tax expense, net | 268 | 432 | 920 | |||||||||
Net income | $ | 24,790 | 58,518 | 54,533 | ||||||||
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(Parent Company Only)
Accumulated | ||||||||||||||||||||||||
Common | Common | Additional | other | |||||||||||||||||||||
stock | stock | paid-in | Retained | comprehensive | ||||||||||||||||||||
Class A | Class B | capital | earnings | income (loss) | Total | |||||||||||||||||||
Balance, December 31, 2005 | 26,712 | — | 124,052 | 162,964 | (5,025 | ) | 308,703 | |||||||||||||||||
Dividends declared | — | — | (6,231 | ) | — | (6,231 | ) | |||||||||||||||||
Adjustment to initially apply SFAS No. 158, net of tax | — | — | — | (16,081 | ) | (16,081 | ) | |||||||||||||||||
Other | 21 | (21 | ) | — | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 54,533 | — | 54,533 | ||||||||||||||||||
Net unrealized change in fair value of available for sale securities | — | — | — | — | (3,212 | ) | (3,212 | ) | ||||||||||||||||
Net change in minimum pension liability | — | — | — | — | 4,952 | 4,952 | ||||||||||||||||||
Net change in fair value of cash-flow hedges | — | — | — | — | (65 | ) | (65 | ) | ||||||||||||||||
Total comprehensive income | 56,208 | |||||||||||||||||||||||
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 resticted 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 | ||||||||||||||||
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(Parent Company Only)
2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 24,790 | 58,518 | 54,533 | ||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||
Equity in net income of subsidiaries | (26,103 | ) | (57,980 | ) | (53,632 | ) | ||||||
Depreciation and amortization | 922 | 1,120 | 1,130 | |||||||||
Share-based compensation | 3,268 | 200 | — | |||||||||
Provision for obsolescence | — | — | (83 | ) | ||||||||
Deferred income tax (benefit) expense | (607 | ) | (88 | ) | 148 | |||||||
Other | 1,965 | (394 | ) | — | ||||||||
Changes in assets and liabilities: | ||||||||||||
Receivables | (8,404 | ) | (233 | ) | 1,062 | |||||||
Accrued interest | (3,883 | ) | (4,244 | ) | (1,842 | ) | ||||||
Prepaid income tax and other assets | (189 | ) | (146 | ) | 517 | |||||||
Accounts payable, accrued expenses, liability for pension benefit and due to subsidiary | (3,475 | ) | (3,945 | ) | 6,807 | |||||||
Income taxes payable | — | (291 | ) | 291 | ||||||||
Net cash (used in) provided by operating activities | (11,716 | ) | (7,483 | ) | 8,931 | |||||||
Cash flows from investing activities: | ||||||||||||
Acquisition of investment in securities classified as available for sale | (70,684 | ) | (28,202 | ) | — | |||||||
Proceeds from sale and maturities of investment in securities classified as available for sale | 45,905 | 4,393 | 335 | |||||||||
Notes receivable from subsidiaries | — | 22,000 | 4,000 | |||||||||
Acquisition of business | — | — | (38,196 | ) | ||||||||
Net retirement (acquisition) of property and equipment | (47 | ) | 149 | (162 | ) | |||||||
Net cash used in investing activities | (24,826 | ) | (1,660 | ) | (34,023 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Dividends | — | (2,448 | ) | (6,231 | ) | |||||||
Repayments of long-term borrowings | (1,639 | ) | (12,141 | ) | (2,503 | ) | ||||||
Proceeds from long-term borrowings | — | — | 35,000 | |||||||||
Net proceeds from initial public offering | — | 70,279 | — | |||||||||
Repurchases and retirement of common stock | (7,645 | ) | — | — | ||||||||
Other | 6 | 1 | — | |||||||||
Net cash (used in) provided by financing activities | (9,278 | ) | 55,691 | 26,266 | ||||||||
Net increase (decrease) in cash and cash equivalents | (45,820 | ) | 46,548 | 1,174 | ||||||||
Cash and cash equivalents, beginning of year | 47,772 | 1,224 | 50 | |||||||||
Cash and cash equivalents, end of year | $ | 1,952 | 47,772 | 1,224 | ||||||||
Supplemental information: | ||||||||||||
Income taxes paid | $ | 1,149 | 922 | 402 | ||||||||
Interest paid | 7,357 | 7,751 | 7,809 | |||||||||
Noncash activities: | ||||||||||||
Change in net unrealized gain on securities available for sale, including deferred income tax liability of $854, $1,840, and $803 in 2008, 2007 and 2006, respectively | $ | (3,952 | ) | 9,549 | (3,212 | ) | ||||||
Change in cash-flow hedges, including deferred tax liability of $37 and $159, $40 in 2008, 2007 and 2006, respectively | (56 | ) | (250 | ) | (65 | ) | ||||||
Change in liability for pension benefits and deferred income tax asset of $4,796, $2,189, and $7,189 in 2008, 2007, and 2006, respectively | (7,615 | ) | 4,090 | 4,952 | ||||||||
Adjustment to initially apply SFAS No. 158, including deferred income tax effect of $10,152 in 2006 | — | — | (16,081 | ) | ||||||||
Unsettled shares repurchases | 6,235 | — | — |
5
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(Parent Company Only)
(1) | Organization | |
