TRIPLE-S MANAGEMENT CORPORATION
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from _______ to _______
COMMISSION FILE NUMBER: 0-49762
Triple-S Management Corporation
(Exact name of registrant as specified in its charter)
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Puerto Rico
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66-0555678 |
(State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.) |
organization) |
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1441 F.D. Roosevelt Avenue |
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San Juan, Puerto Rico
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00920 |
(Address of principal executive offices)
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(Zip code) |
(787) 749-4949
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Title of each class
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Outstanding at September 30, 2007 |
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Common Stock, $1.00 par value
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26,772,000 |
Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended September 30, 2007
Table of Contents
2
Part I Financial Information
Item 1. Financial Statements
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
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(Unaudited) |
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September 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Investments and cash: |
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Securities held for trading, at fair value: |
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Equity securities |
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$ |
69,968 |
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83,447 |
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Securities available for sale, at fair value: |
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Fixed maturities |
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728,649 |
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702,566 |
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Equity securities |
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73,406 |
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61,686 |
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Securities held to maturity, at amortized cost: |
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Fixed maturities |
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46,331 |
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47,989 |
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Policy loans |
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5,491 |
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5,194 |
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Cash and cash equivalents |
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95,973 |
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81,564 |
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Total investments and cash |
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1,019,818 |
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982,446 |
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Premiums and other receivables, net |
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205,034 |
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165,626 |
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Deferred policy acquisition costs and value of business acquired |
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114,352 |
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111,417 |
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Property and equipment, net |
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42,529 |
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41,615 |
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Net deferred tax asset |
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8,363 |
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9,292 |
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Other assets |
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34,465 |
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35,113 |
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Total assets |
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$ |
1,424,561 |
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1,345,509 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Claim liabilities: |
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Claims processed and incomplete |
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$ |
168,914 |
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147,211 |
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Unreported losses |
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162,401 |
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150,735 |
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Unpaid loss-adjustment expenses |
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17,244 |
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16,736 |
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Total claim liabilities |
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348,559 |
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314,682 |
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Liability for future policy benefits |
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190,508 |
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180,420 |
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Unearned premiums |
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98,838 |
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113,582 |
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Policyholder deposits |
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46,136 |
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45,425 |
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Liability to Federal Employees Health Benefits Program |
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19,637 |
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13,563 |
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Accounts payable and accrued liabilities |
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134,345 |
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110,609 |
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Borrowings |
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171,357 |
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183,087 |
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Income tax payable |
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9,242 |
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Liability for pension benefits |
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32,315 |
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32,300 |
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Total liabilities |
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1,041,695 |
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1,002,910 |
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Stockholders equity: |
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Common stock |
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26,772 |
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26,733 |
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Additional paid-in capital |
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123,993 |
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124,031 |
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Retained earnings |
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249,618 |
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211,266 |
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Accumulated other comprehensive loss |
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(17,517 |
) |
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(19,431 |
) |
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Total stockholders equity |
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382,866 |
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342,599 |
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Total liabilities and stockholders equity |
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$ |
1,424,561 |
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1,345,509 |
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See accompanying notes to unaudited consolidated financial statements.
3
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
For the three months and nine months ended September 30, 2007 and 2006
(Dollar amounts in thousands, except per share data)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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REVENUES: |
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Premiums earned, net |
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$ |
375,803 |
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390,431 |
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$ |
1,101,614 |
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1,158,599 |
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Administrative service fees |
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3,908 |
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3,725 |
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11,034 |
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10,356 |
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Net investment income |
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11,229 |
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10,509 |
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33,397 |
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31,325 |
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Total operating revenues |
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390,940 |
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404,665 |
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1,146,045 |
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1,200,280 |
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Net realized investment gains |
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1,183 |
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363 |
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6,163 |
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1,324 |
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Net unrealized investment gain (loss) on trading securities |
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588 |
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3,407 |
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(764 |
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3,718 |
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Other income (expense), net |
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(525 |
) |
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1,295 |
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1,842 |
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1,208 |
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Total revenues |
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392,186 |
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409,730 |
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1,153,286 |
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1,206,530 |
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BENEFITS AND EXPENSES: |
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Claims incurred |
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310,033 |
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317,388 |
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915,374 |
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974,304 |
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Operating expenses |
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57,944 |
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55,810 |
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173,439 |
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170,472 |
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Total operating costs |
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367,977 |
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373,198 |
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1,088,813 |
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1,144,776 |
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Interest expense |
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3,938 |
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4,493 |
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11,948 |
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12,387 |
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Total benefits and expenses |
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371,915 |
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377,691 |
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1,100,761 |
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1,157,163 |
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Income before taxes |
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20,271 |
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32,039 |
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52,525 |
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49,367 |
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INCOME TAX EXPENSE: |
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Current |
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4,575 |
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6,130 |
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11,573 |
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9,545 |
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Deferred |
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206 |
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1,079 |
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152 |
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992 |
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Total income taxes |
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4,781 |
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7,209 |
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11,725 |
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10,537 |
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Net income |
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$ |
15,490 |
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24,830 |
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$ |
40,800 |
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38,830 |
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Basic net income per share (note 7) |
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$ |
0.58 |
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0.93 |
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$ |
1.53 |
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1.45 |
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See accompanying notes to unaudited consolidated financial statements.
4
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Unaudited)
For the nine months
ended September 30, 2007 and 2006
(Dollar amounts in thousands, except per share data)
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2007 |
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2006 |
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BALANCE AT JANUARY 1 |
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$ |
342,599 |
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308,703 |
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Dividends |
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(2,448 |
) |
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(6,231 |
) |
Other |
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1 |
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Comprehensive income (loss): |
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Net income |
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40,800 |
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38,830 |
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Net unrealized change in fair value of available for sale securities |
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1,137 |
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(3,487 |
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Defined benefit pension plan: |
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Actuarial loss, net |
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935 |
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Prior service cost, net |
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27 |
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Net change in fair value of cash flow hedges |
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(185 |
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(30 |
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Total comprehensive income |
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42,714 |
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35,313 |
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BALANCE AT SEPTEMBER 30 |
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$ |
382,866 |
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337,785 |
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5
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARES
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2007 and 2006
(Dollar amounts in thousands, except per share data)
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Nine months ended |
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September 30, |
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2007 |
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2006 |
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Net income |
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$ |
40,800 |
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38,830 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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5,413 |
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4,486 |
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Net amortization of investments |
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556 |
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135 |
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Provision for doubtful receivables |
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1,902 |
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1,588 |
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Deferred tax expense |
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152 |
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|
992 |
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Net gain on sale of securities |
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(6,163 |
) |
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(1,324 |
) |
Net unrealized (gain) loss of trading securities |
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764 |
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(3,718 |
) |
Proceeds from trading securities sold: |
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Equity securities |
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38,309 |
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|
14,137 |
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Acquisition of securities in trading portfolio: |
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Equity securities |
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(19,172 |
) |
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(14,599 |
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Loss on sale of property and equipment |
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2 |
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22 |
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(Increase) decrease in assets: |
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Premiums receivable |
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(21,258 |
) |
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(34,552 |
) |
Agent balances |
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2,084 |
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(528 |
) |
Accrued interest receivable |
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(1,314 |
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(21 |
) |
Other receivables |
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(4,289 |
) |
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|
(2,843 |
) |
Reinsurance recoverable on paid losses |
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(16,409 |
) |
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(3,637 |
) |
Deferred policy acquisition costs and
value of business acquired |
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(2,935 |
) |
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|
(4,066 |
) |
Prepaid income tax |
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(2,598 |
) |
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|
3,353 |
|
Other assets |
|
|
2,942 |
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|
459 |
|
Increase (decrease) in liabilities: |
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Claims processed and incomplete |
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|
21,703 |
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|
|
18,971 |
|
Unreported losses |
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|
11,666 |
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|
|
17,402 |
|
Unpaid loss-adjustment expenses |
|
|
508 |
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|
1,414 |
|
Liability for future policy benefits |
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|
10,088 |
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|
10,254 |
|
Unearned premiums |
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|
(14,744 |
) |
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|
(3,832 |
) |
Policyholder deposits |
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|
1,192 |
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|
1,356 |
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Liability to FEHBP |
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6,074 |
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(1,812 |
) |
Accounts payable and accrued liabilities |
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|
5,459 |
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|
|
3,970 |
|
Income tax payable |
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(9,242 |
) |
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|
4,677 |
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Net cash provided by
operating activities |
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$ |
51,490 |
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|
51,114 |
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(Continued)
6
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2007 and 2006
(Dollar amounts in thousands, except per share data)
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Nine months ended |
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September 30, |
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2007 |
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2006 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from investments sold or matured: |
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Securities available for sale: |
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Fixed maturities sold |
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$ |
101,828 |
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|
16,151 |
|
Fixed maturities matured |
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|
25,733 |
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|
30,895 |
|
Equity securities |
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|
1,000 |
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|
|
1,209 |
|
Fixed maturity securities held to maturity |
|
|
7,172 |
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|
|
342 |
|
Acquisition of investments: |
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|
|
|
|
|
|
Securities available for sale: |
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|
|
|
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|
|
Fixed maturities |
|
|
(147,357 |
) |
|
|
(54,221 |
) |
Equity securities |
|
|
(16,759 |
) |
|
|
(11,517 |
) |
Securities held to maturity: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(4,891 |
) |
|
|
(1,688 |
) |
Acquisition of business, net of $10,403 of cash acquired |
|
|
|
|
|
|
(27,793 |
) |
Net disbursements for policy loans |
|
|
(297 |
) |
|
|
(502 |
) |
Net capital expenditures |
|
|
(6,329 |
) |
|
|
(9,468 |
) |
|
Net cash used in investing activities |
|
|
(39,900 |
) |
|
|
(56,592 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Change in outstanding checks in excess of bank balances |
|
|
17,477 |
|
|
|
490 |
|
Repayments of short-term borrowings |
|
|
(43,559 |
) |
|
|
(119,547 |
) |
Proceeds from short-term borrowings |
|
|
43,559 |
|
|
|
117,807 |
|
Repayments of long-term borrowings |
|
|
(11,730 |
) |
|
|
(2,093 |
) |
Proceeds from long-term borrowings |
|
|
|
|
|
|
35,000 |
|
Dividends paid |
|
|
(2,448 |
) |
|
|
(6,231 |
) |
Proceeds from policyholder deposits |
|
|
5,133 |
|
|
|
4,389 |
|
Surrenders of policyholder deposits |
|
|
(5,614 |
) |
|
|
(10,213 |
) |
Other |
|
|
1 |
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,819 |
|
|
|
19,602 |
|
|
Net increase in cash and cash equivalents |
|
|
14,409 |
|
|
|
14,124 |
|
Cash and cash equivalents at beginning of the period |
|
|
81,564 |
|
|
|
49,050 |
|
|
Cash and cash equivalents at end of the period |
|
$ |
95,973 |
|
|
|
63,174 |
|
|
See accompanying notes to unaudited consolidated financial statements.
7
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated interim financial statements prepared by Triple-S Management
Corporation and its subsidiaries (the Corporation) are unaudited, except for the balance sheet
information as of December 31, 2006, which is derived from the Corporations audited consolidated
financial statements, pursuant to the rules and regulations of the United States Securities and
Exchange Commission. The consolidated interim financial statements do not include all of the
information and the footnotes required by U.S. generally accepted accounting principles for
complete financial statements. These consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements included in the Corporations Annual
Report on Form 10-K for the year ended December 31, 2006.
