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 June 30, 2008
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
(State or other jurisdiction of incorporation or organization)
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66-0555678
(I.R.S. Employer Identification No.) |
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1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico
(Address of principal executive offices)
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00920
(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, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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 July 17, 2008 |
Common Stock Class A, $1.00 par value |
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16,042,809 |
Common Stock Class B, $1.00 par value |
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16,286,489 |
Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended June 30, 2008
Table of Contents
2
Part I Financial Information
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Item 1. |
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Financial Statements |
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
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(Unaudited) |
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June 30, |
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December 31, |
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2008 |
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2007 |
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Assets |
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Investments and cash: |
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Equity securities held for trading, at fair value |
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$ |
45,749 |
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67,158 |
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Securities available for sale, at fair value: |
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Fixed maturities |
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921,348 |
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823,629 |
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Equity securities |
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79,269 |
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71,050 |
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Securities held to maturity, at amortized cost: |
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Fixed maturities |
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24,367 |
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43,691 |
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Policy loans |
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5,377 |
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5,481 |
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Cash and cash equivalents |
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41,283 |
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240,153 |
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Total investments and cash |
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1,117,393 |
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1,251,162 |
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Premiums and other receivables, net |
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237,845 |
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202,268 |
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Deferred policy acquisition costs and value of
business acquired |
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121,453 |
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117,239 |
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Property and equipment, net |
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46,951 |
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43,415 |
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Net deferred tax asset |
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10,211 |
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6,783 |
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Other assets |
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40,529 |
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38,675 |
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Total assets |
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$ |
1,574,382 |
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1,659,542 |
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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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$ |
181,694 |
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186,065 |
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Unreported losses |
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158,898 |
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149,996 |
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Unpaid loss-adjustment expenses |
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18,903 |
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17,769 |
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Total claim liabilities |
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359,495 |
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353,830 |
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Liability for future policy benefits |
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200,619 |
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194,131 |
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Unearned premiums |
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101,666 |
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132,599 |
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Policyholder deposits |
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49,414 |
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45,959 |
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Liability to Federal Employees Health
Benefits Program (FEHBP) |
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15,981 |
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21,338 |
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Accounts payable and accrued liabilities |
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132,719 |
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228,980 |
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Short-term borrowings |
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32,075 |
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Long-term borrowings |
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170,127 |
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170,946 |
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Liability for pension benefits |
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28,501 |
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29,221 |
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Total liabilities |
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1,090,597 |
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1,177,004 |
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Stockholders equity: |
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Common stock Class A |
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16,043 |
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16,043 |
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Common stock Class B |
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16,286 |
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16,266 |
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Additional paid-in capital |
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190,465 |
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188,935 |
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Retained earnings |
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280,661 |
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267,336 |
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Accumulated other comprehensive loss |
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(19,670 |
) |
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(6,042 |
) |
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Total stockholders equity |
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483,785 |
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482,538 |
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Total liabilities and stockholders equity |
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$ |
1,574,382 |
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1,659,542 |
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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 six months ended June 30, 2008 and 2007
(Dollar amounts in thousands, except per share data)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues: |
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Premiums earned, net |
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$ |
419,157 |
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377,346 |
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$ |
823,556 |
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725,811 |
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Administrative service fees |
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3,920 |
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3,617 |
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7,633 |
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7,126 |
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Net investment income |
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14,302 |
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11,047 |
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27,734 |
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22,168 |
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Total operating revenues |
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437,379 |
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392,010 |
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858,923 |
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755,105 |
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Net realized investment gains |
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(1,741 |
) |
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3,784 |
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(1,132 |
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4,980 |
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Net unrealized investment loss (gain) on trading securities |
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(951 |
) |
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573 |
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(7,201 |
) |
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(1,352 |
) |
Other income (expense), net |
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1,360 |
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2,158 |
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(161 |
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2,367 |
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Total revenues |
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(436,047 |
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398,525 |
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850,429 |
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761,100 |
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Benefits and expenses: |
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Claims incurred |
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354,780 |
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308,023 |
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704,987 |
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605,341 |
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Operating expenses |
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61,399 |
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59,358 |
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121,430 |
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115,495 |
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Total operating costs |
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416,179 |
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367,381 |
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826,417 |
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720,836 |
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Interest expense |
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3,926 |
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4,058 |
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7,599 |
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8,010 |
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Total benefits and expenses |
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420,105 |
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371,439 |
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834,016 |
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728,846 |
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Income before taxes |
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15,942 |
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27,086 |
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16,413 |
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32,254 |
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Income tax expense (benefit): |
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Current |
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4,291 |
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5,938 |
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4,107 |
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6,998 |
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Deferred |
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(486 |
) |
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343 |
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(1,033 |
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(54 |
) |
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Total income taxes |
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3,805 |
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6,281 |
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3,074 |
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6,944 |
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Net income |
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$ |
12,137 |
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20,805 |
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$ |
13,339 |
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25,310 |
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Basic net income per share |
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$ |
0.38 |
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0.78 |
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$ |
0.41 |
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0.95 |
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Diluted net income per share |
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$ |
0.38 |
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0.78 |
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$ |
0.41 |
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0.95 |
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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 (Loss) (Unaudited)
For the six months
ended June 30, 2008 and 2007
(Dollar amounts in thousands, except per share data)
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2008 |
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2007 |
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Balance at January 1 |
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$ |
482,538 |
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342,599 |
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Dividends |
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(2,448 |
) |
Share-based compensation |
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1,530 |
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Grant of restricted Class B common stock |
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20 |
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Other |
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(14 |
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Comprehensive income (loss): |
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Net income |
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13,339 |
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25,310 |
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Net unrealized change in fair value of available for sale securities |
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(14,012 |
) |
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(6,260 |
) |
Defined benefit pension plan: |
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Actuarial loss, net |
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587 |
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|
630 |
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Prior service (cost) credit, net |
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(147 |
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17 |
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Net change in fair value of cash flow hedges |
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(56 |
) |
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(99 |
) |
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Total
comprehensive income (loss) |
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(289 |
) |
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|
19,598 |
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Balance at June 30 |
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$ |
483,785 |
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|
359,749 |
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5
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2008 and 2007
(Dollar amounts in thousands, except per share data)
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Six months ended |
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June 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
13,339 |
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|
25,310 |
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Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
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Depreciation and amortization |
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|
3,572 |
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|
3,395 |
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Net amortization of investments |
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|
377 |
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|
371 |
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Provision for doubtful receivables |
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|
176 |
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|
3,981 |
|
Deferred tax benefit |
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(1,033 |
) |
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|
(54 |
) |
Net (loss) gain on sale of securities |
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|
1,132 |
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|
(4,980 |
) |
Net
unrealized loss on trading securities |
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|
7,201 |
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|
1,352 |
|
Share-based compensation |
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|
1,530 |
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|
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|
Proceeds from trading securities sold: |
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Equity securities |
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22,094 |
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|
32,399 |
|
Acquisition of securities in trading portfolio: |
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Equity securities |
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(7,766 |
) |
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|
(12,860 |
) |
Loss on sale of property and equipment |
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|
11 |
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2 |
|
(Increase) decrease in assets: |
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Premiums receivable |
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(43,157 |
) |
|
|
(43,452 |
) |
Agents balances |
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|
670 |
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|
|
(2,464 |
) |
Accrued interest receivable |
|
|
(3,720 |
) |
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|
(741 |
) |
Other receivables |
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|
268 |
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|
|
(4,303 |
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Reinsurance recoverable on paid losses |
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|
10,204 |
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|
(18,355 |
) |
Deferred policy acquisition costs and
value of business acquired |
|
|
(4,214 |
) |
|
|
(3,031 |
) |
Prepaid income tax |
|
|
(6,796 |
) |
|
|
(4,663 |
) |
Other assets |
|
|
4,849 |
|
|
|
172 |
|
Increase (decrease) in liabilities: |
|
|
|
|
|
|
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|
Claims processed and incomplete |
|
|
(4,371 |
) |
|
|
31,197 |
|
Unreported losses |
|
|
8,902 |
|
|
|
(814 |
) |
Unpaid loss-adjustment expenses |
|
|
1,134 |
|
|
|
(249 |
) |
Liability for future policy benefits |
|
|
6,488 |
|
|
|
6,903 |
|
Unearned premiums |
|
|
(30,933 |
) |
|
|
1,321 |
|
Policyholder deposits |
|
|
943 |
|
|
|
864 |
|
Liability to FEHBP |
|
|
(5,357 |
) |
|
|
(1,511 |
) |
Accounts payable and accrued liabilities |
|
|
(732 |
) |
|
|
5,844 |
|
Income tax payable |
|
|
|
|
|
|
(9,242 |
) |
|
Net cash (used in) provided by operating activities |
|
$ |
(25,189 |
) |
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|
6,392 |
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|
(Continued)
6
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2008 and 2007
(Dollar amounts in thousands, except per share data)
|
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|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold or matured: |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Fixed maturities sold |
|
$ |
153,393 |
|
|
|
76,904 |
|
Fixed maturities matured |
|
|
54,166 |
|
|
|
10,852 |
|
Equity securities |
|
|
2,019 |
|
|
|
1,011 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
Fixed maturities matured |
|
|
19,526 |
|
|
|
1,285 |
|
Acquisition of investments: |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(428,476 |
) |
|
|
(100,668 |
) |
Equity securities |
|
|
(16,717 |
) |
|
|
(14,507 |
) |
Net proceeds (disbursements) for policy loans |
|
|
104 |
|
|
|
(145 |
) |
Net capital expenditures |
|
|
(7,119 |
) |
|
|
(3,440 |
) |
|
Net cash used in investing activities |
|
|
(223,104 |
) |
|
|
(28,708 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in outstanding checks in excess of bank balances |
|
|
15,649 |
|
|
|
16,989 |
|
Repayments of short-term borrowings |
|
|
(474,156 |
) |
|
|
(23,110 |
) |
Proceeds from short-term borrowings |
|
|
506,231 |
|
|
|
23,110 |
|
Repayments of long-term borrowings |
|
|
(819 |
) |
|
|
(820 |
) |
Dividends paid |
|
|
|
|
|
|
(2,448 |
) |
Proceeds from policyholder deposits |
|
|
5,895 |
|
|
|
2,844 |
|
Surrenders of policyholder deposits |
|
|
(3,383 |
) |
|
|
(4,033 |
) |
Other |
|
|
6 |
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
49,423 |
|
|
|
12,532 |
|
|
Net decrease in cash and cash equivalents |
|
|
(198,870 |
) |
|
|
(9,784 |
) |
Cash and cash equivalents at beginning of the period |
|
|
240,153 |
|
|
|
81,320 |
|
|
Cash and cash equivalents at end of the period |
|
$ |
41,283 |
|
|
|
71,536 |
|
|
See accompanying notes to unaudited consolidated financial statements.
