Item 1. Business.
GENERAL DESCRIPTION OF BUSINESS AND RECENT DEVELOPMENTS
Triple-S Management Corporation (TSM) is incorporated under the laws of the Commonwealth of Puerto Rico. It is the holding company of several entities, through which it offers a wide range of insurance products and services. These products and services are offered through the following TSM wholly-owned subsidiaries:
•
Triple-S, Inc. (TSI), a health insurance company serving two major segments: the Commercial Program and the Commonwealth of Puerto Rico Healthcare Reform Program (the Healthcare Reform);
•
Seguros Triple-S, Inc. (STS), a property and casualty insurance company; and
•
Seguros de Vida Triple-S, Inc. (SVTS), a life and disability insurance and annuity products company.
TSM’s insurance subsidiaries, as well as other insurers doing business in Puerto Rico, are subject to the regulations and supervision of the Office of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance). The regulations and supervision of the Commissioner of Insurance consists primarily of: the approval of policy forms and rates, when applicable, the standards of solvency that must be met and maintained by insurers and their agents, and the nature of and limitations on investments, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations and the form and content of reports of financial condition required to be filed, among others. In general, such regulations are for the protection of policyholders rather than security holders.
In addition to the insurance subsidiaries mentioned above, TSM has the following other wholly-owned subsidiaries: Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TCI). ISI provides data processing services to Triple-S Management Corporation and its subsidiaries (the Corporation). TCI is currently engaged as the third-party administrator in the administration of the Corporation’s Healthcare Reform segment described under “Health Insurance - Healthcare Reform Segment”. It also provides healthcare advisory services to TSI and other health-related services.
All of the premiums generated by the insurance subsidiaries are generated from customers within Puerto Rico. In addition, long-lived assets, other than financial instruments, including deferred policy acquisition costs and deferred tax assets of the Corporation, are located in Puerto Rico.
TSM became the holding company for its subsidiaries on January 4, 1999, the effective date of the corporate reorganization described below. Before the Reorganization (as defined herein), Triple-S, Inc. (SSS), a health insurance company, was the parent company of the existing subsidiaries previously described.
Effective January 4, 1999, SSS and its subsidiaries completed a tax-exempt corporate reorganization with the approval of the Department of the Treasury and the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Reorganization). In the Reorganization, the following transactions occurred:
•
The stockholders of SSS exchanged their common stock in SSS for common stock of TSM on a share for share basis.
•
SSS transferred to TSM its investment in its wholly-owned subsidiaries, amounting to $50.2 million, consisting of SSS’s capital contribution to its wholly owned subsidiaries of $9.8 million as well as the accumulated operating reserves and unrealized gains on securities classified as available-for-sale of the wholly owned subsidiaries amounting to $35.4 million and $4.9 million, respectively.
•
SSS sold to TSM its real estate at its carrying value of $22.5 million at the date of the Reorganization. No gain or loss was recognized by SSS in relation to this transaction.
•
SSS merged with and into Triple-S Salud, Inc., a wholly-owned subsidiary of TSM which later changed its name to Triple-S, Inc. (TSI). Thus, TSI acquired the net assets of SSS amounting to $139.4 million
(excluding SSS’s investment in its former wholly owned subsidiaries), including SSS’s accumulated operating reserves of $105 million and unrealized gains on securities classified as available-for-sale of $33.8 million.
The purpose of the Reorganization was to allow the Corporation to participate in activities that may better position it in the health services market without the limitations inherent to an insurance company. Since TSM is not an insurance company, it is not subject to the limitations of the Puerto Rico Insurance Code and the Reorganization provides increased flexibility to diversify into other lines of business. During the Reorganization, there were no significant changes in the management of the entities within the Corporation; the President and Chief Executive Officer of TSI (at the time) was named President and Chief Executive Officer of TSM while retaining the position and responsibilities of the Presidency of TSI.
The Reorganization was structured as a tax-exempt reorganization under the Puerto Rico Income Tax Code and the Puerto Rico Income Tax Act of 1954, as amended. A favorable determination letter approving the tax-exempt status of the Reorganization was obtained from the Puerto Rico Department of the Treasury. In order to continue with the tax exemption, TSI had to comply with certain conditions imposed by the Department of the Treasury in the tax exemption ruling.