In the opinion of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such consolidated interim financial statements have been
included. The results of operations for the three months and nine months ended September 30, 2007
are not necessarily indicative of the results for the full year.
Certain amounts in the 2006 consolidated financial statements were reclassified to conform to the
2007 presentation.
(2) Recent Accounting Standards
There were no new accounting pronouncements issued during the first nine months of 2007 that have
not been disclosed in Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations included in the Corporations Annual Report on Form 10-K for the year ended
December 31, 2006.
The Corporation adopted the provisions of the Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109 (FIN 48) on January 1, 2007. See note 10 for details.
(3) Segment Information
The operations of the Corporation are conducted principally through three business segments:
Managed Care, Life and Accident and Health Insurance (the Life Insurance segment), and Property and
Casualty Insurance. The Corporation 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 Corporation calculates operating income or loss as operating revenues less
operating costs.
The following tables summarize the operations by major operating segment for the three months and
nine months ended September 30, 2007 and 2006:
8
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
$ |
330,366 |
|
|
|
346,668 |
|
|
$ |
965,909 |
|
|
|
1,028,452 |
|
Administrative service fees |
|
|
3,908 |
|
|
|
3,725 |
|
|
|
11,034 |
|
|
|
10,356 |
|
Intersegment premiums /service fees |
|
|
1,309 |
|
|
|
1,335 |
|
|
|
4,717 |
|
|
|
4,224 |
|
Net investment income |
|
|
4,848 |
|
|
|
4,770 |
|
|
|
14,338 |
|
|
|
13,842 |
|
|
Total managed care |
|
|
340,431 |
|
|
|
356,498 |
|
|
|
995,998 |
|
|
|
1,056,874 |
|
Life Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
|
21,974 |
|
|
|
21,936 |
|
|
|
66,837 |
|
|
|
64,434 |
|
Intersegment premiums |
|
|
92 |
|
|
|
79 |
|
|
|
264 |
|
|
|
235 |
|
Net investment income |
|
|
3,695 |
|
|
|
3,285 |
|
|
|
11,054 |
|
|
|
10,117 |
|
|
Total life |
|
|
25,761 |
|
|
|
25,300 |
|
|
|
78,155 |
|
|
|
74,786 |
|
Property and Casualty Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
|
23,463 |
|
|
|
21,827 |
|
|
|
68,868 |
|
|
|
65,713 |
|
Intersegment premiums |
|
|
154 |
|
|
|
154 |
|
|
|
462 |
|
|
|
438 |
|
Net investment income |
|
|
2,566 |
|
|
|
2,340 |
|
|
|
7,645 |
|
|
|
7,020 |
|
|
Total property and casualty |
|
|
26,183 |
|
|
|
24,321 |
|
|
|
76,975 |
|
|
|
73,171 |
|
Other segments - intersegment service revenues * |
|
|
10,683 |
|
|
|
12,855 |
|
|
|
32,325 |
|
|
|
38,320 |
|
|
Total business segments |
|
|
403,058 |
|
|
|
418,974 |
|
|
|
1,183,453 |
|
|
|
1,243,151 |
|
TSM operating revenues from external sources |
|
|
120 |
|
|
|
114 |
|
|
|
360 |
|
|
|
346 |
|
Elimination of intersegment premiums |
|
|
(1,555 |
) |
|
|
(1,568 |
) |
|
|
(5,443 |
) |
|
|
(4,897 |
) |
Elimination of intersegment service fees |
|
|
(10,683 |
) |
|
|
(12,855 |
) |
|
|
(32,325 |
) |
|
|
(38,320 |
) |
|
Consolidated operating revenues |
|
$ |
390,940 |
|
|
|
404,665 |
|
|
$ |
1,146,045 |
|
|
|
1,200,280 |
|
|
|
|
|
* |
|
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 managed care services. |
9
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care |
|
$ |
17,499 |
|
|
|
22,377 |
|
|
$ |
39,396 |
|
|
|
33,165 |
|
Life insurance |
|
|
2,605 |
|
|
|
3,089 |
|
|
|
8,260 |
|
|
|
9,069 |
|
Property and casualty insurance |
|
|
1,508 |
|
|
|
3,756 |
|
|
|
6,494 |
|
|
|
7,946 |
|
Other segments * |
|
|
509 |
|
|
|
505 |
|
|
|
787 |
|
|
|
1,009 |
|
|
Total business segments |
|
|
22,121 |
|
|
|
29,727 |
|
|
|
54,937 |
|
|
|
51,189 |
|
TSM operating revenues from external sources |
|
|
120 |
|
|
|
114 |
|
|
|
360 |
|
|
|
346 |
|
TSM unallocated operating expenses |
|
|
(2,006 |
) |
|
|
(1,120 |
) |
|
|
(6,279 |
) |
|
|
(3,762 |
) |
Elimination of TSM
intersegment charges |
|
|
2,728 |
|
|
|
2,746 |
|
|
|
8,214 |
|
|
|
7,731 |
|
|
Consolidated operating income |
|
|
22,963 |
|
|
|
31,467 |
|
|
|
57,232 |
|
|
|
55,504 |
|
Consolidated net realized investment gains |
|
|
1,183 |
|
|
|
363 |
|
|
|
6,163 |
|
|
|
1,324 |
|
Consolidated net unrealized gain (loss) on
trading securities |
|
|
588 |
|
|
|
3,407 |
|
|
|
(764 |
) |
|
|
3,718 |
|
Consolidated interest expense |
|
|
(3,938 |
) |
|
|
(4,493 |
) |
|
|
(11,948 |
) |
|
|
(12,387 |
) |
Consolidated other income, net |
|
|
(525 |
) |
|
|
1,295 |
|
|
|
1,842 |
|
|
|
1,208 |
|
|
Consolidated income before taxes |
|
$ |
20,271 |
|
|
|
32,039 |
|
|
$ |
52,525 |
|
|
|
49,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care |
|
$ |
1,167 |
|
|
|
977 |
|
|
$ |
2,925 |
|
|
|
2,786 |
|
Life insurance |
|
|
193 |
|
|
|
195 |
|
|
|
532 |
|
|
|
512 |
|
Property and casualty insurance |
|
|
377 |
|
|
|
101 |
|
|
|
1,114 |
|
|
|
340 |
|
|
Total business segments |
|
|
1,737 |
|
|
|
1,273 |
|
|
|
4,571 |
|
|
|
3,638 |
|
TSM depreciation expense |
|
|
281 |
|
|
|
283 |
|
|
|
842 |
|
|
|
1,121 |
|
|
Consolidated depreciation
expense |
|
$ |
2,018 |
|
|
|
1,556 |
|
|
$ |
5,413 |
|
|
|
4,759 |
|
|
|
|
|
* |
|
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 managed care services. |
10
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
Assets: |
|
|
|
|
|
|
|
|
Managed care |
|
$ |
633,387 |
|
|
|
600,948 |
|
Life insurance |
|
|
424,326 |
|
|
|
407,994 |
|
Property and casualty insurance |
|
|
354,444 |
|
|
|
326,894 |
|
Other segments * |
|
|
8,350 |
|
|
|
7,807 |
|
|
Total business segments |
|
|
1,420,507 |
|
|
|
1,343,643 |
|
Unallocated amounts related to TSM: |
|
|
|
|
|
|
|
|
Cash, cash equivalents, and investments |
|
|
10,346 |
|
|
|
11,879 |
|
Property and equipment,net |
|
|
22,801 |
|
|
|
23,792 |
|
Other assets |
|
|
3,044 |
|
|
|
4,096 |
|
|
|
|
|
36,191 |
|
|
|
39,767 |
|
Elimination entries-intersegment receivables and others |
|
|
(32,137 |
) |
|
|
(37,901 |
) |
|
Consolidated total assets |
|
$ |
1,424,561 |
|
|
|
1,345,509 |
|
|
|
|
|
|
|
|
|
|
|
Significant noncash items: |
|
|
|
|
|
|
|
|
Net change in unrealized gain on securities available for sale: |
|
|
|
|
|
|
|
|
Managed care |
|
$ |
(449 |
) |
|
|
(1,560 |
) |
Life insurance |
|
|
(690 |
) |
|
|
(1,457 |
) |
Property and casualty insurance |
|
|
2,184 |
|
|
|
(183 |
) |
|
Total business segments |
|
|
1,045 |
|
|
|
(3,200 |
) |
Amount related to TSM |
|
|
92 |
|
|
|
(12 |
) |
|
Consolidated net change in unrealized gain on
securities available for sale |
|
$ |
1,137 |
|
|
|
(3,212 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in defined benefit pension plan liability: |
|
|
|
|
|
|
|
|
Managed care |
|
$ |
658 |
|
|
|
3,795 |
|
Life |
|
|
9 |
|
|
|
212 |
|
Property and casualty |
|
|
69 |
|
|
|
197 |
|
Other segments* |
|
|
205 |
|
|
|
614 |
|
|
Total business segments |
|
|
941 |
|
|
|
4,818 |
|
Amount related to TSM |
|
|
21 |
|
|
|
134 |
|
|
Consolidated net change in defined benefit pension
plan liability |
|
$ |
962 |
|
|
|
4,952 |
|
|
|
|
|
* |
|
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 managed care services. |
11
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
(4) Investment in Securities
The amortized cost for debt securities 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 September 30, 2007 and December 31,
2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Estimated fair |
|
|
cost |
|
gains |
|
losses |
|
value |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
54,215 |
|
|
|
16,525 |
|
|
|
(772 |
) |
|
|
69,968 |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
735,033 |
|
|
|
1,969 |
|
|
|
(8,353 |
) |
|
|
728,649 |
|
Equity securities |
|
|
65,586 |
|
|
|
10,200 |
|
|
|
(2,380 |
) |
|
|
73,406 |
|
|
|
|
|
800,619 |
|
|
|
12,169 |
|
|
|
(10,733 |
) |
|
|
802,055 |
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
46,331 |
|
|
|
53 |
|
|
|
(710 |
) |
|
|
45,674 |
|
|
|
|
$ |
901,165 |
|
|
|
28,747 |
|
|
|
(12,215 |
) |
|
|
917,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Estimated fair |
|
|
cost |
|
gains |
|
losses |
|
value |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
66,930 |
|
|
|
17,436 |
|
|
|
(919 |
) |
|
|
83,447 |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
714,113 |
|
|
|
590 |
|
|
|
(12,137 |
) |
|
|
702,566 |
|
Equity securities |
|
|
50,132 |
|
|
|
13,112 |
|
|
|
(1,558 |
) |
|
|
61,686 |
|
|
|
|
|
764,245 |
|
|
|
13,702 |
|
|
|
(13,695 |
) |
|
|
764,252 |
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
47,989 |
|
|
|
383 |
|
|
|
(1,491 |
) |
|
|
46,881 |
|
|
|
|
$ |
879,164 |
|
|
|
31,521 |
|
|
|
(16,105 |
) |
|
|
894,580 |
|
|
Investment in securities at September 30, 2007 are mostly comprised of U.S. Treasury securities,
obligations of government sponsored enterprises and obligations of U.S. government
instrumentalities (58.9%), mortgage backed and collateralized mortgage obligations that are U.S.
agency-backed (7.6%) and obligations of the government of Puerto Rico and its instrumentalities
(6.9%). The remaining 26.6% of the investment portfolio is comprised of corporate bonds, equity
securities and mutual funds.
The Corporation regularly monitors 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 Corporations 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
investments cost exceeds its fair value solely due to changes in interest rates, impairment may
not be appropriate. If after monitoring and analyzing, the Corporation 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.