7
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(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 or TSM) are unaudited, except for the balance
sheet information as of December 31, 2007, 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
(GAAP) 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, 2007.
In the opinion of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such consolidated interim financial statements have been
included. The results of operations for the three months and six months ended June 30, 2008 are
not necessarily indicative of the results for the full year.
(2) Recent Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standard (FAS) No. 157, Fair Value Measurements. FAS 157 defines fair value, establishes a
framework for the measurement of fair value, and enhances disclosures about fair value
measurements. FAS 157 does not require any new fair value measurements. We adopted FAS 157 on
January 1, 2008. This adoption did not have an impact on our financial position or results of
operations. See Note 7, Fair Value Measurements, to our unaudited consolidated financial
statements for the three months and six months ended June 30, 2008 included in this Quarterly
Report on Form 10-Q for discussion of the impact of adoption of FAS 157.
In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement No. 115. FAS 159 allows entities to
measure many financial instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis under the fair value option. We adopted FAS 159 on January 1, 2008.
The Corporation has chosen not to elect the fair value option for any items that are not already
required to be measured at fair value in accordance with GAAP. Accordingly, the adoption of FAS
159 did not have an impact on our financial position or operating results.
In March 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging
Activities. FAS 161 requires companies with derivative instruments to disclose information about
how and why a company uses derivative instruments, how derivative instruments and related hedged
items are accounted for under FAS 133, Accounting for Derivative Instruments and Hedging
Activities, and how derivative instruments and related hedged items affect a companys financial
position, financial performance, and cash flows. This statement expands the current disclosure
framework in FAS 133. FAS 161 is effective prospectively for periods beginning on or after
November 15, 2008. We do not expect the adoption of FAS 161 to have a material impact on our
consolidated financial statements.
In May 2008, the FASB issued FAS 163, Accounting for Financial Guarantee Insurance Contracts an
Interpretation of FASB Statement No. 60. FAS 163 prescribes the accounting for premium revenue and
claims liabilities by insurers of financial obligations, and requires expanded disclosures about
financial guarantee insurance contracts. FAS 163 applies to financial guarantee insurance and
reinsurance contracts issued by insurers subject to FAS 60, Accounting and Reporting by Insurance
Enterprises. The Statement does not apply to insurance contracts that are similar to financial
guarantee insurance contracts such as mortgage guaranty or trade-receivable insurance, financial
guarantee contracts issued by noninsurance entities, or financial guarantee contracts that are
derivative instruments within the scope of FAS 133. Statement 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those years, except for certain disclosure requirements about the risk-management activities of the
insurance enterprise that are effective for the first quarter
8
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
beginning after the Statement was
issued (May 23, 2008). Except for those disclosures, early application is
prohibited. The Corporation is currently evaluating the impact of
adopting this standard.
There were no other new accounting pronouncements issued during the first six months of 2008 that
had a material impact on our financial position, operating results or disclosures.
(3) Segment Information
The operations of the Corporation are conducted principally through three business segments:
Managed Care, Life Insurance, 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
six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
$ |
373,439 |
|
|
|
330,712 |
|
|
$ |
732,550 |
|
|
|
635,543 |
|
Administrative service fees |
|
|
3,920 |
|
|
|
3,617 |
|
|
|
7,633 |
|
|
|
7,126 |
|
Intersegment premiums /service fees |
|
|
1,660 |
|
|
|
1,781 |
|
|
|
3,310 |
|
|
|
3,408 |
|
Net investment income |
|
|
6,075 |
|
|
|
4,661 |
|
|
|
11,677 |
|
|
|
9,490 |
|
|
Total managed care |
|
|
385,094 |
|
|
|
340,771 |
|
|
|
755,170 |
|
|
|
655,567 |
|
Life Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
|
22,783 |
|
|
|
22,483 |
|
|
|
44,912 |
|
|
|
44,863 |
|
Intersegment premiums |
|
|
93 |
|
|
|
90 |
|
|
|
185 |
|
|
|
172 |
|
Net investment income |
|
|
4,057 |
|
|
|
3,739 |
|
|
|
7,991 |
|
|
|
7,359 |
|
|
Total life insurance |
|
|
26,933 |
|
|
|
26,312 |
|
|
|
53,088 |
|
|
|
52,394 |
|
Property and Casualty Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
|
22,935 |
|
|
|
24,151 |
|
|
|
46,094 |
|
|
|
45,405 |
|
Intersegment premiums |
|
|
152 |
|
|
|
154 |
|
|
|
306 |
|
|
|
308 |
|
Net investment income |
|
|
3,059 |
|
|
|
2,527 |
|
|
|
6,023 |
|
|
|
5,079 |
|
|
Total property and casualty insurance |
|
|
26,146 |
|
|
|
26,832 |
|
|
|
52,423 |
|
|
|
50,792 |
|
Other segments intersegment service revenues * |
|
|
11,205 |
|
|
|
10,602 |
|
|
|
22,273 |
|
|
|
21,642 |
|
|
Total business segments |
|
|
449,378 |
|
|
|
404,517 |
|
|
|
882,954 |
|
|
|
780,395 |
|
TSM operating revenues from external sources |
|
|
1,111 |
|
|
|
120 |
|
|
|
2,043 |
|
|
|
240 |
|
Elimination of intersegment premiums |
|
|
(1,905 |
) |
|
|
(2,025 |
) |
|
|
(3,801 |
) |
|
|
(3,888 |
) |
Elimination of intersegment service fees |
|
|
(11,205 |
) |
|
|
(10,602 |
) |
|
|
(22,273 |
) |
|
|
(21,642 |
) |
|
Consolidated operating revenues |
|
$ |
437,379 |
|
|
|
392,010 |
|
|
$ |
858,923 |
|
|
|
755,105 |
|
|
|
|
|
* |
|
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
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care |
|
$ |
13,970 |
|
|
|
17,797 |
|
|
$ |
19,302 |
|
|
|
21,897 |
|
Life insurance |
|
|
3,200 |
|
|
|
2,680 |
|
|
|
5,705 |
|
|
|
5,655 |
|
Property and casualty insurance |
|
|
2,271 |
|
|
|
3,593 |
|
|
|
4,368 |
|
|
|
4,986 |
|
Other segments * |
|
|
179 |
|
|
|
140 |
|
|
|
288 |
|
|
|
278 |
|
|
Total business segments |
|
|
19,620 |
|
|
|
24,210 |
|
|
|
29,663 |
|
|
|
32,816 |
|
TSM operating revenues from external sources |
|
|
1,111 |
|
|
|
120 |
|
|
|
2,043 |
|
|
|
240 |
|
TSM unallocated operating expenses |
|
|
(2,016 |
) |
|
|
(2,447 |
) |
|
|
(4,156 |
) |
|
|
(4,273 |
) |
Elimination of TSM intersegment charges |
|
|
2,485 |
|
|
|
2,746 |
|
|
|
4,956 |
|
|
|
5,486 |
|
|
Consolidated operating income |
|
|
21,200 |
|
|
|
24,629 |
|
|
|
32,506 |
|
|
|
34,269 |
|
Consolidated
net realized investment (loss) gains |
|
|
(1,741 |
) |
|
|
3,784 |
|
|
|
(1,132 |
) |
|
|
4,980 |
|
Consolidated net unrealized gain (loss) on
trading securities |
|
|
(951 |
) |
|
|
573 |
|
|
|
(7,201 |
) |
|
|
(1,352 |
) |
Consolidated interest expense |
|
|
(3,926 |
) |
|
|
(4,058 |
) |
|
|
(7,599 |
) |
|
|
(8,010 |
) |
Consolidated other income (expense), net |
|
|
1,360 |
|
|
|
2,158 |
|
|
|
(161 |
) |
|
|
2,367 |
|
|
Consolidated income before taxes |
|
$ |
15,942 |
|
|
|
27,086 |
|
|
$ |
16,413 |
|
|
|
32,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care |
|
$ |
1,008 |
|
|
|
862 |
|
|
$ |
1,992 |
|
|
|
1,758 |
|
Life insurance |
|
|
167 |
|
|
|
160 |
|
|
|
349 |
|
|
|
339 |
|
Property and casualty insurance |
|
|
367 |
|
|
|
377 |
|
|
|
739 |
|
|
|
737 |
|
|
Total business segments |
|
|
1,542 |
|
|
|
1,399 |
|
|
|
3,080 |
|
|
|
2,834 |
|
TSM depreciation expense |
|
|
230 |
|
|
|
280 |
|
|
|
492 |
|
|
|
561 |
|
|
Consolidated depreciation expense |
|
$ |
1,772 |
|
|
|
1,679 |
|
|
$ |
3,572 |
|
|
|
3,395 |
|
|
|
|
|
* |
|
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
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Managed care |
|
$ |
690,028 |
|
|
|
762,422 |
|
Life insurance |
|
|
451,946 |
|
|
|
430,807 |
|
Property and casualty insurance |
|
|
341,423 |
|
|
|
375,415 |
|
Other segments * |
|
|
11,042 |
|
|
|
11,255 |
|
|
Total business segments |
|
|
1,494,170 |
|
|
|
1,579,899 |
|
Unallocated amounts related to TSM: |
|
|
|
|
|
|
|
|
Cash, cash equivalents, and investments |
|
|
83,293 |
|
|
|
82,980 |
|
Property and equipment,net |
|
|
22,031 |
|
|
|
22,523 |
|
Other assets |
|
|
3,261 |
|
|
|
2,280 |
|
|
|
|
|
108,585 |
|
|
|
107,783 |
|
Elimination entries intersegment receivables and
others |
|
|
(28,642 |
) |
|
|
(28,140 |
) |
|
Consolidated total assets |
|
$ |
1,574,382 |
|
|
|
1,659,542 |
|
|
|
|
|
|
|
|
|
|
|
Significant noncash items: |
|
|
|
|
|
|
|
|
Net change in unrealized gain on securities available for