TSI, although legally incorporated as a for-profit organization, operated as if it were a non-for-profit organization, whose principal purpose was to offer affordable healthcare coverage in the Puerto Rico community. TSI was exempt from Puerto Rico income taxes before and after the Reorganization under the ruling issued by the Puerto Rico Department of the Treasury.
Under a resolution passed by the Puerto Rico House of Representatives (House of Representatives), during 2002 and 2003 the Banking and Insurance Committee of the House of Representatives conducted an investigation of TSI’s tax treatment under the Department of the Treasury ruling that granted TSI’s tax exempt status. A similar investigation was approved by the Puerto Rico Senate. In addition, the Department of the Treasury conducted an audit of TSI’s compliance with the requirements of the tax ruling. All three investigations on the tax exemption have been concluded. The Department of the Treasury concluded its investigations with no findings of non-compliance. The House of Representatives and the Puerto Rico Senate concluded their investigations by recommending and providing for the termination of the tax exemption solely on account of TSI’s for-profit status and the fact that no other for-profit health insurer in Puerto Rico enjoys a tax exemption under section 1101(6) of the Puerto Rico Internal Revenue Code of 1994, as amended (the P.R. Code). TSM was notified on June 18, 2003 by the Department of Treasury that the ruling recognizing TSI’s tax exemption was terminated effective December 31, 2002. The termination of the ruling was in accordance with a new public policy set by the Department of the Treasury pursuant to which tax exemptions under Section 1101(6) of the P.R. Code will not apply to corporations organized as for-profit, which is TSI’s case.
On July 31, 2003, TSM and TSI executed a closing agreement with the Department of the Treasury. In general, the terms of the closing agreement established the termination of TSI’s tax exemption effective December 31, 2002. Accordingly, effective January 1, 2003 TSI is subject to Puerto Rico income taxes as an other-than-life insurance entity, as defined in the P.R. Code.
The closing agreement also stipulates that TSM will pay taxes on TSI’s accumulated statutory net income, in accordance with the income recognition methodology applied by the Secretary of the Treasury in the closing agreement and the ruling mentioned above. This tax ruling established the following methodology for TSM to determine its tax liability:
The Corporation has not declared or distributed dividends on its common stock by virtue of an affirmative vote of its stockholders. However, a resolution was approved by the Corporation’s stockholders at the Annual Meeting held on April 27, 2003, acknowledging that the Board of Directors (the Board) of the Corporation may declare dividends subject to the Board’s determination that in its best judgment the payment of dividends is financially and legally feasible.
The amount of TSM’s net income available for distribution to stockholders had excluded TSI’s results of operations for the years 2002 and 2001 due to the prohibition on declaring dividends contained in the tax exemption ruling. Since the tax status of TSI changed effective January 1, 2003, its earnings for the years 2002 and 2001 are now available for distribution to TSI’s stockholders.
AVAILABLE INFORMATION
TSM files annual, quarterly and current reports and other information with the Securities and Exchange Commission (the SEC). The SEC maintains a website that contains annual, quarterly and current reports and other information that issuers (including TSM) file electronically with the SEC. The SEC’s website is www.sec.gov. The filings of TSM with the SEC are not available in its website address (ssspr.com) since the Corporation’s stock has no established public trading market. The information on our website is not incorporated by reference into this report. The website addresses listed above are provided for the information of the reader and are not intended to be active links. The Corporation will provide free of charge copies of its filings to any shareholder that requests them at the following address: Triple-S Management Corporation; Office of the Secretary of the Board; PO Box 363628; San Juan, P.R. 00936-3628.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and other publicly available documents of TSM 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 the financial condition, results of operations and business of the Corporation. These statements are not historical, but instead represent the TSM’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of the Corporation’s control. These statements may address, among other things, future financial results, strategy for growth, and market position. It is possible that the Corporation’s 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 10-K. TSM is not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.
PUERTO RICO’S ECONOMY
Key economic indicators published by the government of Puerto Rico during the last months of the year 2003, suggest that Puerto Rico may have commenced a slow economic recovery. The information published by the government for 2003 presents a growth in the local economy of 0.3% and a growth in total employment of 2.8%. Thus, after three years of economic slowdown, it appears to management that the economic recovery that has not happened in Puerto Rico may finally occur during 2004. The sluggish performance of the Puerto Rico economy during the last several years is due to many factors. First, the slow growth of the United States economy during these years has had a direct impact on the Puerto Rican economy. On a local level, the fiscal crisis of the government of Puerto Rico has led to tax increases and the postponement of several tax-cut measures, which is not only a discouraging factor for economic growth but also creates reservations that tend to slow investments.