12
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
The
impairment is charged to operations and a new cost basis for the security is established. During
the nine months ended September 30, 2007 and 2006 the Corporation recognized other-than-temporary
impairments amounting to $564 and $1,350, respectively, on its equity securities classified as
available for sale.
(5) Premiums and Other Receivables
Premiums and other receivables as of September 30, 2007 and December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
Premium |
|
$ |
68,696 |
|
|
|
53,377 |
|
Self-funded group receivables |
|
|
30,038 |
|
|
|
24,854 |
|
FEHBP |
|
|
9,942 |
|
|
|
9,187 |
|
Agents balances |
|
|
26,729 |
|
|
|
28,813 |
|
Accrued interest |
|
|
9,368 |
|
|
|
8,054 |
|
Reinsurance recoverable on paid losses |
|
|
57,294 |
|
|
|
40,885 |
|
Other |
|
|
23,099 |
|
|
|
18,686 |
|
|
|
|
|
225,166 |
|
|
|
183,856 |
|
|
Less allowance for doubtful receivables: |
|
|
|
|
|
|
|
|
Premiums |
|
|
13,195 |
|
|
|
12,128 |
|
Other |
|
|
6,937 |
|
|
|
6,102 |
|
|
|
|
|
20,132 |
|
|
|
18,230 |
|
|
Total premiums and other receivables |
|
$ |
205,034 |
|
|
|
165,626 |
|
|
(6) Claim Liabilities
The activity in the total claim liabilities for the three months and nine months ended September
30, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Claim liabilities at beginning of period |
|
$ |
344,816 |
|
|
|
341,598 |
|
|
$ |
314,682 |
|
|
|
297,563 |
|
Reinsurance recoverable on claim liabilities |
|
|
(50,003 |
) |
|
|
(29,173 |
) |
|
|
(32,066 |
) |
|
|
(28,720 |
) |
|
Net claim liabilities at beginning of period |
|
|
294,813 |
|
|
|
312,425 |
|
|
|
282,616 |
|
|
|
268,843 |
|
|
Claim liabilities acquired from GA Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,771 |
|
Incurred claims and loss-adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period insured events |
|
|
311,925 |
|
|
|
317,413 |
|
|
|
931,605 |
|
|
|
975,170 |
|
Prior period insured events |
|
|
(4,815 |
) |
|
|
(6,163 |
) |
|
|
(25,753 |
) |
|
|
(12,471 |
) |
|
Total |
|
|
307,110 |
|
|
|
311,250 |
|
|
|
905,852 |
|
|
|
962,699 |
|
|
Payments of losses and loss-adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period insured events |
|
|
288,469 |
|
|
|
289,548 |
|
|
|
711,175 |
|
|
|
748,093 |
|
Prior period insured events |
|
|
14,776 |
|
|
|
20,010 |
|
|
|
178,615 |
|
|
|
178,103 |
|
|
Total |
|
|
303,245 |
|
|
|
309,558 |
|
|
|
889,790 |
|
|
|
926,196 |
|
|
Net claim liabilities at end of period |
|
|
298,678 |
|
|
|
314,117 |
|
|
|
298,678 |
|
|
|
314,117 |
|
Reinsurance recoverable on claim liabilities |
|
|
49,881 |
|
|
|
30,416 |
|
|
|
49,881 |
|
|
|
30,416 |
|
|
Claim liabilities at end of period |
|
$ |
348,559 |
|
|
|
344,533 |
|
|
$ |
348,559 |
|
|
|
344,533 |
|
|
13
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
As a result of differences between actual amounts and estimates of insured events in prior periods,
the amounts included as incurred claims for prior period insured events differ from anticipated
claims incurred.
The amount included in the incurred claims and loss-adjustment expenses for prior period insured
events for the three months and nine months ended September 30, 2007 and 2006 represents a
favorable development of claim liabilities due primarily to better than expected utilization
trends.
(7) Capital Stock
The Corporation is authorized to issue 100,000,000 shares of common stock with a par value of $1.00
per share pursuant to an amendment to the Corporations Article of Incorporation that became
effective in February 2007.
On April 24, 2007, the Corporations Board of Directors (the Board) authorized a 3,000-for-one
stock split 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 Corporation cancelled 24,000 director qualifying shares. As of February 2007,
Board members are no longer required to hold qualifying shares to participate in the Board of
Directors of the Corporation.
(8) Borrowings
A summary of the Corporations borrowings at September 30, 2007 and December 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
Secured loan payable of $20,000, payable in various different
installments up to August 1, 2007, with interest payable on a
monthly basis at a rate reset periodically of 130 basis points
over LIBOR selected (which was 6.67% December 31, 2006) |
|
$ |
|
|
|
|
10,500 |
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes payable of $50,000 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 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 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 up to July 1, 2024, plus interest at a rate reset periodically
of 100 basis points over LIBOR selected (which was 6.72% and
6.35% at September 30, 2007 and December 31, 2006, respectively) |
|
|
26,357 |
|
|
|
27,587 |
|
|
Total borrowings |
|
$ |
171,357 |
|
|
|
183,087 |
|
|
14
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
(9) Comprehensive Income
The accumulated balances for each classification of other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Unrealized |
|
Liability for |
|
|
|
|
|
other |
|
|
gain (loss) on |
|
pension |
|
Cash flow |
|
comprehensive |
|
|
securities |
|
benefits |
|
hedges |
|
income |
|
BALANCE AT JANUARY 1 |
|
$ |
5 |
|
|
|
(19,742 |
) |
|
|
306 |
|
|
|
(19,431 |
) |
Net current period change |
|
|
1,137 |
|
|
|
962 |
|
|
|
(185 |
) |
|
|
1,914 |
|
|
BALANCE AT SEPTEMBER 30 |
|
$ |
1,142 |
|
|
|
(18,780 |
) |
|
|
121 |
|
|
|
(17,517 |
) |
|
(10) Income Taxes
Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns
with its subsidiaries. The Corporation and its subsidiaries are subject to Puerto Rico income
taxes. The Corporations insurance subsidiaries are also subject to U.S. federal income taxes for
foreign source dividend income. As of January 1, 2007, tax years 2003 through 2006 for the
Corporation and its subsidiaries are subject to examination by Puerto Rico taxing authorities.
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 statements 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. Quarterly income taxes are calculated using the
effective tax rate determined based on the income forecasted for the full fiscal year.
In June 2006, FASB issued FIN 48, which among other things, provides guidance to address
uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum
recognition threshold which income tax positions must achieve before being recognized in the
financial statements. In addition, FIN 48 requires expanded annual disclosures, including a
rollforward of the beginning and ending aggregate unrecognized taxes as well as specific detail
related to tax uncertainties for which it is reasonably possible the amount of unrecognized taxes
will significantly increase or decrease within twelve months. The Corporation adopted FIN 48 on
January 1, 2007; no adjustment was required upon the adoption of this accounting pronouncement.
15
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
(11) Pension Plan
The components of net periodic benefit cost for the three months and nine months ended September
30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,254 |
|
|
|
1,350 |
|
|
$ |
4,194 |
|
|
|
4,042 |
|
Interest cost |
|
|
1,195 |
|
|
|
1,151 |
|
|
|
3,916 |
|
|
|
3,454 |
|
Expected return on assets |
|
|
(1,034 |
) |
|
|
(954 |
) |
|
|
(3,395 |
) |
|
|
(2,880 |
) |
Prior service cost |
|
|
14 |
|
|
|
12 |
|
|
|
44 |
|
|
|
36 |
|
Actuarial loss |
|
|
501 |
|
|
|
602 |
|
|
|
1,526 |
|
|
|
1,794 |
|
|
Net periodic benefit cost |
|
$ |
1,930 |
|
|
|
2,161 |
|
|
$ |
6,285 |
|
|
|
6,446 |
|
|
Employer contributions
The Corporation disclosed in its audited consolidated financial statements for the year ended
December 31, 2006 that it expected to contribute $5,000 to its pension program in 2007. As of
September 30, 2007, the Corporation contributed $5,000 to the pension program.
(12) Net Income Available to Stockholders and Net Income per Share
The Corporation presents only basic earnings per share, which consists of the net income that is
available to common stockholders divided by the weighted-average number of common shares
outstanding for the period.
The following table sets forth the computation of basic net income per share after giving
retroactive effect to the stock split disclosed in note 7:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Numerator for basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to stockholders |
|
$ |
15,490 |
|
|
|
24,830 |
|
|
$ |
40,800 |
|
|
|
38,830 |
|
|
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of outstanding
common shares giving effect to
3,000-for-one stock split |
|
|
26,772,000 |
|
|
|
26,733,000 |
|
|
|
26,741,333 |
|
|
|
26,728,333 |
|
|
Basic net income per share giving effect
to 3,000-for-one stock split |
|
$ |
0.58 |
|
|
|
0.93 |
|
|
$ |
1.53 |
|
|
|
1.45 |
|
|
(13) Contingencies
Various litigation claims and assessments against the Corporation have arisen in the ordinary
course of business, including but not limited to, its activities as an insurer and employer.
Furthermore, the Commissioner of Insurance, as well as other Federal and Puerto Rico government
authorities, regularly make inquiries and conduct audits concerning our compliance with applicable
insurance and other laws and regulations. Management believes, based
16
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
on the opinion of legal
counsel, that the aggregate liabilities, if any, arising from such claims, assessments, audits and
lawsuits would 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
our 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 have incurred 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.
Sánchez Litigation
On September 4, 2003, José Sánchez and others filed a putative class action complaint against the
Corporation, present and former directors of the board of directors of the Corporation and
Triple-S, Inc. (TSI), and others, in the United States District Court for the District of Puerto
Rico, alleging violations under the Racketeer Influenced and Corrupt Organizations Act (RICO). The
class action complaint, which was amended on March 24, 2005, seeks damages in excess of $40
million. The plaintiffs purport to represent, among others, providers of medical products and
services covered under policies issued or administered by the defendants, as well as the
subscribers to those policies. Among other allegations, the suit alleges a scheme to defraud the
plaintiffs by acquiring control of TSI through illegally capitalizing TSI and later converting it
to a for-profit corporation and depriving the shareholders of their ownership rights. The
plaintiffs base their allegations on the alleged decisions of TSIs board of directors and
shareholders, purportedly made in 1979, to operate with certain restrictions in order to turn TSI
into a charitable corporation. On May 4, 2006, the Court issued an Opinion and Order awarding
summary judgment in favor of all the defendants, thereby dismissing the case. Plaintiffs filed a
notice of appeal before the United States Court of Appeals for the First Circuit. On June 13,
2007, the First Circuit issued its Opinion confirming the summary judgment entered by the District
Court. The plaintiffs did not move for any type of post-judgment relief before the Court of
Appeals. On September 11, 2007, the plaintiffs filed a petition for certiorari with the U.S.
Supreme Court, which was docketed on September 17, 2007. We filed an opposition to the petition
for certiorari on October 17, 2007.
Jordán et al Litigation
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,
alleging, among other things, violations by the defendants of provisions of the Puerto Rico
Insurance Code, antitrust violations, unfair business practices, breach of contract with providers,
and damages in the amount of $12.0 million. The plaintiffs also
asserted that in light of TSIs former tax-exempt status, the
assets of TSI belong to a charitable trust to be held for the benefit
of the people of Puerto Rico (the charitable trust claim). They also requested that the Corporation sell shares
to them pursuant to a contract with TSI dated August 16, 1989 regarding the acquisition of shares.