sale: |
|
|
|
|
|
|
|
|
Managed care |
|
$ |
(5,799 |
) |
|
|
2,928 |
|
Life insurance |
|
|
(3,589 |
) |
|
|
3,253 |
|
Property and casualty insurance |
|
|
(3,930 |
) |
|
|
3,085 |
|
|
Total business segments |
|
|
(13,318 |
) |
|
|
9,266 |
|
Amount related to TSM |
|
|
(694 |
) |
|
|
283 |
|
|
Consolidated net change in unrealized gain on
securities available for sale |
|
$ |
(14,012 |
) |
|
|
9,549 |
|
|
|
|
|
|
|
|
|
|
|
Net change in liability for pension benefits: |
|
|
|
|
|
|
|
|
Managed care |
|
$ |
295 |
|
|
|
2,838 |
|
Life |
|
|
4 |
|
|
|
35 |
|
Property and casualty |
|
|
36 |
|
|
|
275 |
|
Other segments* |
|
|
95 |
|
|
|
844 |
|
|
Total business segments |
|
|
430 |
|
|
|
3,992 |
|
Amount related to TSM |
|
|
10 |
|
|
|
98 |
|
|
Consolidated net change in liability for
pension benefits |
|
$ |
440 |
|
|
|
4,090 |
|
|
|
|
|
* |
|
Includes segments that are not required to be reported separately. These segments
include the data processing services organization as well as the third-party administrator of managed care
services. |
11
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(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 June 30, 2008 and December 31, 2007,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
unrealized |
|
unrealized |
|
Estimated fair |
|
|
Amortized cost |
|
gains |
|
losses |
|
value |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
40,549 |
|
|
|
9,373 |
|
|
|
(4,173 |
) |
|
|
45,749 |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
924,247 |
|
|
|
7,662 |
|
|
|
(10,561 |
) |
|
|
921,348 |
|
Equity securities |
|
|
81,618 |
|
|
|
2,869 |
|
|
|
(5,218 |
) |
|
|
79,269 |
|
|
|
|
|
1,005,865 |
|
|
|
10,531 |
|
|
|
(15,779 |
) |
|
|
1,000,617 |
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
24,367 |
|
|
|
174 |
|
|
|
(73 |
) |
|
|
24,468 |
|
|
|
|
$ |
1,070,781 |
|
|
|
20,078 |
|
|
|
(20,025 |
) |
|
|
1,070,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
unrealized |
|
unrealized |
|
Estimated fair |
|
|
Amortized cost |
|
gains |
|
losses |
|
value |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
54,757 |
|
|
|
15,170 |
|
|
|
(2,769 |
) |
|
|
67,158 |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
816,536 |
|
|
|
11,583 |
|
|
|
(4,490 |
) |
|
|
823,629 |
|
Equity securities |
|
|
66,747 |
|
|
|
7,354 |
|
|
|
(3,051 |
) |
|
|
71,050 |
|
|
|
|
|
883,283 |
|
|
|
18,937 |
|
|
|
(7,541 |
) |
|
|
894,679 |
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
43,691 |
|
|
|
227 |
|
|
|
(69 |
) |
|
|
43,849 |
|
|
|
|
$ |
981,731 |
|
|
|
34,334 |
|
|
|
(10,379 |
) |
|
|
1,005,686 |
|
|
Investment in securities at June 30, 2008 are mostly comprised of U.S. Treasury securities,
obligations of government sponsored enterprises and obligations of U.S. government
instrumentalities (54.2%), mortgage backed and collateralized mortgage obligations that are U.S.
agency-backed (12%), obligations of the government of Puerto Rico and its instrumentalities (11.6%)
and obligations of U.S. states and municipalities and its instrumentalities (2.1%). The remaining
20.1% of the investment portfolio is comprised of corporate bonds, equity securities, mutual funds
and certain collateralized mortgage obligations.
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
12
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
security below cost is
other than temporary, the carrying amount of the security is reduced to its fair value. The
impairment is charged to operations and a new cost basis for the security is established. During
the six months ended June 30, 2008 and 2007, the Corporation recognized other-than-temporary
impairments amounting to $2,383 and $356.
(5) Premiums and Other Receivables
Premiums and other receivables as of June 30, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
Premiums |
|
$ |
98,359 |
|
|
|
54,330 |
|
Self-funded group receivables |
|
|
31,696 |
|
|
|
31,344 |
|
FEHBP |
|
|
8,978 |
|
|
|
10,202 |
|
Agents balances |
|
|
32,204 |
|
|
|
32,874 |
|
Accrued interest |
|
|
12,083 |
|
|
|
8,363 |
|
Reinsurance recoverable |
|
|
48,553 |
|
|
|
58,757 |
|
Other |
|
|
22,073 |
|
|
|
22,323 |
|
|
|
|
|
253,946 |
|
|
|
218,193 |
|
|
Less allowance for doubtful receivables: |
|
|
|
|
|
|
|
|
Premiums |
|
|
11,757 |
|
|
|
11,753 |
|
Other |
|
|
4,344 |
|
|
|
4,172 |
|
|
|
|
|
16,101 |
|
|
|
15,925 |
|
|
Total premiums and other receivables |
|
$ |
237,845 |
|
|
|
202,268 |
|
|
13
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
(6) Claim Liabilities
The activity in the total claim liabilities for the three months and six months ended June 30, 2008
and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Claim liabilities at beginning of period |
|
$ |
362,967 |
|
|
|
327,871 |
|
|
$ |
353,830 |
|
|
|
314,682 |
|
Reinsurance recoverable on claim liabilities |
|
|
(49,469 |
) |
|
|
(32,331 |
) |
|
|
(54,834 |
) |
|
|
(32,066 |
) |
|
Net claim liabilities at beginning of period |
|
|
313,498 |
|
|
|
295,540 |
|
|
|
298,996 |
|
|
|
282,616 |
|
|
Incurred claims and loss-adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period insured events |
|
|
350,022 |
|
|
|
310,115 |
|
|
|
708,326 |
|
|
|
619,680 |
|
Prior period insured events |
|
|
2,318 |
|
|
|
(4,747 |
) |
|
|
(8,903 |
) |
|
|
(20,938 |
) |
|
Total |
|
|
352,340 |
|
|
|
305,368 |
|
|
|
699,423 |
|
|
|
598,742 |
|
|
Payments of losses and loss-adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period insured events |
|
|
308,846 |
|
|
|
277,892 |
|
|
|
480,445 |
|
|
|
422,706 |
|
Prior period insured events |
|
|
37,101 |
|
|
|
28,203 |
|
|
|
198,083 |
|
|
|
163,839 |
|
|
Total |
|
|
345,947 |
|
|
|
306,095 |
|
|
|
678,528 |
|
|
|
586,545 |
|
|
Net claim liabilities at end of period |
|
|
319,891 |
|
|
|
294,813 |
|
|
|
319,891 |
|
|
|
294,813 |
|
Reinsurance recoverable on claim liabilities |
|
|
39,604 |
|
|
|
50,003 |
|
|
|
39,604 |
|
|
|
50,003 |
|
|
Claim liabilities at end of period |
|
$ |
359,495 |
|
|
|
344,816 |
|
|
$ |
359,495 |
|
|
|
344,816 |
|
|
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 of incurred claims and loss-adjustment expenses for prior period insured events for the
three months ended June 30, 2008 is due primarily to higher than expected utilization trends. The
credits in the incurred claims and loss-adjustment expenses for prior period insured events for the
six months ended June 30, 2008 and the three months and six months ended June 30, 2007 is due
primarily to better than expected utilization trends.
The claims incurred disclosed in this table exclude the change in the liability for future policy
benefits amounting to $5,564 and $6,599 during the three months and six months ended June 30, 2008
and 2007, respectively.
14
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
(7) Fair Value Measurements
The
Corporation adopted FAS 157 on January 1, 2008. Beginning on this date, assets recorded at fair value in
the consolidated balance sheets are categorized based upon the level of judgment associated with
the inputs used to measure their fair value. Level inputs, as defined by FAS 157, are as follows:
|
|
|
Level Input: |
|
Input Definition: |
Level 1
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
|
|
|
Level 2
|
|
Inputs other than quoted prices included in Level I that are observable for the asset or liability through
corroboration with market data at the measurement date. |
|
|
|
Level 3
|
|
Unobservable inputs that reflect managements best estimate of what market participants would use in pricing the
asset or liability at the measurement date. |
The following table summarizes fair value measurements by level at June 30, 2008 for assets
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Equity securities held for trading |
|
$ |
45,749 |
|
|
|
|
|
|
|
|
|
|
|
45,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
|
|
|
|
|
921,348 |
|
|
|
|
|
|
|
921,348 |
|
Equity securities |
|
|
43,785 |
|
|
|
35,484 |
|
|
|
|
|
|
|
79,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (reported within other assets in
the consolidated balance sheets) |
|
|
|
|
|
|
3,964 |
|
|
|
|
|
|
|
3,964 |
|
|
Total |
|
$ |
89,534 |
|
|
|
960,796 |
|
|
|
|
|
|
|
1,050,330 |
|
|
(8) Share-Based Compensation
Share-based compensation expense recorded during the three months and six months ended June 30,
2008 was $792 and $1,530, respectively. No share-based compensation expense was recorded during
the three months and six months ended June 30, 2007. On April 28, 2008 the Company granted 19,935
shares of restricted stock to non-employee directors pursuant to the 2007 Incentive Plan, all of
which were outstanding as of June 30, 2008. Restricted stock was issued at the fair value of the
stock on the grant date and vest in one year. The restriction period ends six months after each
director ceases to be a member of the Board of Directors. No grants of stock options or
performance awards were given during the three months and six months ended June 30, 2008.