The overall growth of the U.S. economy is the most important variable exerting an impact on Puerto Rico’s economy. The U. S. government reported that its economy grew 2.2% during 2002, following a growth of 0.5% during 2001, when its economy was experiencing its first formal recession in a decade. The annual growth rate of the U.S. economy was 3.1% for 2003. The economists’ forecasts show the U.S. economy with a strong growth rate during 2004. After 2004, the U.S. economy is expected to maintain a growth path, but at lower rates than during the extraordinary expansion of the second half of the nineties. Even with the apparent rebound in the economy, the possibility of another terrorist attack, continuing concerns about the costs of the war with Iraq along with other concerns with international politics and corporate and accounting irregularities might damper the economic rebound in the U.S. and Puerto Rico economies.
Although the long-awaited economic recovery in Puerto Rico did not fully materialize during 2003, some sectors of the economy are beginning to show signs of recovery. This is the case of the construction, tourism and commercial sectors. Local government believes that the rebound of the Puerto Rican economy will be noticeable during 2004. However, economic indicators suggest that most of the impetus toward economic recovery will come from public-sector investment, since the 2004 agenda of Puerto Rico’s government includes several large construction projects that did not occur in 2003. This investment should have a significant multiplying effect on the Island’s economic activity in
general. The local government expects the Puerto Rico economy to grow between 2.1% and 2.5% during 2004 and 2005. However, if the expected U.S. economy growth does not materialize, the real growth rate of the economy in Puerto Rico will be negatively affected, at least reducing the growth prospects for the years 2004 and the foreseeable future.
INSURANCE INDUSTRY
The insurance industry in Puerto Rico is highly competitive and is comprised of both local and foreign entities. The approval of the Gramm-Leach-Bliley Act of 1999, which applies to financial institutions domiciled in Puerto Rico, has opened the insurance market to new competition since financial institutions are permitted to enter into the insurance business. At the moment, several banks in Puerto Rico have established subsidiaries that operate as insurance agencies.
Natural disasters, which have affected Puerto Rico greatly over the past ten years, have prompted local government to create property and casualty insurance reserves through legislation in order to provide coverage for catastrophic events. The auto insurance market has also been affected by government regulation, with the Compulsory Auto Insurance Law, which was passed in 1995. This law requires vehicle owners to maintain a minimum of $3,000 in public liability insurance. Additionally, the healthcare insurance sector has experienced significant changes in the past ten years due to the implementation of the Healthcare Reform Program (the Program). This Program provides healthcare coverage to Puerto Rico’s medically indigent population (as defined by the law), estimated at over 1.4 million lives as of December 31, 2003.
The Corporation is the leader in the insurance industry in Puerto Rico, as measured by the share of its consolidated premiums of the total insurance premiums subscribed in Puerto Rico. The Corporation’s health insurance company, TSI, is the leader in the health insurance industry. TSI’s participation in the health insurance industry, considering both the Commercial and Healthcare Reform segments, provide this subsidiary with a market share of approximately 37.7% as of December 31, 2003. The property and casualty and the life insurance subsidiaries also have important positions in their respective markets. As of December 31, 2002, STS had a market share of approximately 7.9% in the property and casualty insurance industry in Puerto Rico and SVTS had a market share of approximately 16.0% in the group life insurance market in Puerto Rico.
Almost all of the Corporation’s business is done within Puerto Rico and as such, it is subject to the risks associated with Puerto Rico’s economy and its geographic location.
The operations of the Corporation are conducted principally through four business segments, which are identified according to the type of insurance products offered. These segments and a description of their respective operations are as follows:
HEALTH INSURANCE - COMMERCIAL SEGMENT
The Corporation participates in the commercial health insurance marketplace through TSI. Total premiums in the Commercial segment represented 55.0%, 54.6% and 54.9% of the Corporation’s consolidated total premiums for the years 2003, 2002 and 2001, respectively.