The Corporation believes that many of the allegations brought by the plaintiffs in this
complaint have been resolved in favor of the Corporation and TSI in previous cases brought by the
same plaintiffs in the United States District Court for the District of Puerto Rico and in the
local courts. The defendants, including the Corporation and TSI, answered the complaint, filed a
counterclaim and filed several motions to dismiss.
On May 9, 2005, the plaintiffs amended the complaint to allege causes of action similar to those
dismissed in the Sánchez case and to seek damages of approximately $207.0 million. Defendants
moved to dismiss all claims in the amended complaint. Plaintiffs opposed the motions to dismiss
and defendants filed corresponding replies. In 2006, the Court held several hearings concerning
these dispositive motions and stayed all discovery until the motions were resolved.
On January 19, 2007, the Court denied a motion by the plaintiffs to dismiss the defendants
counterclaim for malicious prosecution and abuse of process. The Court ordered plaintiffs to
answer the counterclaim by February 20, 2007. Although they filed after the required date,
plaintiffs have filed an answer to the counterclaim.
On February 7, 2007, the Court dismissed the charitable trust, RICO and violation of due
process claims as to all the plaintiffs. The tort, breach
of contract and violation of the Puerto Rico corporations law claims were dismissed only against
certain of the physician plaintiffs. The Court allowed the
17
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
count
based on antitrust to proceed, and in
reconsideration allowed the charitable trust and RICO claims to
proceed. The Corporation appealed to the
Puerto Rico Court of Appeals the denial of the motion to dismiss as to the antitrust allegations
and the Courts decision to reconsider the claims previously dismissed.
On May 30, 2007 the Puerto Rico Court of Appeals granted leave to replead the RICO and antitrust
claims only to the physician plaintiffs, consistent with certain requirements set forth in its
opinion, to allow the physician plaintiffs the opportunity to cure the deficiencies and flaws the
Court found in plaintiffs allegations. The Court dismissed the charitable trust claim as to all plaintiffs, denying them the
opportunity to replead that claim, and dismissed the RICO
and antitrust claims as to the
non-physician plaintiffs. Also, the Court of Appeals granted leave to replead a derivative claim
capacity on behalf of the Corporation to the lone shareholder plaintiff. The plaintiffs moved for
the reconsideration of this judgment. On July 18, 2007 the Court of Appeals denied the plaintiffs
motion for reconsideration, which has granted plaintiffs leave to replead certain matters. On
August 17, 2007, plaintiffs filed a petition for certiorari by the Puerto Rico Supreme Court, which
was opposed on August 27, 2007. On October 16, 2007, the plaintiffs filed an Urgent Motion for
acceptance of their petition for certiorari in light of the allegations of improper political
contributions made with the Corporations funds by the Corporations former CEO, Miguel
Vázquez-Deynes, while in office. The Corporation does not believe that the alleged activity
referenced by Mr. Vázquez-Deynes relates to the claims asserted in this case by plaintiffs or to
legal issues presented in the petition for certiorari. We opposed the Urgent Motion on October 30,
2007. The plaintiffs petition for certiorari was denied by the Puerto
Rico Supreme Court on November 9, 2007.
Thomas Litigation
On May 22, 2003, a putative class action suit was filed by Kenneth A. Thomas, M.D. and Michael
Kutell, M.D., on behalf of themselves and all others similarly situated and the Connecticut State
Medical Society against the Blue Cross Blue Shield Association (BCBSA) and substantially all of the
other Blue Cross and Blue Shield plans in the United States, including TSI. The case is pending
before the U.S. District Court for the Southern District of Florida, Miami District.
The individual plaintiffs bring this action on behalf of themselves and a class of similarly
situated physicians seeking redress for alleged illegal acts of the defendants, which they allege
have resulted in a loss of their property and a detriment to their business, and for declaratory
and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that
the defendants, on their own and as part of a common scheme, systematically deny, delay and
diminish the payments due to doctors so that they are not paid in a timely manner for the covered,
medically necessary services they render.
The class action complaint alleges that the health care plans are the agents of BCBSA licensed
entities, and as such have committed the acts alleged above and acted within the scope of their
agency, with the consent, permission, authorization and knowledge of the others, and in furtherance
of both their interest and the interests of other defendants.
Management believes that TSI was brought to this litigation for the sole reason of being associated
with the BCBSA. However, on June 18, 2004 the plaintiffs moved to amend the complaint to include
the Colegio de Médicos y Cirujanos de Puerto Rico (a compulsory association grouping all physicians
in Puerto Rico), Marissel Velázquez, M.D., President of the Colegio de Médicos y Cirujanos de
Puerto Rico, and Andrés Meléndez, M.D., as plaintiffs against our managed care subsidiary. Later
Marissel Velázquez, M.D. voluntarily dismissed her complaint against TSI.
TSI, along with the other defendants, moved to dismiss the complaint on multiple grounds, including
but not limited to arbitration and applicability of the McCarran Ferguson Act.
The parties have been ordered to engage in mediation by the District Court, and twenty four plans,
including TSI, are actively participating in the mediation efforts. The mediation resulted in the
creation of a Settlement Agreement that was filed with the Court on April 27, 2007, and on May 31,
2007, the District Court preliminarily approved the Settlement Agreement. The Corporation has
recorded an accrual for the estimated settlement, which is included
within the accounts payable and accrued liabilities in the accompanying unaudited consolidated
financial statements. A final approval hearing for the Settlement Agreement has been set for
November 14, 2007.
18
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
(Dollar amounts in thousands, except per share data)
(Unaudited)
Lens Litigation
On October 23, 2007, Ivonne Houellemont, Ivonne M. Lens and Antonio A. Lens, heirs of Dr. Antonio
Lens-Aresti, a former shareholder of TSI, filed a suit against TSI in the Court of First Instance
for San Juan, Superior Section. The plaintiffs are seeking the return of 16 shares (prior to
giving effect to the 3,000-for-one stock split) that were redeemed in 1996, a year after the death
of Dr. Lens-Aresti, or compensation in the amount of $40,000 per share which they allege is a
shares present value, alleging that they were fraudulently induced to submit the shares for
redemption in 1996. At the time of Dr. Lens-Arestis death, the bylaws of TSI would not have
permitted the plaintiffs to inherit Dr. Lens-Arestis shares, as those bylaws provided that in the
event of a shareholders death, shares could be redeemed at the price originally paid for them or
could be transferred only to an heir who was either a doctor or dentist. The plaintiffs complaint
also states that they purport to represent as a class all heirs of the TSIs former shareholders
whose shares were redeemed upon such shareholders deaths. On October 31, 2007, the Corporation
filed a motion to dismiss the claims as barred by the applicable statute of limitations.
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 Commissioner of Insurance in the Court of First Instance for San Juan,
Superior Section. Mr. Colón-Dueño owned one share of TSI predecessor stock that was redeemed in
1999 for its original purchase price pursuant to an order issued by the Commissioner of Insurance
requiring the redemption of a total of 1,582 shares that had been previously sold by the company.
The Company appealed this Commissioner of Insurance's order to the Puerto Rico Court of Appeals,
which upheld that order by decision dated 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. TSI believes that
this claim is meritless, as the validity of the share repurchase was decided by the Court of Appeals in 2000, and plans to vigorously contest this matter.
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 the fiscal
years 1992-1993 through 2002-2003, during which 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 contends that because a for-profit corporation,
such as TSI, is not entitled to such an exemption, the
rulings recognizing the tax exemption that were issued should be
revoked on a retroactive basis and property taxes should be applied
to TSI for the period when it was exempt. 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. On October 29, 2007, the Court
entered summary judgment for CRIM affirming the real property tax
assessment of approximately $1.3 million. TSI will file a motion
for reconsideration of the Courts summary judgment decision on
November 14, 2007. The Court has not issued a decision with
respect to the personal property tax assessment. Management believes
that these municipal tax assessments are improper and currently
expects to prevail in this litigation.
Puerto Rico House of Representatives Investigation
On October 25, 2007, the House of
Representatives of the Legislative Assembly (the "House") of the Commonwealth of Puerto Rico
approved a resolution ordering the House's Committee on Health to investigate TSI, our managed
care subsidiary. The resolution states that TSI originally intended to operate as a not-for-profit
entity in order to provide low-cost health insurance and improve the health services offered by certain government agencies. The resolution orders the Committee to investigate the effects
of TSI's alleged failure to provide low-cost health insurance, among other obligations, and
requires the Committee to prepare and submit a report to the House detailing its findings,
conclusions and recommendations on or prior to sixty (60) days from the approval of the resolution.
The Committee may refer any finding of wrongdoing to the Secretary of Justice of the Commonwealth
for further investigation. We believe that TSI and its predecessor managed care companies have complied
with such obligations in all material respects, but cannot predict the outcome of the proposed
investigation and are currently unable to ascertain the impact these
matters may have on our business, if any.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Managements Discussion and Analysis of Financial Condition and Results of Operations included
in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting our
financial condition and results of operations for the three months and nine months ended September
30, 2007. Therefore, the following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Annual Report on Form 10-K
filed with the United States Securities and Exchange Commission as of and for the year ended
December 31, 2006.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other of our publicly available documents may include
statements that constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including, among other things: statements concerning our
business and our financial condition and results of operations. These statements are not
historical, but instead represent our belief regarding future events, any of which, by their
nature, are inherently uncertain and outside of our control. These statements may address, among
other things, future financial results, strategy for growth, and market position. It is possible
that our actual results and financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these forward-looking statements. The
factors that could cause actual results to differ from those in the forward-looking statements are
discussed throughout this form. We are not under any obligation to update or alter any
forward-looking statement (and expressly disclaims any such obligations), whether as a result of
new information, future events or otherwise. Factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include, but are not limited
to, rising healthcare costs, business conditions and competition in the different insurance
segments, government action and other regulatory issues.
Overview
We are the largest managed care company in Puerto Rico in terms of membership and have over 45
years of experience in the managed care industry. We offer a broad portfolio of managed care and
related products in the Commercial, Reform and Medicare Advantage (including the Part D stand-alone
prescription drug plan (PDP)) markets. The Reform program is a Puerto Rico government-funded
managed care program for the medically indigent population, similar to the Medicaid program in the
U.S. We have the exclusive right to use the Blue Shield name and mark throughout Puerto Rico,
serve approximately one million members across all regions of Puerto Rico and hold a leading market
position covering approximately 25% of the population. For the nine months ended September 30,
2007, our managed care segment represented approximately 87.9% of our total consolidated premiums
earned, net and approximately 68.9% of our operating income. We also have significant positions in
the life insurance and property and casualty insurance markets. Our life insurance segment had a
market share of approximately 15% (in terms of premiums written) as of December 31, 2006. Our
property and casualty segment had a market share of approximately 9% (in terms of direct premiums)
as of December 31, 2006.
We participate in the managed care market through our subsidiary, Triple-S, Inc. (TSI). Our
managed care subsidiary is a Blue Cross and Blue Shield Association (BCBSA) licensee, which
provides us with exclusive use of the Blue Shield brand in Puerto Rico. We offer products to the
Commercial, Reform and Medicare Advantage (including PDP) market sectors. The Commercial sector
includes corporate accounts, U.S. federal government employees, local government employees,
individual accounts and Medicare Supplement.
We
participate in the life insurance market through our subsidiary,
Triple-S Vida, Inc., which resulted from the merger of our former subsidiary Seguros
de Vida Triple-S, Inc. (SVTS) into Great American Life
Assurance Company of Puerto Rico (GA Life) and in the property and casualty insurance market
through our subsidiary, Seguros Triple-S, Inc. (STS), which represented approximately 6.1% and
6.3%, respectively, of our consolidated premiums earned, net for the nine months ended September
30, 2007 and 14.5% and 11.2%, respectively, of our operating income for that period.