(9) Comprehensive
Income (Loss)
The
accumulated balances for each classification of other comprehensive
income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Unrealized |
|
Liability for |
|
|
|
|
|
other |
|
|
gain (loss) on |
|
pension |
|
Cash flow |
|
comprehensive |
|
|
securities |
|
benefits |
|
hedges |
|
income (loss) |
|
Balance at January 1 |
|
$ |
9,554 |
|
|
|
(15,652 |
) |
|
|
56 |
|
|
|
(6,042 |
) |
Net current period change |
|
|
(14,012 |
) |
|
|
440 |
|
|
|
(56 |
) |
|
|
(13,628 |
) |
|
Balance at June 30 |
|
$ |
(4,458 |
) |
|
|
(15,212 |
) |
|
|
|
|
|
|
(19,670 |
) |
|
15
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
(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 December 31, 2007, tax years 2003 through 2007 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.
(11) Pension Plan
The components of net periodic benefit cost for the three months and six months ended June 30, 2008
and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,508 |
|
|
|
1,584 |
|
|
$ |
2,825 |
|
|
|
2,940 |
|
Interest cost |
|
|
1,494 |
|
|
|
1,427 |
|
|
|
2,916 |
|
|
|
2,721 |
|
Expected return on assets |
|
|
(1,461 |
) |
|
|
(1,233 |
) |
|
|
(2,686 |
) |
|
|
(2,361 |
) |
Prior service cost |
|
|
(127 |
) |
|
|
16 |
|
|
|
(240 |
) |
|
|
30 |
|
Actuarial loss |
|
|
476 |
|
|
|
511 |
|
|
|
955 |
|
|
|
1,025 |
|
|
Net periodic benefit cost |
|
$ |
1,890 |
|
|
|
2,305 |
|
|
$ |
3,770 |
|
|
|
4,355 |
|
|
Employer contributions
The Corporation disclosed in its audited consolidated financial statements for the year ended
December 31, 2007 that it expected to contribute $5,000 to its pension program in 2008. As of June
30, 2008, the Corporation contributed $4,000 to the pension program. The Corporation currently
anticipates contributing an additional $1,000 to fund its pension program in 2008.
16
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
(12) Net Income Available to Stockholders and Basic Net Income per Share
The following table sets forth the computation of basic and diluted earnings per share for the
three months and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Numerator for earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to stockholders |
|
$ |
12,137 |
|
|
|
20,805 |
|
|
$ |
13,339 |
|
|
|
25,310 |
|
|
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares |
|
|
32,142,809 |
|
|
|
26,717,000 |
|
|
|
32,142,809 |
|
|
|
26,726,000 |
|
Effect of dilutive securities |
|
|
41,550 |
|
|
|
|
|
|
|
38,420 |
|
|
|
|
|
|
Denominator for diluted earnings per share |
|
|
32,184,359 |
|
|
|
26,717,000 |
|
|
|
32,181,229 |
|
|
|
26,726,000 |
|
|
Basic net income per share |
|
$ |
0.38 |
|
|
|
0.78 |
|
|
$ |
0.41 |
|
|
|
0.95 |
|
Diluted net income per share |
|
$ |
0.38 |
|
|
|
0.78 |
|
|
$ |
0.41 |
|
|
|
0.95 |
|
|
(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 the Corporations compliance
with applicable insurance and other laws and regulations. Management believes, based 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 incur a loss related to one or
more of the mentioned pending lawsuits or investigations, but the Corporation is unable to estimate
the range of possible loss which may be ultimately realized, either individually or in the
aggregate, upon their resolution.
Additionally, we may face various potential litigation claims that have not to date been asserted,
including claims from persons purporting to have contractual rights to acquire shares of the
Corporation on favorable terms or to have inherited such shares notwithstanding applicable transfer
and ownership restrictions.
Jordán et al Litigation
On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the
Corporation, Triple-S, Inc. (TSI) and others (the defendants) 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.
17
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
On May 9, 2005, the plaintiffs amended the complaint to allege causes of action similar to those
dismissed in another case closed in favor of the Corporation 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 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.
The plaintiffs petition for
certiorari was denied by the Puerto Rico Supreme Court on November 9, 2007. Plaintiffs amended
their complaint on June 20, 2008. The Second Amended Complaint (SAC) is an attempt to try to
comply with the directives of the May 30, 2007 Court of Appeals Judgment. The SAC is a reshuffling
of the same allegations of the First Amended Complaint with only minor differences. Additional
allegations were included in reference to certain audits conducted on two physicians. The
non-physician plaintiffs were excluded from the SAC. We requested until August 11, 2008 to answer
the complaint. As we did with respect to the First Amended Complaint, we will move to dismiss the allegations of
the SAC.
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 class
action complaint alleges that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered medically necessary services they render.
TSI, along with the other defendants, moved to dismiss the complaint on multiple grounds, including
but not limited an arbitration and the applicability of the McCarran Ferguson Act.
The parties were ordered to engage in mediation by the U.S. District Court for the Southern
District of Florida, and twenty four plans, including TSI, actively
participated in the
mediation efforts. The mediation resulted in the creation of a Settlement Agreement that was filed
with the Court on April 27, 2007. The Corporation recorded an accrual for the estimated
settlement, which is included within accounts payable and accrued liabilities in the accompanying
unaudited consolidated financial statements. On April 19, 2008, the Court issued the final order
approving the settlement. Certain physicians who were unable to either prevent the final approval
of the settlement
18
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
or modify the terms of the agreement, appealed before the Court of Appeals for the Eleventh
Circuit. The appeals were recently lodged and the clerk has yet to notify the briefing schedule.
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. On
December 21, 2007, the plaintiffs filed an opposition to our motion to dismiss, alleging that the
two year statute of limitations is not applicable to the redemption of the stock by
the Corporation that took place in 1996. On March 3, 2008, the Corporation filed a reply to
plaintiffs opposition to the motion to dismiss. In its reply, the Corporation renews its motion
to dismiss and further argued that plaintiffs argument is wrong because the statute of limitations
has expired, pursuant to the two year term provided under the Uniform Security Act of Puerto Rico
for cases of this nature. Management believes that the statute of limitations has
expired and expects to prevail in this litigation. Regarding the plaintiffs attempt to represent
a purported class, as of the date of this Quarterly Report on Form 10-Q, no further efforts have
been made by the plaintiffs in this case.
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 TSI.
TSI appealed this Commissioner of Insurances 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 attorneys fees. On
January 23, 2008, TSI filed a motion for summary judgment, on the ground that inter alia the
finding of the Commissioner of Insurance is firm and final and cannot be collaterally attacked in
this litigation. Plaintiffs have petitioned the Court to hold the motion in abeyance pending
discovery. Discovery is currently in its preliminary stages. TSI believes that this claim is
meritless because the validity of the share repurchase was decided by the Court of Appeals in 2000, and
plans to vigorously contest this matter.
Acevedo Litigation
On March 27, 2008, the heirs of the estates of physicians Juan Acevedo, Rafael Angel Blanco-Pagán
and Francisco Casalduc-Roselló, each a former shareholder of TSIs predecessor, filed a suit
against the Corporation and TSI in the Puerto Rico Court of First Instance for Mayagüez,
Superior Section. The heirs of each of the estates of Dr. Acevedo, Dr. Blanco-Pagán and Dr.
Casalduc-Roselló are seeking the return of a total of 38 shares (prior to giving effect to the
3,000-for-one stock split) of the Corporation, as alleged successor to TSI, the payment of
dividends in connection with such shares, and the Corporations recognition of each heirs status
as a shareholder of the Corporation. The number of shares indicated in this disclosure is based
solely on information provided in the complaint filed by the plaintiffs and could differ from our
corporate records. Each of the estates claims that they were fraudulently induced to tender the
shares for redemption. Based on the opinion of counsel, management believes that the statute of
limitations has expired and expects to prevail in this litigation, as the redemption took place
more than 20 years ago. The Court granted TSIs motion Requesting Change of Venue thereby
transferring the case to San Juan and discovery will soon begin.
19
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
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 filed a motion for reconsideration of the Courts
summary judgment decision, which was denied. On November 29, 2007 TSI appealed this determination
to the Court of Appeals and requested an argumentative hearing. On January 19, 2008 CRIM filed
a brief in opposition to TSIs appeal. On March 3, 2008 TSI filed its response to the brief
submitted by CRIM.
On December 5, 2007, the Court entered a summary judgment for CRIM with respect to the personal
property assessment that was notified on January 22, 2008. On January 31, 2008, TSI filed a motion
for reconsideration, which was denied. TSI appealed this decision on February 21, 2008 with the
Court of Appeals, requested an argumentative hearing and also requested a consolidation of both
property tax cases.
On April 17, 2008, the Court of Appeals approved the consolidation of both property tax cases. On
April 24, 2008, the Court of Appeals denied TSIs request for an argumentative hearing.
On May 27, 2008, TSI submitted a motion to the Court of Appeals requesting the Court to take notice
of a recent decision of the Puerto Rico Supreme Court that addresses administrative law issues
involving other parties and which confirms TSIs position that the rulings issued by the Puerto
Rico tax authorities may not be revoked on a retroactive basis. On June 30, 2008 the Court of
Appeals confirmed the summary judgment issued by the Court of First Instance in both property tax
cases. The opinion of the Court of Appeals was notified to the parties on July 17, 2008 and TSI
will submitted a motion for reconsideration on July 31, 2008. The filing of the motion for
reconsideration interrupted the period of time that TSI has to
submit a writ of
certiorari to the Puerto Rico Supreme Court.