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): (a) Triple-S, Inc. (TSI) a managed care organization, that provides health benefits services to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations located mainly in Puerto Rico; (b) 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 (c) Seguros Triple-S, Inc. (STS), which is engaged in the underwriting of property and casualty insurance policies. Effective February 16, 2009, TSI and STS change their name to Triple-S Salud, Inc. and Triple-S Propiedad, Inc., respectively. The Company and TSI are members of the Blue Cross and Blue Shield Association (BCBSA). | ||
Effective January 31, 2006, the Company completed the acquisition of 100% of the common stocks of Great American Life Assurance Company of Puerto Rico (GA Life) (now Triple-S Vida, Inc.) and effective June 30, 2006, the Company merged the operations of its former life and accident and health insurance subsidiary, Seguros de Vida Triple-S, Inc. (SVTS), into the GA Life. The results of operations and financial position of GA Life are included as part of equity in net income of subsidiaries in the accompanying statements of earnings for the period following January 31, 2006. Effective November 1, 2007 GA Life changed its name to Triple-S Vida, Inc. | ||
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 TSI in the administration of the Commonwealth of Puerto Rico Health Care Reform business (the Reform). Also, TC provides health care advisory services to TSI and other health insurance-related services to the health insurance industry. | ||
A substantial majority of the Company’s business activity through its subsidiaries is with insureds located throughout Puerto Rico and, as such, the Company is subject to the risks associated with the Puerto Rico economy. | ||
(2) | Significant Accounting Policies | |
The significant accounting policies followed by the Company are set forth in the notes to the consolidated financial statements of the Company referred to in Item 15 to the Annual Report on Form 10-K. |
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(Parent Company Only)
(3) | Property and Equipment, Net | |
Property and equipment as of December 31 are composed of the following: |
2008 | 2007 | |||||||
Land | $ | 6,531 | 6,531 | |||||
Buildings and leasehold improvements | 27,825 | 27,778 | ||||||
34,356 | 34,309 | |||||||
Less accumulated depreciation and amortization | (12,708 | ) | (11,786 | ) | ||||
Property and equipment, net | $ | 21,648 | 22,523 | |||||
(4) | Investment in Wholly Owned Subsidiaries | |
Summarized combined financial information for the Company’s wholly owned subsidiaries as of and for the years ended December 31, 2008 and 2007 is as follows: |
2008 | 2007 | |||||||
Assets | ||||||||
Cash, cash equivalents, and investments | $ | 1,003,316 | 1,168,182 | |||||
Receivables, net | 250,644 | 216,525 | ||||||
Other assets | 235,527 | 195,192 | ||||||
Total assets | $ | 1,489,487 | 1,579,899 | |||||
Liabilities and Equity | ||||||||
Claim liabilities | $ | 323,710 | 353,830 | |||||
Future policy benefits | 207,545 | 194,131 | ||||||
Unearned premiums | 110,141 | 132,599 | ||||||
Annuity contracts | 48,764 | 46,083 | ||||||
Accounts payable and other liabilities | 314,792 | 404,677 | ||||||
Total liabilities | 1,004,952 | 1,131,320 | ||||||
Stockholders’ equity | 484,535 | 448,579 | ||||||
Total liabilities and equity | $ | 1,489,487 | 1,579,899 | |||||
The net income of the subsidiaries during the three-year period ended December 31, 2008 was $26,103, $57,980, and $53,632. The Company allocates to its subsidiaries certain expenses incurred in the administration of their operations. Total charges including other expenses paid on behalf of the subsidiaries amounted to $8,596, $4,989 and $4,346, in the three-year period ended December 31, 2008. |
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(Parent Company Only)
(5) | Long-Term Borrowings | |
A summary of the long-term borrowings entered by the Company at December 31, 2008 and 2007 follows: |
2008 | 2007 | |||||||
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 2.43% and 6.24% at December 31, 2008 and 2007, respectively). | 24,307 | 25,946 | ||||||
119,307 | 120,946 | |||||||
Less current maturities | (1,640 | ) | (1,640 | ) | ||||
Total loans payable to bank | $ | 117,667 | 119,306 | |||||
2009 | 1,640 | |||
2010 | 1,640 | |||
2011 | 1,640 | |||
2012 | 1,640 | |||
2013 | 1,640 | |||
Thereafter | 111,107 | |||
$ | 119,307 | |||
8
Table of Contents
(Parent Company Only)
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 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 Company was also a party to another secured loan whose outstanding balance of $10,500 was repaid upon its maturity on August 1, 2007. | ||
Interest expense on the above long-term borrowings amounted to $7,301, $8,415 and $8,545, in the three-year period ended December 31, 2008. | ||
(6) | Income Taxes | |