Intersegment revenues and expenses are reported on a gross basis in each of the operating segments
but eliminated in the consolidated results. Except as otherwise indicated, the numbers for each
segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations.
These intersegment revenues and expenses affect the
20
amounts reported on the financial statement line items for each segment, but are eliminated in
consolidation and do not change net income.
Our revenues primarily consist of premiums earned, net and administrative service fees. These
revenues are derived from the sale of managed care products in the Commercial market to employer
groups, individuals and government-sponsored programs, principally Medicare and Reform. Premiums
are derived from insurance contracts and administrative service fees are derived from self-funded
contracts, under which we provide a range of services, including claims administration, billing and
membership services, among others. Revenues also include premiums earned from the sale of property
and casualty and life insurance contracts, and investment income. Substantially all of our
earnings are generated in Puerto Rico.
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and
other service providers, and to policyholders. Each segments results of operations depend in
significant part on their ability to accurately predict and effectively manage claims. A portion
of the claims incurred for each period consists of claims reported but not paid during the period,
as well as a management and actuarial estimate of claims incurred but not reported during the
period. Operating expenses consist primarily of compensation expenses, commission payments to
brokers and other overhead business expenses.
We use operating income as a measure of performance of the underwriting and investment functions of
our segments. We also use the loss ratio and the operating expense ratio as measures of
performance. The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100.
The operating expense ratio is operating expenses divided by premiums earned, net and
administrative service fees, multiplied by 100.
Recent Developments
Healthcare Reform Contracts
In June 2007, we renewed the contracts to serve the North and Southwest regions for a twelve-month
period ending June 30, 2008.
Recent Accounting Standards
For a description of recent accounting standards, see note 2 to the unaudited consolidated
financial statements included in this Quarterly Report on Form 10-Q.
Managed Care Membership
|
|
|
|
|
|
|
|
|
|
|
As of September 30, |
|
|
2007 |
|
2006 |
|
Managed care enrollment: |
|
|
|
|
|
|
|
|
Commercial 1 |
|
|
576,600 |
|
|
|
589,785 |
|
Reform 2 |
|
|
352,722 |
|
|
|
554,996 |
|
Medicare Advantage |
|
|
48,291 |
|
|
|
44,425 |
|
|
Total |
|
|
977,613 |
|
|
|
1,189,206 |
|
|
Managed care enrollment by funding arrangement: |
|
|
|
|
|
|
|
|
Fully-insured |
|
|
816,068 |
|
|
|
1,032,083 |
|
Self-insured |
|
|
161,545 |
|
|
|
157,123 |
|
Total |
|
|
977,613 |
|
|
|
1,189,206 |
|
|
|
|
|
(1) |
|
Commercial membership includes corporate accounts, self-funded employers, individual
accounts, Medicare Supplement, Federal government employees and local government employees. |
|
(2) |
|
Enrollment as of September 30, 2006 includes 198,301 members of the Metro-North region. The
contract for this region was not renewed effective November 1, 2006. |
21
Consolidated Operating Results
The following table sets forth the Corporations consolidated operating results. Further details
of the results of operations of each reportable segment are included in the analysis of operating
results for the respective segments. On January 31, 2006 we completed the acquisition of GA Life.
The results of operations of GA Life are included in this table for the period following the
effective date of the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(Dollar amounts in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
$ |
375.8 |
|
|
|
390.4 |
|
|
$ |
1,101.6 |
|
|
|
1,158.6 |
|
Administrative service fees |
|
|
3.9 |
|
|
|
3.7 |
|
|
|
11.0 |
|
|
|
10.4 |
|
Net investment income |
|
|
11.2 |
|
|
|
10.5 |
|
|
|
33.4 |
|
|
|
31.3 |
|
|
Total operating revenues |
|
|
390.9 |
|
|
|
404.6 |
|
|
|
1,146.0 |
|
|
|
1,200.3 |
|
Net realized investment gains |
|
|
1.2 |
|
|
|
0.4 |
|
|
|
6.2 |
|
|
|
1.3 |
|
Net unrealized gain (loss) on trading securities |
|
|
0.6 |
|
|
|
3.4 |
|
|
|
(0.8 |
) |
|
|
3.7 |
|
Other income (expense), net |
|
|
(0.5 |
) |
|
|
1.3 |
|
|
|
1.8 |
|
|
|
1.2 |
|
|
Total revenues |
|
|
392.2 |
|
|
|
409.7 |
|
|
|
1,153.2 |
|
|
|
1,206.5 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims incurred |
|
|
310.0 |
|
|
|
317.4 |
|
|
|
915.4 |
|
|
|
974.3 |
|
Operating expenses |
|
|
58.0 |
|
|
|
55.8 |
|
|
|
173.4 |
|
|
|
170.5 |
|
|
Total operating expenses |
|
|
368.0 |
|
|
|
373.2 |
|
|
|
1,088.8 |
|
|
|
1,144.8 |
|
Interest expense |
|
|
3.9 |
|
|
|
4.5 |
|
|
|
11.9 |
|
|
|
12.4 |
|
|
Total benefits and expenses |
|
|
371.9 |
|
|
|
377.7 |
|
|
|
1,100.7 |
|
|
|
1,157.2 |
|
|
Income before taxes |
|
|
20.3 |
|
|
|
32.0 |
|
|
|
52.5 |
|
|
|
49.3 |
|
Income tax expense |
|
|
4.8 |
|
|
|
7.2 |
|
|
|
11.7 |
|
|
|
10.5 |
|
|
Net income |
|
$ |
15.5 |
|
|
|
24.8 |
|
|
$ |
40.8 |
|
|
|
38.8 |
|
|
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Operating Revenues
Consolidated premiums earned, net and administrative service fees decreased by $14.4 million, or
3.7%, to $379.7 million during the three months ended September 30, 2007 compared to the three
months ended September 30, 2006. The decrease was primarily due to a decrease in the premiums
earned, net in our managed care segment, principally due to the decreased volume of the Reform
business after the termination of the contract for the Metro-North region, offset in part by the
growth of our Medicare Advantage business.
Net Unrealized Gain (Loss) on Trading Securities and Other Income(Expense), Net
The combined balance of our consolidated net unrealized gain on trading securities and other
income, net decreased by $4.6 million, to a gain of $0.1 million during the three months ended
September 30, 2007. The decrease is
principally due to a decrease in the unrealized gain on trading securities and the derivative
component of our investment in structured notes due to market fluctuations. The change in the fair
value of the derivative component of these structured notes is included within other income, net.
Claims Incurred
Consolidated claims incurred during the three months ended September 30, 2007 decreased by $7.4
million, or 2.3%, to $310.0 million when compared to the claims incurred during the three months
ended September 30, 2006. This decrease is principally due to decreased claims in the managed care
segment as a result of the decreased volume of the Reform business due to the termination of the
contract for the Metro-North region, net of increased enrollment in the Medicare Advantage
business. The consolidated loss ratio increased by 1.2 percentage points to
22
82.5%, primarily due
to favorable reserve developments in the Medicare Advantage claims reserve during the 2006 period
and to higher utilization trends in the Reform business during the 2007 period.
Operating Expenses
Consolidated operating expenses during the three months ended September 30, 2007 increased by
$2.2 million, or 3.9%, to $58.0 million as compared to the operating expenses during the 2006
period. This increase is primarily attributed to normal increases in payroll and payroll related
expenses, an increase in net commission expense, as well as an increase in professional services
expenses (mainly legal expenses). These increases are offset in part by the decrease in the
operating expenses for the Reform business resulting from the reduction in volume of this business.
The consolidated operating expense ratio increased by 1.1 percentage points during the 2007 period
mainly due to the aforementioned reduction in volume.
Income Tax Expense
The consolidated effective tax rate increased by 1.1 percentage points, from 22.5% in 2006 to 23.6%
in 2007, primarily due to a higher taxable income in 2007 from our managed care segment, which has
a higher effective tax rate than our other segments.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Operating Revenues
Consolidated premiums earned, net and administrative service fees decreased by $56.4 million, or
4.8%, to $1,112.6 million during the nine months ended September 30, 2007 compared to the nine
months ended September 30, 2006. The decrease was primarily due to a decrease in the premiums
earned, net in our managed care segment, principally due to the decreased volume of the Reform
business after the termination of the contract for the Metro-North region, offset in part by the
growth of our Medicare Advantage business and the increases in premium rates of the Reform business
during 2007.
Consolidated net investment income increased by $2.1 million, or 6.7%, to $33.4 million during the
nine months ended September 30, 2007. This increase is primarily the result of an increase of $1.1
million attributed to a higher yield in 2007 and a higher balance of invested assets and the
acquisition of GA Life effective January 31, 2006. Net investment income earned by GA Life during
the month of January 2006 amounted to $1.0 million, which is not included in our consolidated
financial statements.
Net Realized Investment Gains
Consolidated net realized investment gains increased by $4.9 million to $6.2 million during the
nine months ended September 30, 2007. This increase is primarily the result of higher sales in
2007 of investments, particularly in trading securities, in order to keep the portfolio within our
established targets in each investment sector.
Net Unrealized (Loss) Gain on Trading Securities and Other Income (Expense), Net
The combined balance of our consolidated net unrealized gain (loss) on trading securities and other
income, net decreased by $3.9 million, to a gain of $1.0 million during the nine months ended
September 30, 2007. The decrease is primarily the net result of an increase in the fair value of
the derivative component of our investment in
structured notes linked to foreign stock indexes, offset in part by the unrealized loss on the
trading portfolio. This unrealized loss on trading securities is due to the sale of one equity
portfolio which had a net unrealized gain at the time of sale. This sale has the effect of
eliminating the unrealized gain that was offsetting unrealized losses in our trading portfolio.
Claims Incurred
Consolidated claims incurred during the nine months ended September 30, 2007 decreased by $58.9
million, or 6.0%, to $915.4 million when compared to the claims incurred during the nine months
ended September 30, 2006. This decrease is principally due to decreased claims in the managed care
segment as a result of the decreased volume of the Reform business due to the termination of the
contract for the Metro-North region, net of increased
23
enrollment in the Medicare Advantage
business. The consolidated loss ratio decreased by 1.0 percentage points, to 83.1% in the 2007
period. The lower loss ratio is mainly the result of an overall increase in premium rates and a
change in the mix of business. During the nine months ended September 30, 2007, the weight in the
mix of business of the managed care segment corresponding to the Reform business decreased as a
result of the termination of the contract for the Metro-North area. The Reform business has a
higher loss ratio than other businesses within this segment. On the other hand, the Medicare
Advantage business, which has a lower loss ratio than other businesses within the managed care
segment, has a higher weight in the mix of business in the 2007 period.
Operating Expenses
Consolidated operating expenses during the nine months ended September 30, 2007 increased by
$2.9 million, or 1.7%, to $173.4 million as compared to operating expenses during the 2006 period.
This increase is primarily attributed to increases in professional services expense (mainly legal
expenses), normal increases in payroll and payroll related expense, as well as higher technology
related costs due to the new systems initiative of our managed care subsidiary. This increase is
offset in part by the decrease in the operating expenses for the Reform business resulting from the
reduction in volume of this business. The consolidated operating expense ratio increased by 1.0
percentage points during the 2007 period mainly due to fixed expenses not affected by a reduction
in volume.