Management believes that these municipal tax assessments are improper and currently expects to
prevail in this litigation.
Government
Investigations
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 Houses 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 TSIs 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 of Puerto Rico 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. The Puerto Rico Department of Justice and the
Commissioner of Insurance have also launched similar investigations.
20
|
|
|
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 six months
ended June 30, 2008. 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, 2007.
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, Commonwealth of Puerto Rico Health Reform (the Reform) and
Medicare (including Medicare Advantage and the Part D stand-alone prescription drug plan (PDP))
markets. In the Commercial market we offer products to corporate accounts, U.S. federal government
employees, local government employees, individual accounts and Medicare Supplement. The Reform is
a government of Puerto Rico-funded managed care program for the medically indigent, 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 six
months ended June 30, 2008, our managed care segment represented approximately 89.1% of our total
consolidated premiums earned, net and approximately 59.4% 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 13% (in terms of premiums written) as of
December 31, 2007. Our property and casualty segment had a market share of approximately 9% (in
terms of direct premiums) as of December 31, 2007.
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 participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (TSV) and
in the property and casualty insurance market through our subsidiary, Seguros Triple-S, Inc. (STS),
which represented approximately 5.5% and 5.6%, respectively, of our consolidated premiums earned,
net for the six months ended June 30, 2008 and 17.8% and 13.5%, 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 amounts reported on the financial statement
line items for each segment, but are eliminated in consolidation and do not change net income.
21
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
All of the Reform contracts, except the contract for the Metro-North region, expired on June 30,
2008. The government of Puerto Rico (the government) notified all Healthcare Reform carriers that
the expired contracts would not be subject to a competitive bid; instead they would renegotiate the
contracts of all existing carriers for an additional twelve-month period ending June 30, 2009. As
of the date of this Quarterly Report on Form 10-Q, TSI has not finalized the negotiation process
with the government. In July 2008, the contracts were amended extending them until August 30,
2008, at which time it is expected the negotiation process will be completed. Once such
negotiation is completed, premium rates will be retroactively adjusted to July 1, 2008.
On July 30, 2008, the government notified TSI that it had been selected as the managed care
services carrier for the Metro-North region effective November 1, 2008. The contract for the
Metro-North region is expected to be on an Administrative Services Only (ASO) basis. On an ASO
agreement TSI would not generate premiums but instead administrative service fees. The Metro-North
region is expected to have approximately 175,000 members.
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.
22
Managed Care Membership
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
2008 |
|
2007 |
|
Managed care enrollment: |
|
|
|
|
|
|
|
|
Commercial 1 |
|
|
577,371 |
|
|
|
576,314 |
|
Reform |
|
|
344,104 |
|
|
|
356,737 |
|
Medicare Advantage |
|
|
72,134 |
|
|
|
47,470 |
|
|
Total |
|
|
993,609 |
|
|
|
980,521 |
|
|
Managed care enrollment by funding arrangement: |
|
|
|
|
|
|
|
|
Fully-insured |
|
|
825,187 |
|
|
|
818,930 |
|
Self-insured |
|
|
168,422 |
|
|
|
161,591 |
|
|
Total |
|
|
993,609 |
|
|
|
980,521 |
|
|
|
|
|
(1) |
|
Commercial membership includes corporate accounts, self-funded employers, individual
accounts, Medicare Supplement, U.S. Federal government employees and local government
employees. |
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(Dollar amounts in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net |
|
$ |
419.2 |
|
|
|
377.3 |
|
|
$ |
823.6 |
|
|
|
725.8 |
|
Administrative service fees |
|
|
3.9 |
|
|
|
3.6 |
|
|
|
7.6 |
|
|
|
7.1 |
|
Net investment income |
|
|
14.3 |
|
|
|
11.0 |
|
|
|
27.7 |
|
|
|
22.2 |
|
|
Total operating revenues |
|
|
437.4 |
|
|
|
391.9 |
|
|
|
858.9 |
|
|
|
755.1 |
|
Net
realized investment (loss) gains |
|
|
(1.8 |
) |
|
|
3.8 |
|
|
|
(1.1 |
) |
|
|
5.0 |
|
Net unrealized investment (loss) gain
on trading securities |
|
|
(1.0 |
) |
|
|
0.6 |
|
|
|
(7.2 |
) |
|
|
(1.4 |
) |
Other income (expense), net |
|
|
1.4 |
|
|
|
2.2 |
|
|
|
(0.2 |
) |
|
|
2.4 |
|
|
Total revenues |
|
|
436.0 |
|
|
|
398.5 |
|
|
|
850.4 |
|
|
|
761.1 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims incurred |
|
|
354.8 |
|
|
|
308.0 |
|
|
|
705.0 |
|
|
|
605.4 |
|
Operating expenses |
|
|
61.4 |
|
|
|
59.3 |
|
|
|
121.4 |
|
|
|
115.5 |
|
|
Total operating expenses |
|
|
416.2 |
|
|
|
367.3 |
|
|
|
826.4 |
|
|
|
720.9 |
|
Interest expense |
|
|
3.9 |
|
|
|
4.1 |
|
|
|
7.6 |
|
|
|
8.0 |
|
|
Total benefits and expenses |
|
|
420.1 |
|
|
|
371.4 |
|
|
|
834.0 |
|
|
|
728.9 |
|
|
Income before taxes |
|
|
15.9 |
|
|
|
27.1 |
|
|
|
16.4 |
|
|
|
32.2 |
|
Income tax expense (benefit) |
|
|
3.8 |
|
|
|
6.3 |
|
|
|
3.1 |
|
|
|
6.9 |
|
|
Net income |
|
$ |
12.1 |
|
|
|
20.8 |
|
|
$ |
13.3 |
|
|
|
25.3 |
|
|
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Consolidated premiums earned, net and administrative service fees increased by $42.2 million, or
11.1%, to $423.1 million during the three months ended June 30, 2008 compared to the three months
ended June 30, 2007. The increase was primarily due to an increase in the premiums earned, net in
our managed care segment, principally
23
due to an increased volume in the Medicare business. Also,
during the three months ended June 30, 2007, the managed care segment received approximately $8.1
million corresponding to the retroactive increase in premium rates of the Reform business for the
period between November 1, 2006 and March 31, 2007.
Consolidated net investment income increased by $3.3 million, or 30.0%, to $14.3 million during the
three months ended June 30, 2008. This increase is attributed to a higher yield in 2008 as well as
to a higher balance of invested assets.
Net
Realized Investment Losses
Consolidated net realized investment losses of $1.8 million during the three months ended June 30, 2008 are the result of other-than-temporary impairments related to fixed income securities. The other-than-temporary impairments were offset in part by $0.6 million of net realized gains from the sale of fixed income and equity securities.
Net Unrealized Loss on Trading Securities and Other Income (Expense), Net
The combined balance of our consolidated net unrealized loss on trading securities and other income
(expense), net decreased by $2.4 million, to $0.4 million during the three months ended June 30,
2008. The decrease is principally due to an increase in the unrealized loss on trading securities
and a decrease in the fair value of the derivative component of our investment in structured notes
linked to the Euro Stoxx 50 and Nikkei 225 stock indexes; both decreases are due to market
fluctuations. The unrealized loss experienced on trading securities represents a decrease of 0.8%
in the market value of the portfolio, which is slightly lower than the decrease experienced by the
Standard and Poors 500 Index of 3.2%. The change in the fair value of the derivative component of
these structured notes is included within other income (expense), net.
Claims Incurred
Consolidated
claims incurred during the three months ended June 30, 2008
increased by $46.8
million, or 15.2%, to $354.8 million when compared to the claims incurred during the three months
ended June 30, 2007. This increase is principally due to increased claims in the managed care
segment as a result of higher enrollment and utilization trends. The consolidated loss ratio
increased by 3.0 percentage points to 84.6%, primarily due to
the fact that during the three months ended June 30, 2007 the managed
care segment recorded the retroactive premium rate increase in the
Reform business described above of approximately $8.1 million, which
had the effect of reducing the consolidated loss ratio by 1.8
percentage points. Also, there were a higher utilization trends in the
managed care segment for the period, particularly in the Medicare business.
Operating Expenses
Consolidated operating expenses during the three months ended June 30, 2008 increased by $2.1
million, or 3.5%, to $61.4 million as compared to the operating expenses during the three months
ended June 30, 2007. This increase is primarily attributed to a higher volume of business,
particularly in the Medicare business of our managed care segment. The consolidated operating
expense ratio decreased by 1.1 percentage point, to 14.5% during the 2008 period mainly due to the
aforementioned increase in volume.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Operating Revenues
Consolidated premiums earned, net and administrative service fees increased by $98.3 million, or
13.4%, to $831.2 million during the six months ended June 30, 2008 compared to the six months ended
June 30, 2007. The increase was primarily due to an increase in the premiums earned, net in our
managed care segment, principally due to a higher volume in the Medicare business and the increases
in premium rates of the Reform business during the second half of 2007.
Consolidated net investment income increased by $5.5 million, or 24.8%, to $27.7 million during the
six months ended June 30, 2008. This increase is attributed to a higher yield in 2008 as well as
to a higher balance of invested assets.
24
Net
Realized Investment Losses
Consolidated net realized investment losses of $1.1 million during the six months ended June 30, 2008 are primarily the result of other-than-temporary impairments related to fixed income securities. The other-than-temporary impairments were offset in part by $1.2 million of net realized gains from the sale of fixed income and equity securities.