The Company is subject to Puerto Rico income taxes. Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries. As of December 31, 2008, tax years 2004 through 2007 are subject to examination by Puerto Rico taxing authorities. | ||
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No.48,Accounting for Uncertainty in income Taxes and Interpretation of FASB statement No.109;no adjustment was required upon the adoption of this accounting pronouncement. | ||
The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to net income before income taxes as a result of the following: |
2008 | 2007 | 2006 | ||||||||||
Income tax expense at statutory rate of 39% | $ | 9,772 | 22,990 | 21,626 | ||||||||
Increase (decrease) in taxes resulting from: | ||||||||||||
Equity in net income of wholly owned subsidiaries | (10,180 | ) | (22,612 | ) | (20,916 | ) | ||||||
Disallowances | 678 | 154 | 37 | |||||||||
Other, net | (2 | ) | (100 | ) | 173 | |||||||
Total income tax expense | $ | 268 | 432 | 920 | ||||||||
9
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(Parent Company Only)
2008 | 2007 | |||||||
Deferred tax assets: | ||||||||
Employee benefits plan | $ | 535 | 388 | |||||
Accumulated depreciation | 334 | 356 | ||||||
Liability for pension benefits | 440 | 344 | ||||||
Deferred compensation | 198 | 155 | ||||||
Unrealized loss on securities available for sale | 217 | — | ||||||
Impairment loss on investments | 299 | — | ||||||
Tax credit | 243 | — | ||||||
Other | — | 37 | ||||||
Gross deferred tax assets | 2,266 | 1,280 | ||||||
Deferred tax liabilities: | ||||||||
Unamortized bond issue costs | (180 | ) | (196 | ) | ||||
Postretirement benefits | (136 | ) | (54 | ) | ||||
Other | (77 | ) | (120 | ) | ||||
Gross deferred tax liabilities | (393 | ) | (370 | ) | ||||
Net deferred tax asset | $ | 1,873 | 910 | |||||
10
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(Parent Company Only)
(7) | Transaction with Related Parties | |
The following are the significant related-party transactions made for the three-year period ended December 31, 2008, 2007 and 2006: |
2008 | 2007 | 2006 | ||||||||||
Rent charges to subsidiaries | $ | 7,286 | 7,023 | 6,824 | ||||||||
Interest charged to subsidiary on notes receivable | 3,189 | 4,821 | 5,620 |
• | On December 22, 2005, TSV borrowed $57,000 from TSM; this note receivable bears interest at an annual rate 6.6%. Accrued interest at December 31, 2008 and 2007 amounted to $11,339 and $8,150, respectively. |
The note receivable from subsidiary are due on demand; however, pursuant to the requirements established by the Commissioner of Insurance of the Commonwealth of Puerto Rico (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. | ||
(8) | Contingencies | |
At December 31, 2008 and 2007, 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. | ||
(9) | 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 affected 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 these consolidated financial statements are presented after giving retroactive effect to the stock split. |
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(Parent Company Only)
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 Directors 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 $6,248 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 IPO. | ||
(b) | Stock Repurchase Program | |
The Company may repurchase its common stock under a $40,000 share repurchase program authorized by the Company’s Board of Directors in October 2008. Repurchases may be conducted through open-market purchases and privately-negotiated transactions of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During 2008, the Company repurchased and retired approximately 1,181,500 shares at an average per share price of $11.75, for an aggregate cost of $13,880. Therefore, as of December 31, 2008, $26,120 remained authorized by the Company’s Board of Directors for future repurchases. At December 31, 2008, the Company had unsettled shares repurchases amounting to $6,235. Such amount is included in the accompanying consolidated balance sheet as account payable and accrued liabilities. The timing and extent of any purchases under the program will depend on market conditions, the trading price of the shares and other considerations, and the program may be suspended or terminated at any time. | ||
(c) | Preferred Stock | |
Authorized capital stock includes 100,000,000 of preferred stock with a par value of $1.00 per share. As of December 31, 2008 and 2007, there are no issued and outstanding preferred shares. | ||
(d) | 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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(Parent Company Only)
On January 13, 2006, the Board declared a cash dividend of $6,231 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding qualifying shares. All stockholders of record as of the close of business on January 16, 2006, except those who only hold qualifying shares, received a dividend per share of $0.23 for each share held on that date. |
13