TSI is a Blue Cross and Blue Shield Association sub-licensee, which allows TSI to use the Blue Shield brand in Puerto Rico. TSI’s participation in the health insurance industry with the Commercial and Reform segments provide this subsidiary with a market share of approximately 37.7% as of December 31, 2003. TSI offers a variety of health insurance products, and is the leader by market share in almost every health insurance market sector, as measured by the share of premiums subscribed. Its market share is more than double that of its nearest competitor (Medical Card Systems, which has a market share of approximately 16.5%) and is over three times larger than that of its second nearest competitor (Humana, which has a market share of approximately 11.9%). In addition to the Healthcare Reform segment described below, TSI offers its products to five distinct market sectors in Puerto Rico. During 2003, TSI had the following market share within each sector: Corporate Accounts (groups), 42.6%; Federal Employees, 99.1%; Local Government Employees, 14.6%; Individual Accounts, 53.6%; and approximately 68.3% in the Medicare supplemental sector. Within the Corporate Accounts sector, employer groups may choose various funding options ranging from fully insured to self-funded financial arrangements. While self-funded clients participate in TSI’s networks, the clients bear the claims risk. Through a contract with the United States Office of Personnel Management (OPM), TSI provides health benefits to federal employees in Puerto Rico under the Federal Employees Health Benefits Program. This contract is subject to termination in the event of a noncompliance not corrected to the satisfaction of OPM. TSI also provides health insurance coverage to certain employees of the government of Puerto Rico and its instrumentalities. Earned premium revenue related to government of Puerto Rico health plans amounted to $65.9 million, $64.6 million and $59.0 million for the three years ended December 31, 2003, 2002 and 2001, respectively. In addition, TSI processes and pays claims as carrier for the Medicare - Part B Program in Puerto Rico and the United States Virgin
Islands. As a carrier for Medicare-Part B, TSI allocates operating expenses to determine reimbursement due for services rendered in accordance with the contract.
TSI’s premiums are generated from customers within Puerto Rico. The premiums for the Commercial segment are mainly originated through TSI’s internal sales force and a network of brokers and independent agents. For purposes of segment reporting, the Healthcare Reform sector is considered a different segment and is separately analyzed. (See “Health Insurance - Healthcare Reform Segment”.)
TSI’s business is subject to changing federal and local legal, legislative and regulatory environments. Some of the more significant current issues that may affect TSI’s business include:
•
efforts to expand the tort liability of health plans,
•
initiatives to increase healthcare regulation,
•
local government initiatives for mandatory benefits.
The U.S. Congress continues to debate legislation containing various patient protection initiatives, including provisions that could expose insurance companies to economic damages, and certain punitive damages, for making a determination denying benefits or for delaying members’ receipt of benefits as a result of “medical necessity” as well as for other coverage determinations. This situation is also an issue at the local level. Given the political process, it is not possible to determine whether any federal and/or local legislation or regulation will be enacted into law in 2004 or what form any such legislation might take.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorizes the U.S. Department of Health and Human Services (HHS) to issue standards for administrative simplification, as well as privacy and security of medical records and other individually identifiable health information. The regulations under the HIPAA Administrative Simplification section impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors. HIPAA Administrative Simplification section requirements apply to self-funded group plans, health insurers and HMO’s, health care clearinghouses and health care providers who transmit health information electronically (“covered entities”). Regulations adopted to implement HIPAA Administrative Simplification also require that business associates acting for or on behalf of HIPAA-covered entities be contractually obligated to meet HIPAA standards. The regulations of the Administrative Simplification section establish significant criminal penalties and civil sanctions for noncompliance.
HHS has released rules mandating the use of new standard formats with respect to certain health care transactions (e.g. health care claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules requiring the use of standardized code sets and unique identifiers by employers and providers. TSI was required to comply with the transactions and code set standards by October 16, 2003 and believes that it has met all relevant requirements. TSI is required to comply with the employer identifier rules by July 2004 and provider identifier rules by May 2007.
HHS also sets standards relating to the privacy of individually identifiable health information. In general, these regulations restrict the use and disclosure of medical records and other individually identifiable health information held by health plans and other affected entities in any form, whether communicated electronically, on paper or orally, subject only to limited exceptions. In addition, the regulations provide patients new rights to understand and control how their health information is used. HHS has also published security regulations designed to protect member health information from unauthorized use or disclosure. TSI is required to comply with these security regulations by April 2005.
TSI is moving forward with implementation efforts to comply with HIPAA regulations on the required due dates.