Net Unrealized Loss on Trading Securities and Other Income (Expense), Net
The combined balance of our consolidated net unrealized loss on trading securities and other income
(expense), net decreased by $8.4 million, to $7.4 million during the six months ended June 30,
2008. The decrease is principally due to a decrease in the unrealized gain on trading securities
and a decrease in the fair value of the derivative component of our investment in structured notes
linked to the Euro Stoxx 50 and Nikkei 225 stock indexes; both decreases are due to market
fluctuations. The unrealized loss experienced on trading securities represents a decrease of 10.5%
in the market value of the portfolio, which is slightly lower than the decrease experienced by the
Standard and Poors 500 Index of 12.8%. The change in the fair value of the derivative component
of these structured notes is included within other income (expense), net.
Claims Incurred
Consolidated
claims incurred during the six months ended June 30, 2008
increased by $99.6 million,
or 16.5%, to $705.0 million when compared to the claims incurred during the six months ended June
30, 2007. This increase is principally due to increased claims in the managed care segment as a
result of higher enrollment and utilization trends. The consolidated
loss ratio increased by 2.2
percentage points to 85.6%, primarily due to higher utilization trends in the managed care segment
for the period, particularly in the Medicare business.
Operating Expenses
Consolidated operating expenses during the six months ended June 30, 2008 increased by $5.9
million, or 5.1%, to $121.4 million as compared to the operating expenses during the 2007 period.
This increase is primarily attributed to a higher volume of business, particularly in the Medicare
business of our managed care segment. The consolidated operating expense ratio decreased by 1.2
percentage points, to 14.6% during the 2008 period mainly due to the aforementioned increase in
volume.
Income Tax Expense (Benefit)
The decrease in income tax expense (benefit) during the six months ended June 30, 2008 is primarily
the result of the lower income before tax during the period. The consolidated income tax rate
decreased by 2.5 percentage points, to 18.9% during the six months ended June 30, 2008, primarily
due to a higher taxable income in 2007 from our managed care segment, which has a higher effective
tax rate than other segments.
25
Managed Care Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(Dollar amounts in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical premiums earned, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
179.7 |
|
|
|
180.6 |
|
|
$ |
361.7 |
|
|
|
360.8 |
|
Reform |
|
|
80.9 |
|
|
|
86.6 |
|
|
|
161.9 |
|
|
|
158.4 |
|
Medicare |
|
|
113.6 |
|
|
|
64.3 |
|
|
|
210.5 |
|
|
|
117.8 |
|
|
Medical premiums earned, net |
|
|
374.2 |
|
|
|
331.5 |
|
|
|
734.1 |
|
|
|
637.0 |
|
Administrative service fees |
|
|
4.8 |
|
|
|
4.6 |
|
|
|
9.3 |
|
|
|
9.0 |
|
Net investment income |
|
|
6.1 |
|
|
|
4.7 |
|
|
|
11.7 |
|
|
|
9.5 |
|
|
Total operating revenues |
|
|
385.1 |
|
|
|
340.8 |
|
|
|
755.1 |
|
|
|
655.5 |
|
|
Medical operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims incurred |
|
|
331.2 |
|
|
|
285.8 |
|
|
|
659.0 |
|
|
|
561.3 |
|
Medical operating expenses |
|
|
39.9 |
|
|
|
37.2 |
|
|
|
76.8 |
|
|
|
72.3 |
|
|
Total medical operating costs |
|
|
371.1 |
|
|
|
323.0 |
|
|
|
735.8 |
|
|
|
633.6 |
|
|
Medical operating income |
|
$ |
14.0 |
|
|
|
17.8 |
|
|
$ |
19.3 |
|
|
|
21.9 |
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member months enrollment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully-insured |
|
|
1,228,783 |
|
|
|
1,247,353 |
|
|
|
2,464,272 |
|
|
|
2,501,096 |
|
Self-funded |
|
|
499,317 |
|
|
|
484,505 |
|
|
|
995,379 |
|
|
|
963,828 |
|
|
Total commercial member months |
|
|
1,728,100 |
|
|
|
1,731,858 |
|
|
|
3,459,651 |
|
|
|
3,464,924 |
|
Reform |
|
|
1,031,631 |
|
|
|
1,068,684 |
|
|
|
2,065,291 |
|
|
|
2,133,530 |
|
Medicare |
|
|
215,828 |
|
|
|
136,214 |
|
|
|
406,357 |
|
|
|
264,844 |
|
|
Total member months |
|
|
2,975,559 |
|
|
|
2,936,756 |
|
|
|
5,931,299 |
|
|
|
5,863,298 |
|
|
Medical loss ratio |
|
|
88.5 |
% |
|
|
86.2 |
% |
|
|
89.8 |
% |
|
|
88.1 |
% |
Operating expense ratio |
|
|
10.5 |
% |
|
|
11.1 |
% |
|
|
10.3 |
% |
|
|
11.2 |
% |
|
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Medical Operating Revenues
Medical premiums earned for the three months ended June 30, 2008 increased by $42.7 million, or
12.9%, to $374.2 million when compared to the medical premiums earned during the three months ended
June 30, 2007. This increase is principally the result of the following:
|
|
|
Medical premiums generated by the Medicare business increased during the three months
ended June 30, 2008 by $49.3 million, or 76.7%, to $113.6 million, primarily due to an
increase in member months enrollment of 79,614, or 58.4% and a change in the mix of
products. The increase in member months is the net result of an increase of 81,384, or
80.0%, in the membership of our Medicare Advantage products and a decrease of 1,770, or
5.1%, in the membership of our PDP product. |
|
|
|
|
Medical premiums earned in the Reform business decreased by $5.7 million, or 6.6%, to
$80.9 million during the 2008 period. This fluctuation is
primarily due to the effect in the 2007 period of
the retroactive premium rate increase recorded in June 2007 for
the period of November 1, 2006 to March 31, 2007 amounting to $8.1 million and a
decrease in member months enrollment by 37,053 or 3.5%. Partially offsetting this decrease
is the increase in premium rates effective July 2007. In the 2007 period this segment
received a retroactive premium rate increase of approximately 6.7% which, even when
effective November 1, 2006, was not received until June 2007. |
26
|
|
|
Medical premiums earned of the Commercial business decreased by $0.9 million, or 0.5%,
to $179.7 million during the three months ended June 30, 2008. This fluctuation is the net
result of a decrease in fully-insured member months enrollment of 18,570, or 1.5%, and an increase in the
average premium rates of corporate accounts of 4.5%. |
Medical Claims Incurred
Medical
claims incurred during the three months ended June 30, 2008 increased by $45.4 million, or
15.9%, to $331.2 million when compared to the three months ended June 30, 2007. The medical loss
ratio (MLR) of the segment increased 2.3 percentage points
during the 2008 period, to 88.5%. These
fluctuations are primarily attributed to the effect of the following:
|
|
|
The medical claims incurred of the Medicare business increased by $63.3 millions during
the 2008 period primarily due to the increase in member months and a higher MLR by 24.5
percentage points. The higher MLR is in part due to the effect of prior period reserve
developments. Excluding the effect of prior period reserve developments in the 2007 and
2008 periods, the MLR increased by 14.3 percentage points, primarily as the result of
higher utilization trends for the period when compared to the three months ended June 30,
2007. The increase in utilization trends is primarily the result of higher utilization in
outpatient visits and drug benefits for dual eligibles. The higher MLR is also the result
of a change in enrollment mix between dual and non-dual eligible members within the
business. Member months during the three months
ended June 30, 2008 has a higher concentration of dual eligible members than the same period
of the prior year. Dual eligible members have a higher utilization than non-dual eligible
members. |
|
|
|
|
The medical claims incurred of the Reform business increased by $3.8 million during the
2008 period and its MLR increased by 10.8 percentage points during the three months ended
June 30, 2008. The higher MLR is primarily the effect of the retroactive premium rate
increase received by this business during June 2007 and prior period reserve developments.
Considering this retroactive premium rate increase and excluding the effect prior period
reserve developments in the 2007 and 2008 periods, the MLR actually decreased by 1.9
percentage points during the 2008 period. |
|
|
|
The medical claims incurred of the Commercial business
decreased by $21.7 million during
the 2008 period and its MLR decreased by 11.6 percentage points during the three months
ended June 30, 2008. The lower MLR is primarily the effect of prior period reserve
developments. Excluding the effect of prior period reserve developments in the 2007 and
2008 periods, the MLR decreased by 1.3 percentage points, primarily as the result of lower
utilization trends in drug and medical claims. Another factor that contributed to the
reduction of the MLR for the period is the re-pricing or termination of less profitable
groups during 2007. |
Medical Operating Expenses
Medical operating expenses for the three months ended June 30, 2008 increased by $2.7 million, or
7.3%, to $39.9 million when compared to the three months ended June 30, 2007. This increase is
primarily attributed to the higher volume of business of the segment, particularly in the Medicare
business. The segments operating expense ratio decreased by 0.6 percentage points during the
three months ended June 30, 2008, to 10.5%.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Medical Operating Revenues
Medical premiums earned for the six months ended June 30, 2008 increased by $97.1 million, or
15.2%, to $734.1 million when compared to the medical premiums earned during the six months ended
June 30, 2007. This increase is principally the result of the following:
|
|
|
Medical premiums generated by the Medicare business increased by $92.7 million, or
78.7%, to $210.5 million, primarily due to an increase in member months enrollment of
141,513, or 53.4% and a change in the mix of products. The increase in member months is
the net result of an increase of 145,926, or 74.9%, in the membership of our Medicare
Advantage products and a decrease of 4,413, or 6.3%, in the membership of our PDP product. |
27
|
|
|
Medical premiums earned of the Reform business increased by $3.5 million, or 2.2%, to
$161.9 million during the 2008 period. This fluctuation is primarily due to the increases
in premium rates during 2007; these rate increases were mitigated by a decrease in member
months enrollment in the Reform business of 68,239, or 3.2%. The retroactive increase in
premium rates received in June 2007 period corresponding to the period between November 1,
2006 and December 31, 2006 was approximately $2.1 million. |
|
|
|
Medical premiums generated by the Commercial business increased by $0.9 million, or
0.2%, to $361.7 million during the six months ended June 30, 2008. This fluctuation is the
net result of an increase in the average premium rates of corporate accounts of 5.2% offset
in part by a decrease in fully-insured member months enrollment of 36,824, or 1.5%. |
Medical Claims Incurred
Medical
claims incurred during the six months ended June 30, 2008 increased by $97.7 million, or
17.4%, to $659.0 million when compared to the six months ended June 30, 2007. The MLR of the
segment increased 1.7 percentage points during the 2008 period,
to 89.8%. These fluctuations are
primarily attributed to the effect of the following:
|
|
|
The medical claims incurred of the Medicare business increased by $100.6 million during
the 2008 period mainly as the result of the increase in member months and a higher MLR by
17.2 percentage points. The higher MLR is in part due to the effect of prior period
reserve developments. Excluding the effect of prior period reserve developments in the
2007 and 2008 periods, the MLR increased by 10.2 percentage points,
primarily as the result of higher utilization trends when compared to the six month ended
June 30, 2007. The increase in utilization trends is primarily the result of higher
utilization in outpatient visits and drug benefits for dual eligibles. The higher MLR is
also the result of a change in enrollment mix between dual and non-dual eligible members
within the business. Member months during the six months ended June 30, 2008 has a higher
concentration of dual eligible members than the same period of the prior year. Dual
eligible members have a higher utilization than non-dual eligible members. |
|
|
|
|
The medical claims incurred of the Reform business increased by $14.1 million during the
2008 period and its MLR increased by 6.8 percentage points during the six months ended June
30, 2008. The higher MLR is primarily the effect of the retroactive premium rate increase
received by this business during June 2007 and prior period reserve developments.