Income Tax Expense
The consolidated effective tax rate increased by 1.0 percentage points, from 21.3% in 2006 to 22.3%
in 2007, primarily due to a higher taxable income in 2007 from our managed care segment, which has
a higher effective tax rate than our other segments.
24
Managed Care Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(Dollar amounts in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Medical operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical premiums earned, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
177.8 |
|
|
|
180.2 |
|
|
$ |
538.7 |
|
|
|
540.7 |
|
Reform |
|
|
85.4 |
|
|
|
118.9 |
|
|
|
243.8 |
|
|
|
366.7 |
|
Medicare Advantage |
|
|
67.9 |
|
|
|
48.3 |
|
|
|
185.7 |
|
|
|
123.2 |
|
|
Medical premiums earned, net |
|
|
331.1 |
|
|
|
347.4 |
|
|
|
968.2 |
|
|
|
1,030.6 |
|
Administrative service fees |
|
|
4.5 |
|
|
|
4.3 |
|
|
|
13.5 |
|
|
|
12.4 |
|
Net investment income |
|
|
4.8 |
|
|
|
4.8 |
|
|
|
14.3 |
|
|
|
13.9 |
|
|
Total medical operating revenues |
|
|
340.4 |
|
|
|
356.5 |
|
|
|
996.0 |
|
|
|
1,056.9 |
|
|
Medical operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims incurred |
|
|
287.6 |
|
|
|
295.6 |
|
|
|
848.9 |
|
|
|
909.4 |
|
Medical operating expenses |
|
|
35.3 |
|
|
|
38.5 |
|
|
|
107.7 |
|
|
|
114.3 |
|
|
Total medical operating costs |
|
|
322.9 |
|
|
|
334.1 |
|
|
|
956.6 |
|
|
|
1,023.7 |
|
|
Medical operating income |
|
$ |
17.5 |
|
|
|
22.4 |
|
|
$ |
39.4 |
|
|
|
33.2 |
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member months enrollment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully-insured |
|
|
1,242,254 |
|
|
|
1,304,711 |
|
|
|
3,743,350 |
|
|
|
3,995,526 |
|
Self-funded |
|
|
483,459 |
|
|
|
469,318 |
|
|
|
1,447,287 |
|
|
|
1,387,341 |
|
|
Total commercial member months |
|
|
1,725,713 |
|
|
|
1,774,029 |
|
|
|
5,190,637 |
|
|
|
5,382,867 |
|
Reform |
|
|
1,066,016 |
|
|
|
1,673,229 |
|
|
|
3,199,546 |
|
|
|
5,211,533 |
|
Medicare Advantage |
|
|
142,831 |
|
|
|
132,209 |
|
|
|
407,675 |
|
|
|
327,289 |
|
|
Total member months |
|
|
2,934,560 |
|
|
|
3,579,467 |
|
|
|
8,797,858 |
|
|
|
10,921,689 |
|
|
Medical loss ratio |
|
|
86.9 |
% |
|
|
85.1 |
% |
|
|
87.7 |
% |
|
|
88.2 |
% |
Operating expense ratio |
|
|
10.5 |
% |
|
|
10.9 |
% |
|
|
11.0 |
% |
|
|
11.0 |
% |
|
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Medical Operating Revenues
Medical premiums earned for the three months ended September 30, 2007 decreased by $16.3 million,
or 4.7%, to $331.1 million when compared to the medical premiums earned during the three months
ended September 30, 2006, principally as a result of the following:
|
|
|
Medical premiums earned in the Reform business decreased by $33.5 million, or 28.2%, to
$85.4 million during the 2007 period. This fluctuation is due to a decrease in member
months enrollment in the Reform business by 607,213, or 36.3%, mainly as the result of the
termination of the contract for the Metro-North region effective November 1, 2006. The
member months enrollment of the Metro-North region was 598,765 during the three months
ended September 30, 2006. The effect of this decrease in membership was mitigated by an
increase in premium rates of approximately 8.7% effective July 1, 2007 and an increase of
approximately 6.7% effective November 1, 2006. |
|
|
|
|
Medical premiums generated by the Commercial business decreased by $2.4 million, or
1.3%, to $177.8 million during the three months ended September 30, 2007. This fluctuation
is primarily the result of a decrease in member months enrollment of 62,457, or 4.8%,
partially offset by an increase in average premium rates of 3.6%. |
25
|
|
|
|
Medical premiums generated by the Medicare Advantage business increased during the three
months ended September 30, 2007 by $19.6 million, or 40.6%, to $67.9 million, primarily due
to an increase in member months enrollment of 10,622, or 8.0%. The increase in member
months is the net result of an increase of 30,391, or 38.7%, in the membership of our
Medicare Advantage products and a decrease of 19,769, or 36.8%, in the membership of our
PDP product. We expect that Medicare Advantage enrollment will continue to experience
growth, but a slower pace than in prior periods. In addition, during this period the
segment received a higher than expected retroactive payment of $2.5 million from the
Centers for Medicare and Medicaid Services (CMS) corresponding to premiums for active
members during the first two quarters of 2007. |
Medical Claims Incurred
Medical claims incurred during the three months ended September 30, 2007 decreased by $8.0 million,
or 2.7%, to $287.6 million when compared to the three months ended September 30. 2006. The
decrease in medical claims incurred is mostly related to the medical claims incurred of the Reform
business, which decreased by $27.6 million due to its decreased enrollment, offset in part by a
combined increase of $23.4 million in the medical claims incurred of the Medicare Advantage and
PDP businesses due to an increase in members. The medical loss ratio increased by 1.8 percentage
points during the 2007 period, to 86.9%, primarily due to favorable reserve
developments in the Medicare Advantage claims reserve during the 2006 period and to higher
utilization trends in the Reform business during the 2007 period.
Medical Operating Expenses
Medical operating expenses for the three months ended September 30, 2007 decreased by $3.2 million,
or 8.3%, to $35.3 million when compared to the three months ended September 30, 2006. This
decrease is primarily attributed to the decrease in the direct costs of the Reform business due to
its reduction in volume. The segments operating expense ratio decreased by 0.4 percentage points
in the 2007 period.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Medical Operating Revenues
Medical premiums earned for the nine months ended September 30, 2007 decreased by $62.4 million, or
6.1%, to $968.2 million when compared to the medical premiums earned during the nine months ended
September 30, 2006, principally as a result of the following:
|
|
|
Medical premiums earned in the Reform business decreased by $122.9 million, or 33.5%, to
$243.8 million during the 2007 period. This fluctuation is due to a decrease in member
months enrollment in the Reform business by 2,011,987, or 38.6%, 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 1,841,815 during the nine months ended September
30, 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. |
|
|
|
|
Medical premiums generated by the Commercial business decreased by $2.0 million, or
0.4%, to $538.7 million during the 2007 period. This decrease is primarily the result of a
decrease in member months enrollment of 252,176, or 6.3%, partially offset by an increase
in average premium rates of 6.3%. |
|
|
|
|
Medical premiums generated by the Medicare Advantage business increased during the nine
months ended September 30, 2007 by $62.5 million, or 50.7%, to $185.7 million, primarily
due to an increase in member months enrollment of 80,386, or 24.6%. The increase in member
months is the net result of an increase of 110,540, or 57.2%, in the membership of our
Medicare Advantage products and a decrease of 30,154, or 22.5%, in the membership of our
PDP product. We expect that Medicare Advantage enrollment will |
26
|
|
|
continue to experience
growth, but 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. |
Administrative service fees increased by $1.1 million, or 8.9%, to $13.5 million during the 2007
period due to an increase in member months enrollment of self-funded arrangements of 59,946, or
4.3% and to a shift of several self-funded groups to arrangements where the administrative service
fee is based on contracts instead of claims paid.
Medical Claims Incurred
Medical claims incurred during the nine months ended September 30, 2007 decreased by $60.5 million,
or 6.7%, to $848.9 million when compared to the nine months ended September 30, 2006. The decrease
in medical claims incurred is mostly related to the medical claims incurred of the Reform business,
which decreased by $112.3 million due to its decreased enrollment, partially offset by a combined
increase of $53.4 million in the medical claims incurred of the Medicare Advantage and PDP
businesses due to an increase in members. The medical loss ratio decreased by 0.5 percentage
points during the 2007 period, to 87.7%, primarily due to an overall increase in premium rates and
a change in the mix of business of the segment. During the nine months ended September 30, 2007
the weight in the mix of business corresponding to the Reform business decreased as a result of the
termination of the contract for the Metro-North area. The Reform business has a higher medical
loss ratio than other businesses within the segment. On the other hand, the Medicare Advantage
business, which has a lower medical loss ratio than other businesses, has a higher weight in the
mix of business in the 2007 period.
Medical Operating Expenses
Medical operating expenses for the nine months ended September 30, 2007 decreased by $6.6 million,
or 5.8%, to $107.7 million when compared to the nine months ended September 30, 2006. This
decrease is primarily attributed to the decrease in the direct costs of the Reform business due to
its reduction in volume. The segments operating expense ratio remained the same as the prior
period at approximately 11%.
Life Insurance Operating Results
On January 31, 2006 we completed the acquisition of GA Life. The results of operations of GA Life
are included in this table for the period following the effective date of the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(Dollar amounts in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
24.1 |
|
|
|
24.3 |
|
|
$ |
73.5 |
|
|
|
67.2 |
|
Premiums earned ceded |
|
|
(2.1 |
) |
|
|
(2.2 |
) |
|
|
(6.6 |
) |
|
|
(7.1 |
) |
Assumed premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
Net premiums earned |
|
|
22.0 |
|
|
|
22.1 |
|
|
|
66.9 |
|
|
|
64.5 |
|
Commission income on reinsuarance |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
|
Premiums earned, net |
|
|
22.1 |
|
|
|
22.0 |
|
|
|
67.1 |
|
|
|
64.6 |
|
Net investment income |
|
|
3.7 |
|
|
|
3.3 |
|
|
|
11.1 |
|
|
|
10.1 |
|
|
Total operating revenues |
|
|
25.8 |
|
|
|
25.3 |
|
|
|
78.2 |
|
|
|
74.7 |
|
|
Operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits and claims incurred |
|
|
11.1 |
|
|
|
11.2 |
|
|
|
34.4 |
|
|
|
32.4 |
|
Underwriting and other expenses |
|
|
12.1 |
|
|
|
11.0 |
|
|
|
35.5 |
|
|
|
33.3 |
|
|
Total operating costs |
|
|
23.2 |
|
|
|
22.2 |
|
|
|
69.9 |
|
|
|
65.7 |
|
|
Operating income |
|
$ |
2.6 |
|
|
|
3.1 |
|
|
$ |
8.3 |
|
|
|
9.0 |
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
50.2 |
% |
|
|
50.9 |
% |
|
|
51.3 |
% |
|
|
50.2 |
% |
Operating expense ratio |
|
|
54.8 |
% |
|
|
50.0 |
% |
|
|
52.9 |
% |
|
|
51.5 |
% |
|
27
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Operating Revenues
Premiums earned for the segment decreased by $0.2 million, or 0.8%, to $24.1 million during the
three months ended September 30, 2007 as compared to the three months ended September 30, 2006.
This decrease was primarily the result of a decrease in the premiums generated by the group
disability and life insurance businesses. This decrease was offset in part by an increase in sales
of individual life policies.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred during the three months ended September 30, 2007 decreased by
$0.1 million, or 0.9%, to $11.1 million in the 2007 period when compared to the 2006 period. This
decrease is primarily the result of decreases in benefits corresponding to the individual life and
group disability businesses, partially offset by increases in the benefits of the group life and
cancer businesses during the 2007 period. This resulted in a 0.7 percentage points decrease in the
loss ratio, from 50.9% in 2006 to 50.2% in 2007.