In recent years, the health insurance market as a whole has been affected by rising healthcare costs, particularly those related to pharmacy benefit costs and new medical technology, and by the current weak economy and a growing sense of consumerism in the provision of healthcare benefits. Rising negative consumer perception about managed care caused many consumers to transfer from Health Maintenance Organization (HMO) type products to companies offering open access and greater choice of healthcare providers. These trends have caused the health insurance industry to adopt strategies that emphasize benefits management (such as defined contribution) and to move away from more restrictive medical management strategies (such as pre-authorization of certain procedures).
The constantly changing healthcare costs inflation trend generally determines the profitability of health insurers. Thus, the greatest challenge for the health insurance industry is to maintain affordable premiums in a sluggish economy while providing for the yearly increases in healthcare costs. These costs are constantly driven upwards by an aging
population, new prescription drugs and advances in medical technology. In 2002 and 2001, most of the insurers did a good job of estimating increases in health care costs, as indicated by solid profitability in those years. This continued profitability has been driven by rate increases that have outpaced increases in medical costs. In recent years, the focus of the underwriting process was on increased profitability rather than on market share growth. However, with premium rates high and strong underwriting results in the last three years, the health insurance market seems posed for renewed price competition.
The strong premium growth across the health insurance industry has not been accompanied by enrollment growth. Weak employment resulting from the weak economy had a negative effect on industry enrollment during 2003. Current signs of an improving economy have not been accompanied by improvement in employment figures. The economic downturn together with increased premium rates affected the employers’ ability to purchase health insurance for existing employees. Frequently, employers chose to forgo health insurance altogether or buy lower cost products. Industry experts expect health insurers to reflect solid profitability again during 2004. However, health insurers are expected to experience increasing resistance to raising premiums. As a result, the profitability of health insurers will depend on their ability to increase the efficiency of the health care delivery model.
During past years, TSI was subject to higher than expected increases in costs and a decrease in investment income due to interest rate declines. As a result, TSI implemented procedures to assure that all its market segment businesses are priced with adequate premium rates that reflect the actual claims trend of each particular business. In spite of this strict pricing policy, TSI achieved and exceeded projected retention rates. The retention rate, which is the percentage of existing of business retained in the renewal process, was 95.0% in 2003, 94.4% in 2002, and 95.2% in 2001. In addition, TSI has maintained its overall market share during the last three years.
TSI has established healthcare management program strategies that seek to control claims costs while striving to fulfill the needs of highly informed and demanding healthcare consumers. Among these strategies is the implementation of disease and case management programs. These programs empower consumers by providing them with education and engaging them in actively maintaining or improving their own health. Early identification of patients and inter-program referrals are the milestones of these programs, which provide for integrated and optimal service. Other strategies include innovative partnerships and business alliances with other entities to provide new products and services such as: a 24-hour telephone based triage and health information service; an employee assistance program (EAP); and, the promotion of evidence-based protocols and patient safety programs among our providers. TSI has also implemented a hospital concurrent review program, the goal of which is to monitor the appropriateness of high admission rate diagnoses and high cost stays. To stem the rising tide in pharmacy benefit costs, TSI has implemented a three-tier formulary product, which has proved to be very effective, an exclusive provider organization (EPO) and benefits design changes.
TSI expects to remain competitive in the markets in which it operates, particularly the Corporate Groups segment. Management considers TSI’s quality of services to be strong enough to enable it to maintain a competitive position in the marketplace.
HEALTH INSURANCE - HEALTHCARE REFORM SEGMENT
The Corporation participates in the medically indigent health insurance market through TSI. The Health Insurance - Healthcare Reform segment comprises TSI’s participation in the Healthcare Reform. The Healthcare Reform segment premiums represented 37.5%, 37.5%, and 39.3% of the Corporation’s consolidated total premiums for the years 2003, 2002 and 2001, respectively.
In 1994, the government of the Commonwealth of Puerto Rico (the government) privatized the delivery of services to the medically indigent population in Puerto Rico, as defined by the government, by contracting with private health insurance companies instead of providing health services directly to such population. The government divided the Island into ten geographical areas. By December 31, 2001, the Healthcare Reform had been fully implemented in each of the geographical areas. Each geographical area is awarded to a health insurer doing business in Puerto Rico through a competitive process requesting proposals from the industry.