Considering this retroactive premium rate increase and excluding the effect prior period
reserve developments in the 2007 and 2008 periods, the MLR actually decreased by 3.8
percentage points during the 2008 period. |
|
|
|
The medical claims incurred of the Commercial business
decreased by $24.0 million during
the 2008 period and its MLR decreased by 6.8 percentage points during the six months ended
June 30, 2008. The lower MLR is primarily the effect of prior period reserve developments.
Excluding the effect of prior period reserve developments in the 2007 and 2008 periods,
the MLR decreased by 3.5 percentage points, primarily as the result of the re-pricing or
termination of less profitable groups, cost containment initiatives and lower utilization
trends in drugs and medical services. |
Medical Operating Expenses
Medical operating expenses for the six months ended June 30, 2008 increased by $4.5 million, or
6.2%, to $76.8 million when compared to the six months ended June 30, 2007. This increase is
primarily attributed to the higher volume of the segment, particularly in the Medicare business.
The segments operating expense ratio decreased by 0.9 percentage points during the six months
ended June 30, 2008, to 10.3%.
28
Life Insurance Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(Dollar amounts in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
24.6 |
|
|
|
24.8 |
|
|
$ |
48.8 |
|
|
|
49.4 |
|
Premiums earned ceded |
|
|
(1.8 |
) |
|
|
(2.3 |
) |
|
|
(3.9 |
) |
|
|
(4.5 |
) |
|
Net premiums earned |
|
|
22.8 |
|
|
|
22.5 |
|
|
|
44.9 |
|
|
|
44.9 |
|
Commission income on reinsurance |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
Premiums earned, net |
|
|
22.9 |
|
|
|
22.6 |
|
|
|
45.1 |
|
|
|
45.0 |
|
Net investment income |
|
|
4.1 |
|
|
|
3.7 |
|
|
|
8.0 |
|
|
|
7.4 |
|
|
Total operating revenues |
|
|
27.0 |
|
|
|
26.3 |
|
|
|
53.1 |
|
|
|
52.4 |
|
|
Operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits and claims incurred |
|
|
11.2 |
|
|
|
11.7 |
|
|
|
23.2 |
|
|
|
23.3 |
|
Underwriting and other expenses |
|
|
12.6 |
|
|
|
11.9 |
|
|
|
24.2 |
|
|
|
23.4 |
|
|
Total operating costs |
|
|
23.8 |
|
|
|
23.6 |
|
|
|
47.4 |
|
|
|
46.7 |
|
|
Operating income |
|
$ |
3.2 |
|
|
|
2.7 |
|
|
$ |
5.7 |
|
|
|
5.7 |
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
48.9 |
% |
|
|
51.8 |
% |
|
|
51.4 |
% |
|
|
51.8 |
% |
Operating expense ratio |
|
|
55.0 |
% |
|
|
52.7 |
% |
|
|
53.6 |
% |
|
|
52.0 |
% |
|
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Operating Revenues
Premiums earned for the segment decreased by $0.2 million, or 0.8%, to $24.6 million during the
three months ended June 30, 2008 as compared to the three months ended June 30, 2007. This
decrease was primarily the result of a decrease in premiums generated by the Group Disability and
Group Life businesses by $0.5 million offset in part by an increase in Cancer premiums of $0.2
million.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred during the three months ended June 30, 2008 decreased by $0.5
million, or 4.3%, to $11.2 million during the three months ended June 30, 2008. This decrease is
primarily the result of a reduction in actuarial reserves of $0.7 million, offset in part by an
increase in claims incurred of $0.2 million, mostly in the claims related to the Cancer business.
This resulted in a decrease in the loss ratio of 2.9 percentage points, from 51.8% in 2007 to 48.9%
in 2008.
Underwriting and Other Expenses
Underwriting and other expenses for the segment increased by $0.7 million, or 5.9%, to $12.6
million during the three months ended June 30, 2008 primarily as a result of higher commission
expenses attributed to a change in the mix of business generated by the segment. The segments
operating expense ratio increased by 2.3 percentage points during the three months ended June 30,
2008, from 52.7% in 2007 to 55.0% in 2008.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Operating Revenues
Premiums earned for the segment decreased by $0.6 million, or 1.2%, to $48.8 million during the six
months ended June 30, 2008 as compared to the six months ended June 30, 2007. Most of the decrease
in premiums earned of this segment was in the Group Disability businesses, which decreased by $1.0
million during the 2008 period; partially offset by an increase of $0.4 million in the premiums
earned of the Cancer business.
29
Policy Benefits and Claims Incurred
Policy benefits and claims incurred during the six months ended June 30, 2008 decreased by $0.1
million, or 0.4%, to $23.2 million. This decrease is primarily due to the net effect of a
reduction in actuarial reserves of $1.0 million and an increase of $0.9 million in claims incurred.
The increase in claims incurred is the result of an increase in the Group Disability and Cancer
lines of business, each presenting an increase of $0.3 million, while the policy surrender benefits
increased by $0.2 million. This resulted in a 0.4 percentage points decrease in the loss ratio,
from 51.8% in 2007 to 51.4% in 2008.
Underwriting and Other Expenses
Underwriting and other expenses for the segment increased by $0.8 million, or 3.4% to $24.2 million
during the six months ended June 30, 2008 primarily as a result of higher commission expenses
attributed to a change in the mix of business generated by the segment. The segments operating
expense ratio increased by 1.6 percentage points during the six months ended June 30, 2008, from
52.0% in 2007 to 53.6% in 2008.
Property and Casualty Insurance Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(Dollar amounts in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
$ |
40.6 |
|
|
|
43.0 |
|
|
|
76.1 |
|
|
|
78.2 |
|
Premiums ceded |
|
|
(18.3 |
) |
|
|
(17.9 |
) |
|
|
(33.9 |
) |
|
|
(33.3 |
) |
Change in unearned premiums |
|
|
0.8 |
|
|
|
(0.8 |
) |
|
|
4.2 |
|
|
|
0.8 |
|
|
Premiums earned, net |
|
|
23.1 |
|
|
|
24.3 |
|
|
|
46.4 |
|
|
|
45.7 |
|
Net investment income |
|
|
3.0 |
|
|
|
2.5 |
|
|
|
6.0 |
|
|
|
5.1 |
|
|
Total operating revenues |
|
|
26.1 |
|
|
|
26.8 |
|
|
|
52.4 |
|
|
|
50.8 |
|
|
Operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims incurred |
|
|
12.4 |
|
|
|
10.5 |
|
|
|
22.7 |
|
|
|
20.7 |
|
Underwriting and other expenses |
|
|
11.4 |
|
|
|
12.7 |
|
|
|
25.3 |
|
|
|
25.1 |
|
|
Total operating costs |
|
|
23.8 |
|
|
|
23.2 |
|
|
|
48.0 |
|
|
|
45.8 |
|
|
Operating income |
|
$ |
2.3 |
|
|
|
3.6 |
|
|
|
4.4 |
|
|
|
5.0 |
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
53.7 |
% |
|
|
43.2 |
% |
|
|
48.9 |
% |
|
|
45.3 |
% |
Operating expense ratio |
|
|
49.4 |
% |
|
|
52.3 |
% |
|
|
54.5 |
% |
|
|
54.9 |
% |
Combined ratio |
|
|
103.1 |
% |
|
|
95.5 |
% |
|
|
103.4 |
% |
|
|
100.2 |
% |
|
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Operating Revenues
Total premiums written during the three months ended June 30, 2008 decreased by $2.4 million, or
5.6%, to $40.6 million. This fluctuation is mostly due to a decrease in premiums written from
Commercial Multi-Peril and Auto Physical Damage policies of $1.4 million and $1.2 million,
respectively. The commercial property and casualty business is under soft market conditions and
the auto insurance business has been affected by lower economic activity in sales and auto loan
originations.
Premiums ceded to reinsurers during the three months ended June 30, 2008 increased by $0.4 million,
or 2.2% to $18.3 million during the second quarter of 2008. The ratio of premiums ceded to
premiums written increased by 3.5 percentage points, from 41.6% in 2007 to 45.1% in 2008, due to
the effect of non-proportional reinsurance treaties in relation to the level of premiums written as
well as to the mix of business. The cost of non-proportional treaties is negotiated for the whole
year based on expected premium volume. The cost is distributed throughout the year on a
straight-line basis and its relation to direct premiums written varies depending on actual writings
in each quarter versus expected results.