Underwriting and Other Expenses
Underwriting and other expenses for the segment increased by $1.1 million, or 10.0%, during the
three months ended September 30, 2007 primarily as a result of a higher allocation of corporate
operating expenses due to the changes in volume within the group, a
decrease in net commission expenses
and a lower amortization of deferred policy acquisition costs and value of business acquired.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Operating Revenues
Premiums earned for the segment increased by $6.3 million, or 9.4%, to $73.5 million during the
nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006,
principally reflecting the acquisition of GA Life effective January 31, 2006. 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 Lifes premiums for the month of
January 2006, the premiums earned in the segment decreased by $0.3 million. During the nine months
ended September 30, 2007 the premiums generated by the segments group disability and group life
businesses decreased by $1.6 million and $0.8 million, respectively, offset in part by an increase
in the individual life and cancer businesses of $1.6 million and $0.5 million, respectively.
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. We acquired GA Life
effective January 31, 2006, and our results reflect premiums assumed under this agreement of $4.4
million, which represents our share of premiums for the month of January 2006. The effects of the
reinsurance transactions corresponding to this agreement were eliminated for consolidated financial
statement purposes for the period following January 31, 2006.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred during the nine months ended September 30, 2007 increased by
$2.0 million, or 6.2%, to $34.4 million in the 2007 period when compared to the 2006 period,
principally reflecting the acquisition of GA Life effective January 31, 2006. Policy benefits and
claims incurred by GA Life during the month of January 2006, net of the effect of the coinsurance
agreement, were $1.0 million. Eliminating the effect of GA Lifes policy benefits and claims
incurred for the month of January 2006, this segment presented an increase of $1.0 million. This
increase is primarily driven by increases in the benefits of the cancer and group life business of
$1.5 million and $1.0 million, respectively, and to an increase in policy surrenders of $0.7
million. These increases were partially offset by decreases in the benefits of the group
disability and individual life businesses of $1.0 million in each business. The segments loss
ratio increased by 1.1 percentage points, from 50.2% in 2006 to 51.3% in 2007, principally as a
result of the inclusion of nine months of GA Life benefits and claims incurred in the 2007 period
and a higher loss ratio in the cancer business.
28
Underwriting and Other Expenses
Underwriting and other expenses for the segment increased by $2.2 million, or 6.6%, during the nine
months ended September 30, 2007. Considering the effect of underwriting and other expenses of $1.7
million incurred by GA Life during the month of January 2006, net of the effect of the coinsurance
agreement, the underwriting and other expenses of the segment increased $0.5 million. This is
mostly related to a higher allocation of corporate operating expenses.
Property and Casualty Insurance Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(Dollar amounts in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
$ |
39.1 |
|
|
|
41.5 |
|
|
|
117.3 |
|
|
|
112.6 |
|
Premiums ceded |
|
|
(17.0 |
) |
|
|
(17.4 |
) |
|
|
(50.3 |
) |
|
|
(46.7 |
) |
Change in unearned premiums |
|
|
1.5 |
|
|
|
(2.1 |
) |
|
|
2.3 |
|
|
|
0.2 |
|
|
Premiums earned, net |
|
|
23.6 |
|
|
|
22.0 |
|
|
|
69.3 |
|
|
|
66.1 |
|
Net investment income |
|
|
2.5 |
|
|
|
2.3 |
|
|
|
7.6 |
|
|
|
7.0 |
|
|
Total operating revenues |
|
|
26.1 |
|
|
|
24.3 |
|
|
|
76.9 |
|
|
|
73.1 |
|
|
Operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims incurred |
|
|
11.4 |
|
|
|
10.6 |
|
|
|
32.1 |
|
|
|
32.5 |
|
Underwriting and other expenses |
|
|
13.3 |
|
|
|
10.0 |
|
|
|
38.4 |
|
|
|
32.7 |
|
|
Total operating costs |
|
|
24.7 |
|
|
|
20.6 |
|
|
|
70.5 |
|
|
|
65.2 |
|
|
Operating income |
|
$ |
1.4 |
|
|
|
3.7 |
|
|
|
6.4 |
|
|
|
7.9 |
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
48.3 |
% |
|
|
48.2 |
% |
|
|
46.3 |
% |
|
|
49.2 |
% |
Operating expense ratio |
|
|
56.4 |
% |
|
|
45.5 |
% |
|
|
55.4 |
% |
|
|
49.5 |
% |
Combined ratio |
|
|
104.7 |
% |
|
|
93.7 |
% |
|
|
101.7 |
% |
|
|
98.7 |
% |
|
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Operating Revenues
Total premiums written during the three months ended September 30, 2007 decreased by $2.4 million,
or 5.8%, to $39.1 million, principally as a result of a decrease in volume in the commercial
multi-peril business.
The change in unearned premiums for the three months ended September 30, 2007 increased by $3.6
million, to $1.5 million, primarily as the result of the segments lower volume of business during
the period, which caused an increase in the net amortization of unearned premiums.
Claims Incurred
Claims incurred during the three months ended September 30, 2007 increased by $0.8 million, or
7.5%, to $11.4 million. The loss ratio increased by 0.1 percentage points, to 48.3% during the
three months ended September 30, 2007.
Underwriting and Other Expenses
Underwriting and other operating expenses for the three months ended September 30, 2007 increased
by $3.3 million, or 33.0%, to $13.3 million. The operating expense ratio increased by 10.9
percentage points during the same period, to 56.4% in 2007. This increase is primarily due to
increases in net commissions, provision for a possible contingency, payroll and payroll related
costs, and depreciation expense, including the depreciation and amortization expense related to the
segments investment in technology. In addition, the segment has experienced increases in the
allocation of corporate operating expenses.
29
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Operating Revenues
Total premiums written during the nine months ended September 30, 2007 increased by $4.7 million,
or 4.2%, to $117.3 million, principally as a result of an increase in the commercial multi-peril
and auto lines of business.
Premiums ceded to reinsurers increased by $3.6 million, or 7.7%, to $50.3 million during 2007. The
ratio of premiums ceded to premiums written increased by 1.4 percentage points, from 41.5% in 2006
to 42.9% in 2007, primarily as the result of higher costs of non-proportional reinsurance treaties
and to the increase in the volume of business of the segment in lines of business that have
reinsurance.
The increase in the change in unearned premiums of $2.1 million, to $2.3 million, during the nine
months ended September 30, 2007 is principally the result of the segments lower volume of business
during the last three months of the nine-month period ended September 30, 2007, which caused an
increase in the amortization of unearned premiums.
Claims Incurred
Claims incurred during the nine months ended September 30, 2007 decreased by $0.4 million, or 1.2%,
to $32.1 million. The loss ratio decreased by 2.9 percentage points during this period, to 46.3%
in the 2007 period, primarily as a result of the segments adherence to underwriting guidelines and
enhancements to the claims handling process, which included hiring additional in-house claim
adjusters. These efforts have resulted in improved loss ratios in the commercial multi-peril,
general liability, auto liability and commercial auto physical damage lines of business.
Underwriting and Other Expenses
Underwriting and other operating expenses for the nine months ended September 30, 2007 increased by
$5.7 million, or 17.4%, to $38.4 million. The operating expense ratio increased by 5.9 percentage
points during the same period, to 55.4% in 2007. This increase is primarily due to increases in
net commission expense, payroll and payroll related expenses, and in provision for a possible
contingency. The segment has also experienced an increase in its depreciation expense, including
the depreciation and amortization expense related to the segments investment in technology, and in
the allocation of corporate operating expenses.
30
Liquidity and Capital Resources
Cash Flows
A summary of our major sources and uses of cash for the periods indicated is presented in the
following table:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
(Dollar amounts in millions) |
|
2007 |
|
2006 |
|
Sources of cash: |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
51.5 |
|
|
|
51.1 |
|
Proceeds from long-term borrowings |
|
|
|
|
|
|
35.0 |
|
Proceeds from short-term borrowings |
|
|
43.6 |
|
|
|
117.8 |
|
Proceeds from policyholder deposits |
|
|
5.1 |
|
|
|
4.4 |
|
Other |
|
|
17.4 |
|
|
|
0.4 |
|
|
Total sources of cash |
|
|
117.6 |
|
|
|
208.7 |
|
|
Uses of cash: |
|
|
|
|
|
|
|
|
Net purchases of investment securities |
|
|
(33.3 |
) |
|
|
(18.8 |
) |
Acquisition of GA Life, net of cash aquired |
|
|
|
|
|
|
(27.8 |
) |
Capital expenditures |
|
|
(6.3 |
) |
|
|
(9.5 |
) |
Dividends |
|
|
(2.4 |
) |
|
|
(6.2 |
) |
Payments of long-term borrowings |
|
|
(11.7 |
) |
|
|
(2.1 |
) |
Net payments of short-term borrowings |
|
|
(43.6 |
) |
|
|
(119.5 |
) |
Net surrenders of policyholder deposits |
|
|
(5.6 |
) |
|
|
(10.2 |
) |
Other |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
Total uses of cash |
|
|
(103.2 |
) |
|
|
(194.6 |
) |
|
Net increase in cash and cash equivalents |
|
$ |
14.4 |
|
|
|
14.1 |
|
|
Cash flows from operating activities increased by $0.4 million, or 0.8%, to $51.5 million for the
nine months ended September 30, 2007, principally due to the net effect of a reduction in cash paid to
suppliers and employees of $7.5 million, a reduction in claims
paid of $48.0 million and a reduction in premiums collected of
$55.0 million, that is mainly attributed to the termination of the contract for the Metro-North
region of our Managed Care segment. In addition, in the 2007 period there was an increase of $21.7
million in the amount of income taxes paid that is the result of the higher taxable income in 2007
of our managed care subsidiary, which has a higher effective tax rate than the other segments.
These decreases are offset in part by an increase of $19.6 million in net proceeds received from
trading securities.
Proceeds from long-term borrowings during 2006 amounted to $35.0 million as a result of the
issuance and sale of our 6.7% senior unsecured notes during the first quarter of 2006. These
proceeds were used for the acquisition of GA Life.
The increase in the other sources of cash of $17.0 million is principally the result of a higher
balance in outstanding checks over bank balance in the 2007 period.
Net purchases of investment securities increased by $14.5 million during the 2007 period, primarily
as the result of purchases of investments classified as available-for-sale securities with the net
proceeds obtained from trading securities.
On January 31, 2006, we acquired GA Life at a cost of $27.8 million, net of $10.4 million of cash
acquired.
Capital expenditures decreased by $3.2 million mainly as the result of the completion of the
renovation of a building adjacent to our corporate headquarters which was completed during the last
quarter of 2006. In addition, our property and casualty insurance segment acquired new hardware
and software as part of its new insurance application during 2006.
In March 2007, we declared and paid dividends to our stockholders amounting to $2.4 million.
31
We repaid upon its maturity on August 1, 2007 the outstanding balance of $10.5 million of one of
our secured term loans.
Financing and Financing Capacity
We have several short-term facilities available to meet our liquidity needs. These short-term
facilities are mostly in the form of arrangements to sell securities under repurchase agreements.
As of September 30, 2007, we had $53.0 million of available credit under these facilities. There
were no outstanding short-term borrowings under these facilities as of September 30, 2007 and
December 31, 2006.