The government has been asking insurers to reduce or, at least, control the increase of Healthcare Reform expenditures, which represent approximately 13.0% of total government expenditures. Several measures have been undertaken by the government to control Healthcare Reform costs. Some of these measures include closer and continuous scrutiny of participant’s (members) eligibility and the carve-out of mental health benefits from the policy. Mental health benefits are currently offered to the Healthcare Reform beneficiaries by behavioral healthcare and mental healthcare companies. The government is considering carving-out additional benefits provided by the insurers. Effective July 1, 2003, the government began a pilot project in which it is contracting directly with a provider medical group, instead of through
the health insurance companies. This project was not implemented in any of the areas served by TSI, but the government is not precluded from implementing a similar project in areas served by TSI in the future.
All of the government Healthcare Reform contracts expired on June 30, 2002. After the expiration of these contracts, the Commonwealth redistributed the geographical areas, merging two of the existing areas with the remaining ones, thus reducing geographical areas to eight. As a result of the reorganization of the geographical areas, the Northwest area (previously administered by TSI) was merged into the West area. In addition, and as a result of the same reorganization, six new municipalities were merged into areas administered by TSI. Commencing on July 1, 2002, TSI was awarded three of the eight resulting geographical areas: North, Metro-North and Southwest. On this date, after the reorganization of the geographical areas and the granting of the three areas, TSI experienced a decrease in average enrollment of approximately 5.7% when compared to the average enrollment as of June 30, 2002. This decrease in enrollment was not significant and since premium rates were increased by approximately 6.3%, total revenues declined only 1.9% compared to the previous year. All Healthcare Reform contracts were negotiated for a term of three years; the contracts expire on June 30, 2005. The premium rates of each contract, however, are negotiated annually. As part of the annual premiums renegotiation process, effective July 1, 2003 and for a twelve month-period ending June 30, 2004, premium rates under all the contracts were increased by approximately 4.5%. The contracts include a provision, however, that if the net income of a geographical area for any given contract year, as defined, resulting from the provision of services under the contract exceeds 2.5% of earned premiums, the insurance company is required to return 75.0% of the excess to the government. In case the contract renewal process is not completed by a contract’s expiration date, the contract may be extended by the government, upon acceptance by TSI, for any subsequent period of time if deemed to be in the best interests of the beneficiaries and the government. The terms of a contract, including premiums, can be renegotiated if the term of the contract is extended. The contract for each geographical area is subject to termination in the event of any non-compliance by the insurance company which is not corrected or cured to the satisfaction of the government entity overseeing the Healthcare Reform, or in the event that the government determines that there is an insufficiency of funds to finance the Healthcare Reform. This last event will require prior written notice of at least ninety days. The loss of any or all of TSI’s three Healthcare Reform contracts would have a material adverse effect on the Corporation’s operating results. This could include the downsizing of certain personnel, the cancellation of lease agreements of certain premises and of certain contracts, and severance payments, among others. Also, this would result in a significant decrease in TSI’s volume of premiums, claims, and operating expenses.
As of December 31, 2003, three insurance companies were participating in the Healthcare Reform. The three insurance companies and their related market shares as of December 31, 2003 were the following: TSI (38%), Medical Card System (33%) and Humana (29%). Once the Healthcare Reform was fully in place, any participating insurance company’s growth in this segment depends on winning a geographical area serviced by another insurance company or through the restructuring of the geographical areas. The health insurance companies that decide to participate in this business compete against each other during the contract award process. Management believes that the Corporation’s Healthcare Reform segment’s competitive strengths include TSI’s highly efficient administrative structure and quality of services.
To provide services to its medically indigent membership, TSI established a managed care program similar to a Health Maintenance Organization (HMO) that integrates both the financing and delivery of services in order to manage the accessibility, cost and quality of care. The established managed care model includes disease and demand management as well as preventive healthcare services. Management believes that all of these programs and TSI’s effective administrative and pricing structure have made TSI one of the most attractive participants in the Healthcare Reform.