30
The change in unearned premiums presented an increase of $1.6 million when compared to prior year
as the result of the lower volume of business during the period, which results in the amortization
into income of the higher volume of business subscribed during the last quarter of the year 2007.
Claims Incurred
Claims incurred during the three months ended June 30, 2008 increased by $1.9 million, or 18.1%, to
$12.4 million. The loss ratio increased by 10.5 percentage points, to 53.7% during the three
months ended June 30, 2008. This increase is primarily reflected in the Commercial Multi-Peril
line of business. The increase in claims incurred and in the loss ratio is primarily due to the
fact that in the three months ended June 30, 2007 the segment recorded a favorable change in net
claim reserves of approximately $1.9 million.
Underwriting and Other Expenses
Underwriting and other operating expenses for the three months ended June 30, 2008 decreased by
$1.3 million, or 10.2%, to $11.4 million. The operating expense ratio decreased by 2.9 percentage
points during the same period, to 49.4% in 2008. This decrease is primarily due to a distribution
of an experience refund of $1.1 million from the Compulsory Vehicle Liability Insurance Joint
Underwriting Association during the month of June 2008, while last year the distribution was
received during the month of September. This refund was recorded as a decrease to the operating
expenses for the period.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Operating Revenues
Total
premiums written during the six months ended June 30, 2008 decreased by $2.1 million, or
2.7%, to $76.1 million when compared to the six months period ended June 30, 2007. This
fluctuation is mostly due to the decrease in the premiums written for the Commercial Multi-Peril,
Auto Physical Damage and All Other lines of business amounting by $1.0 million, $1.2 million and
$1.4 million, respectively. These decreases were partially offset by an increase in the premiums
written for the Dwelling business by $1.8 million. The commercial property and casualty business
is under soft market conditions and the auto insurance business has been affected by lower economic
activity in sales and auto loan originations.
Premiums ceded to reinsurers increased by approximately $0.6 million, or 1.8% to $33.9 million
during the second quarter of 2008. The ratio of premiums ceded to premiums written increased by
1.9 percentage points, from 42.6% in 2007 to 44.5% in 2008, primarily as the effect of
non-proportional reinsurance treaties in relation to the level of premiums written as well as to
the mix of business. The cost of non-proportional treaties is negotiated for the whole year based
on expected premium volume. The cost is distributed throughout the year on a straight-line basis
and its relation to direct premiums written varies depending on actual writings in each quarter
versus expected results.
Change in unearned premiums present an increase of $3.4 million when compared to prior year is the
result of the segments higher volume of business during the last quarter of the year 2007, which
is now being amortized into income.
Claims Incurred
Claims incurred during the six months ended June 30, 2008 increased by $2.0 million, or 9.7%, to
$22.7 million. The loss ratio increased by 3.6 percentage points, to 48.9% during the six months
ended June 30, 2008, primarily as a result of higher loss ratios in the Commercial Multi-Peril,
General Liability, and Auto Physical Damage lines of businesses resulting from a higher number of
claims paid during the 2008 period.
Underwriting and Other Expenses
Underwriting and other operating expenses for the six months ended June 30, 2008 increased by $0.2
million, or 0.8%, to $25.3 million. The operating expense ratio decreased by 0.4 percentage points
during the same period, to 54.5% in 2008. This fluctuation is primarily due to the effect of
increases in net commission expense, as a result of commission rate increases to various general
agencies in several lines of business during 2007. The segment also experienced increases in other
underwriting expenses, including salaries and related expenses, advertising and EDP maintenance.
These increases were offset in part by the experience refund of $1.1 million received during June
2008 from the Compulsory Vehicle Liability Insurance Joint Underwriting Association.
31
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:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
(Dollar amounts in millions) |
|
2008 |
|
2007 |
|
Sources of cash: |
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings |
|
$ |
32.1 |
|
|
|
|
|
Proceeds from policyholder deposits |
|
|
5.9 |
|
|
|
2.8 |
|
Cash provided by operating activities |
|
|
|
|
|
|
6.4 |
|
Other |
|
|
15.6 |
|
|
|
17.0 |
|
|
Total sources of cash |
|
|
53.6 |
|
|
|
26.2 |
|
|
Uses of cash: |
|
|
|
|
|
|
|
|
Cash used in operating activities |
|
|
(25.2 |
) |
|
|
|
|
Net purchases of investment securities |
|
|
(216.0 |
) |
|
|
(25.1 |
) |
Capital expenditures |
|
|
(7.1 |
) |
|
|
(3.5 |
) |
Dividends |
|
|
|
|
|
|
(2.4 |
) |
Payments of long-term borrowings |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Surrenders of policyholder deposits |
|
|
(3.4 |
) |
|
|
(4.0 |
) |
Other |
|
|
|
|
|
|
(0.2 |
) |
|
Total uses of cash |
|
|
(252.5 |
) |
|
|
(36.0 |
) |
|
Net decrease in cash and cash equivalents |
|
$ |
(198.9 |
) |
|
|
(9.8 |
) |
|
Cash flows from operating activities decreased by $31.6 million for the six months ended June
30, 2008, principally due to the effect of increases in claims paid and in cash paid to suppliers
and employees amounting to $96.0 million and $8.5 million, respectively, offset in part by an
increase in premiums collected of $64.8 million. These fluctuations are primarily the result of
the higher volume and increased utilization trends in our managed care segment particularly in the
Medicare business. The increase in premiums collected would have been higher when considering the
$22.8 million of managed care premiums collected in December 2007 but corresponding to January
2008. In addition, as of June 30, 2008 the managed care segment experienced a significant increase
in the premiums receivable, mostly from the government of Puerto Rico and its instrumentalities.
The Government of Puerto Rico and its instrumentalities tend to slow down payments at the end of
its fiscal year (June 30) until funds from the new fiscal year are available. As of the end of
this Quarterly Report on Form 10-Q a significant amount of these balances has been collected by the
managed care segment.
In the 2008 period the proceeds from short-term borrowings exceeded payments of short-term
borrowings by $32.1 million. Short-term borrowings are used to address timing differences between
cash receipts and disbursements. Also, during the six months ended June 30, 2008 we used some of
our financing facilities to acquire investments to take advantage of some investment opportunities.
The
decrease in the other sources of cash of $1.4 million is attributed to a higher balance in
outstanding checks over bank balances in the 2008 period.
Net acquisitions of investment securities increased by $190.9 million during the six months ended
June 30, 2008, principally as the result of acquisitions of available for sale securities mainly in
our managed care segment and the effect of purchases of investments with trade date in December
2007 and a settlement date in January 2008, amounting to $117.7 million.
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Capital expenditures increased by $3.6 million as a result of the capitalization of costs related
to the new systems initiative in our managed care segment.
The net proceeds from policyholder deposits increased by $3.7 million during the six months ended
June 30, 2008 primarily due to the receipt of deposits during the period.
In March 2007, we declared and paid dividends to our stockholders amounting to $2.4 million.
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 June 30, 2008, we had $111.0 million of available credit under these facilities. There were
$32.1 million outstanding short-term borrowings under these facilities as of June 30, 2008.
As of June 30, 2008, we had the following senior unsecured notes payable:
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On January 31, 2006, we issued and sold $35.0 million of our 6.7% senior unsecured notes
payable due January 2021 (the 6.7% notes). |
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On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes
due December 2020 (the 6.6% notes). |
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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 June 30, 2008, we
and our managed care subsidiary, as applicable, are in compliance with these covenants.
In addition, as of June 30, 2008 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 June 30, 2008, this secured loan had an outstanding balance of $25.1 million and
an average annual interest rate of 4.2%.
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 June 30, 2008, we are in
compliance with these covenants. Failure to meet these covenants may trigger the accelerated
payment of the secured loans outstanding balance.
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, 2007.
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Item 3. |
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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, 2007.
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, 2007.
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Item 4. |
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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 June 30, 2008.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective
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as of June 30, 2008. There were no
significant changes in 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
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Item 1. |
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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.
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, 2007.
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 on Form 10-Q, four judicial claims seeking the
return of or compensation for 81
shares (prior to giving effect to the 3,000-for-one stock split) had been brought by non-medical
heirs of former shareholders whose shares were repurchased upon their death. In one claim, heirs
purport to represent as a class all non-medical heirs of deceased shareholders 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.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
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Item 3. |
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Defaults Upon Senior Securities |
Not applicable.
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Item 4. |
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Submissions of Matters to a Vote of Security Holders |
Not applicable.
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Item 5. |
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Other Information |
Not applicable.
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Exhibits |
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Description |
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3(i)(a) |
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Amended and Restated Articles of Incorporation, incorporated
herein by reference to Exhibit 3(i)(d) to TSMs Annual Report
on Form 10-K for the year ended December 31, 2007 (File No.
0-49762). |
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3(i)(b) |
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Amendment to Article Tenth of the Amended and Restated
Articles of Incorporation of Triple-S Management Corporation,
incorporated herein by reference to Exhibit 3(i)(b) to TSMs
Quarterly Report on Form 10-Q for the quarter ended March 31,
2008 (File No. 0-49762). |
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3(i)(c) |
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Articles of Incorporation of Triple-S Management Corporation,
as currently in effect, incorporated herein by reference to
Exhibit 3(i)(c) to TSMs Quarterly Report on Form 10-Q for
the quarter ended March 31, 2008 (File No. 0-49762). |
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10.1* |
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Extension to the agreement between the Puerto Rico Health
Insurance Administration and Triple-S, Inc. for the provision
of health insurance coverage to eligible population in the
North and South-West regions. |
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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 six months ended June 30, 2008 and 2007 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 six months ended June 30, 2008 and 2007 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.
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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 |
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Registrant |
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Date:
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August 6, 2008
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By:
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/s/ Ramón M. Ruiz-Comas |
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Ramón M. Ruiz-Comas, CPA
President and
Chief Executive Officer |
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Date:
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August 6, 2008
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By:
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/s/ Juan J. Román |
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Juan J. Román, CPA
Vice President of Finance
and Chief Financial Officer |
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