As of September 30, 2007, we had the following senior unsecured notes payable:
|
|
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). |
|
|
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). |
|
|
On September 30, 2004, we issued and sold $50.0 million of its 6.3% senior unsecured notes
due September 2019 (the 6.3% notes). |
The 6.3% notes, the 6.6% notes and the 6.7% notes contain certain covenants. At September 30,
2007, we and our managed care subsidiary, as applicable, are in compliance with these covenants.
In addition, as of September 30, 2007 we are a party to a secured term loan with a commercial bank,
FirstBank Puerto Rico. This secured loan bears interest at a rate equal to the London Interbank
Offered Rate (LIBOR) plus 100 basis points and requires monthly principal repayments of $0.1
million. As of September 30, 2007, this secured loan had an outstanding balance of $26.4 million
and average annual interest rates of 6.4%.
This secured loan is guaranteed by a first lien on our land, buildings and substantially all
leasehold improvements, as collateral for the term of the agreements 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. As of September 30, 2007, we
are in compliance with these covenants. Failure to meet these covenants may trigger the
accelerated payment of the secured loans outstanding balance.
We have an interest rate swap agreement, which changes the variable rate of the credit agreement
and fixes the rate at 4.72%. We continually monitor existing and alternative financing sources to
support our capital and liquidity needs.
We were also a party to another secured loan, which outstanding balance of $10.5 million was repaid
upon its maturity on August 1, 2007. The average annual interest rate of this second secured loan
was 6.7%.
We anticipate that we will have sufficient liquidity to support our currently expected needs.
Further details regarding the senior unsecured notes and the credit agreements are incorporated by
reference to Item 7. Management Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended December 31, 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks that are inherent in our financial instruments, which arise
from transactions entered into in the normal course of business. We have exposure to market risk
mostly in our investment activities. For purposes of this disclosure, market risk is defined as
the risk of loss resulting from changes in interest rates and equity prices. No material changes
have occurred in our exposure to financial market risks since December 31,
2006. A discussion of our market risk is incorporated by reference to Item 7A. Quantitative and
Qualitative Disclosures about Market Risk of our Annual Report on Form 10-K for the year ended
December 31, 2006.
32
Item 4. Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2007.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of September 30, 2007. There were no
significant changes in the our disclosure controls and procedures, or in factors that could
significantly affect internal controls, subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed the evaluation referred to above.
Part II Other Information
Item 1. Legal Proceedings
For a description of legal proceedings, see note 13 to the unaudited consolidated financial
statements included in this quarterly report on Form 10-Q.
Item IA. Risk Factors
The following risk factors contain updated information from the risk factors previously disclosed
in our Annual Report on Form 10-K for the year ended December 31. 2006.
Certain of our current and former providers may bring materially dilutive claims against us.
Beginning with our founding in 1959 and until 1994, we encouraged, and at times required, the
doctors and dentists that comprised our provider network to acquire our shares. Between
approximately 1985 and 1994, our predecessor managed care subsidiary, Seguros de Servicios de Salud
de Puerto Rico, Inc. (SSS), generally entered into an agreement with each new physician or dentist
who joined our provider network to sell the provider shares of SSS at a future date (each
agreement, a share acquisition agreement). These share acquisition agreements were necessary
because there were not enough authorized shares of SSS available during this period and afterwards
for issuance to all new providers. Each share acquisition agreement committed SSS to sell, and
each new provider to purchase, five $40-par-value shares of SSS at $40 per share after SSS had
increased its authorized share capital in compliance with the Puerto Rico Insurance Code and was in
a position to issue new shares. Despite repeated efforts in the 1990s, SSS was not successful in
obtaining shareholder approval to increase its share capital, other than in connection with our
reorganization in 1999, when SSS was merged into a newly-formed entity, TSI, having authorized
capital of 25,000 $40-par-value shares, or twice the number of authorized shares of SSS. SSSs
shareholders and the Commissioner of Insurance did not, however, authorize the issuance of the
newly formed entitys shares to providers or any other third party. In addition, subsequent to the
reorganization, our shareholders did not approve attempts to increase our share capital in 2002 and
2003.
Notwithstanding the fact that TSI and its predecessor, SSS, were never in a position to issue new
shares to providers as contemplated by the share acquisition agreements because shareholder
approval for such issuance was never obtained, and the fact that SSS on several occasions in the
1990s offered providers the opportunity to purchase shares of its treasury stock and such offers
were accepted by very few providers, providers who entered into share acquisition agreements may
claim that the share acquisition agreements entitle them to acquire our or TSIs shares at a
subscription price equivalent to that provided for in the share acquisition agreements. SSS
entered into share acquisition agreements with approximately 3,000 providers, the substantial
majority of whom never came to own shares of SSS. Such share acquisition agreements provide for
the purchase and sale of approximately 15,000 shares of SSS. If we or TSI were required to issue a
significant number of shares in respect of these agreements, the interest of our existing
shareholders would be substantially diluted. As of the date of this quarterly report, only one
judicial claim to enforce any of these agreements has been commenced. Additionally, we have
received inquiries with respect to over 600 shares under share acquisition agreements. The share
numbers set forth in this paragraph reflect the number of SSS shares provided for in the share
acquisition agreements. Those agreements do not include
anti-dilution protections and we do not believe that the amounts of any claims under the agreements
with SSS should be multiplied to reflect our 3,000-for-one stock split. We cannot provide
assurances, however, that claimants will not successfully seek to increase the size of their claims
by reference to the stock split.
33
We have been advised by our Puerto Rico counsel that, on the basis of a reasoned analysis, while
the matter is not free from doubt and there are no applicable controlling precedents, we should
prevail in any litigation of these claims because, among other defenses, the condition precedent to
SSSs obligations under the share acquisition agreements never occurred, and any obligation it may,
or we may be deemed to, have had under the share acquisition agreements should be understood to
have expired prior to our corporate reorganization, which took effect in 1999, although the share
acquisition agreements do not expressly provide for any expiration.
We believe that we should prevail in any litigation with respect to these matters; however, we
cannot predict the outcome of any such litigation, including with respect to the magnitude of any
claims that may be asserted by any plaintiff, and the interests of our shareholders could be
materially diluted to the extent that claims under the share acquisition agreements are successful.
Heirs of certain of our former shareholders may bring materially dilutive claims against us.
For much of our history, we and our predecessor entity have restricted the ownership or
transferability of our shares, including by reserving to us or our predecessor a right of first
refusal with respect to share transfers and by limiting ownership of such shares to physicians and
dentists. In addition, we and our predecessor, consistent with the requirements of our and our
predecessors bylaws, have sought to repurchase shares of deceased shareholders at the amount
originally paid for such shares by those shareholders. Nonetheless, former shareholders heirs who
were not eligible to own or be transferred shares because they were not physicians or dentists at
the time of their purported inheritance (non-medical heirs) may claim an entitlement to our
shares or to damages with respect to the repurchased shares notwithstanding applicable transfer and
ownership restrictions. Our records indicate that there may be as many as approximately 450 former
shareholders whose non-medical heirs may claim to have inherited up to 10,500,000 shares after
giving effect to the 3,000-for-one stock split. As of the date of this quarterly report, one
judicial claim seeking the return of or compensation for 16 shares (prior to giving effect to the
3,000-for-one stock split) had been brought by the non-medical heirs of a former shareholder of
ours whose shares were repurchased upon his death. These heirs purport to represent as a class all
non-medical heirs of deceased shareholders of ours whose shares we repurchased. In addition, we
have received inquiries from non-medical heirs with respect to over 600 shares (or 1,800,000 shares
after giving effect to the 3,000-for-one stock split).
We believe that we should prevail in litigation with respect to these matters; however, we cannot
predict the outcome of any such litigation regarding these non-medical heirs. The interests of our
existing shareholders could be materially diluted to the extent that any such claims are
successful.
We could
be subject to possible regulatory actions in connection with alleged
illegal political contributions
Miguel Vázquez-Deynes, who was president and chief executive
officer of the Company from January 1990 to April 2002, prior to the time that we became an SEC registrant, stated during
a radio interview in October 2007 that he had testified to a federal grand jury to having caused the Company to effect
illegal political contributions totaling over $100,000 between 1996
and 2000. Mr. Vázquez-Deynes has stated publicly
that the payments in question were made to Puerto Rico public relations firms for the purpose of concealing the fact
that they exceeded the amounts permitted by applicable Puerto Rico election laws. Mr. Vázquez-Deynes
testimony was given in connection with an
ongoing investigation by the U.S. Attorneys Office for the District of Puerto Rico into illegal political
contributions in Puerto Rico. The Puerto Rico Legislative Assembly and the Puerto Rico Department of Justice have
subsequently launched separate investigations into the matters described by Mr. Vázquez-Deynes. The Company is
cooperating fully with all requests made of it in connection with
these investigations.
There may be, or could in the future be, other investigations
by governmental authorities relating to these matters. The current and any such future investigations could result
in actions against us or certain of our current or former employees. These actions could result in fines, penalties,
sanctions, injunctions against future conduct, third party litigation or other actions that could have a material adverse
effect on our business, financial condition, share price and reputation, including impairing government contracts and
adversely affecting our ability to obtain future contracts.
Following the airing of Mr. Vázquez-Deynes allegations,
the Companys board of directors hired outside counsel from Clifford Chance US, LLP, a law firm that had no prior
relationship with the Company, to conduct an internal investigation into these allegations.
The internal investigation is ongoing but substantially advanced. The Company believes that any misconduct was limited to
the matters publicly described by Mr. Vázquez-Deynes and isolated to the period when Mr. Vázquez-Deynes
was an officer of the Company. Although we cannot predict the outcome of the government investigations described above,
management does not currently believe that they will result in
actions having a material adverse effect on the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
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Exhibits |
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Description |
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3 |
(i) |
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Amendment to Triple-S Management Corporations Amended and
Restated Articles of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 2007 (File No. 0-49762). |
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10.1 |
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Amendment to agreement between 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. |
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10.2 |
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Agreement between 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 the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007 (File No.
0-49762). |
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10.3 |
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Blue Shield License and other Agreements with Blue Cross Blue
Shield Association, incorporated herein by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007 (File No. 0-49762). |
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11 |
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Statement re computation of per share earnings; an exhibit
describing the computation of the earnings per share for the
three months and nine months ended September 30, 2007 and 2006
has been omitted as the detail necessary to determine the
computation of earnings per share can be clearly determined from
the material contained in Part I of this Quarterly Report on Form
10-Q. |
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12 |
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Statements re computation of ratios; an exhibit describing the
computation of the loss ratio, expense ratio and combined ratio
for the three months and nine months ended September 30, 2007 and
2006 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 I of this Quarterly Report on Form 10-Q. |
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31.1 |
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Certification of the President and Chief Executive Officer
required by Rule 13a-14(a)/15d-14(a). |
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31.2 |
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Certification of the Vice President of Finance and Chief
Financial Officer required by Rule 13a-14(a)/15d-14(a). |
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32.1 |
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Certification of the President and Chief Executive Officer
required pursuant to 18 U.S.C Section 1350. |
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32.2 |
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Certification of the Vice President of Finance and Chief
Financial Officer required pursuant to 18 U.S.C Section 1350. |
All other exhibits for which provision is made in the applicable accounting regulation of the
United States Securities and Exchange Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
35
SIGNATURES
Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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Triple-S Management Corporation
Registrant
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Date: November 14, 2007 |
By: |
/s/ Ramón M. Ruiz-Comas
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Ramón M. Ruiz-Comas, CPA |
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President and
Chief Executive Officer |
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Date: November 14, 2007 |
By: |
/s/ Juan J. Román
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Juan J. Román, CPA |
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Vice President of Finance
and Chief Financial Officer |
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36