TSI has established a network of Independent Practice Associations (IPA) to provide service to its Healthcare Reform beneficiaries in the Healthcare Reform areas serviced by TSI. TSI believes it has designed the economic model that best suits the IPA’s and the primary care physicians (PCP). The risks covered by the Healthcare Reform policy are divided among those assumed by the IPA’s and those retained by TSI. The IPA receives an amount per capita, and it assumes the costs of services provided and referred by its PCP’s, including procedures and in-patient services not related to risks assumed by TSI. As part of its services, TSI retains a portion of the capitation payments to the IPA’s as a reserve to provide for incurred, but not reported claims (IBNR) for services rendered by providers other than PCP’s. TSI retains the risk associated with services provided to the beneficiaries with special healthcare needs, such as: neonatal, obstetrical, AIDS, cancer, cardiovascular, and dental services, among others. Effective October 1, 2001, mental healthcare services were carved-out by the government and contracted with behavioral healthcare companies. This represented a decrease in premium income of approximately $36 million annually.
As of June 30, 2003, the three geographical areas administered by TSI under the Healthcare Reform had a total enrollment of approximately 621 thousand beneficiaries, which represented approximately 39% of the total eligible beneficiaries in Puerto Rico.
Healthcare Reform contracts have generally been for twelve-month periods. Premiums need to be determined taking into consideration future costs of services. Since premium levels for this significant block of business are determined on a yearly basis, TSI is exposed to a significant underwriting risk.
TSI entered into a service agreement with TCI for the administration of the Healthcare Reform segment operations in exchange for a service fee that will cover TCI’s operating expenses plus a profit.
PROPERTY AND CASUALTY INSURANCE SEGMENT
The Corporation participates in the property and casualty insurance market through STS. The property and casualty insurance segment premiums represented 6.2%, 4.9% and 4.7% of the Corporation’s consolidated total premiums for the years 2003, 2002 and 2001, respectively.
STS is a multiple line insurer that underwrites substantially all lines of property and casualty insurance. Its predominant lines of business are commercial multiple peril, auto physical damage, auto liability and dwelling insurance. Business is exclusively subscribed in Puerto Rico through approximately twenty general agencies and independent insurance agents and brokers. Signature Insurance Agency, Inc., STS’s wholly-owned subsidiary, underwrote approximately 46% of its total premium volume during 2003 and 45% during each of 2002 and 2001.
Property and casualty premiums represented approximately 35% of premiums in the total insurance market in Puerto Rico, amounting to $1.9 billion for the year ended December 31, 2002. In 2002, STS’s market share of the property and casualty insurance market was 7.9%. The segment’s nearest competitors and their market share of the property and casualty insurance market in Puerto Rico were: Royal and Sunalliance Insurance PR, Inc. (9.9%), National Insurance Company (6.8%) and Integrand Assurance Co. (5.8%). In 2003 STS advanced into the fifth position in the property and casualty insurance industry in Puerto Rico. The market leader in the property and casualty insurance industry in Puerto Rico is Universal Insurance Group, with a market share of 19.0% in 2002.
During 2003, the Puerto Rican insurance market was impacted by the announcement and eventual sale of Royal and Sunalliance Insurance PR, Inc. (one of STS’s nearest competitors in 2002) to Cooperativa de Seguros Múltiples de Puerto Rico, a locally-owned mutual insurance carrier. As of December 31, 2002, Cooperativa de Seguros Múltiples de Puerto Rico ranked third in the property and casualty insurance market, with a market share of 13.0%.
The property and casualty insurance market in Puerto Rico is extremely competitive. Due to the slow growth in the economy, there are no new sources that provide continued growth; thus, property and casualty insurance companies tend to compete for the same accounts through price and/or more favorable policy terms and better quality of services. STS competes by reasonably pricing its products and providing efficient services to producers, agents and clients. The knowledgeable, experienced personnel employed by the segment is also an incentive for professional producers to conduct business with STS.
The property and casualty insurance market has been affected by increased costs of reinsurance. The international reinsurance market has been experiencing difficult times and has raised its reinsurance premium rates over the last two years. Recent worldwide catastrophes have, in effect, significantly altered the balance as to negotiating rates, terms and other conditions. The Puerto Rico property and casualty insurance market must pass on these additional costs to its customers, in spite of a recession and an economic slowdown.
Due to its geographical location, the property and casualty insurance operations in Puerto Rico are subject to natural catastrophic activity. Puerto Rico is exposed to two major natural perils (hurricanes and earthquakes), which lead local insurers to rely on the international reinsurance market in order to provide enough capacity. Other issues that have plagued the industry over the years, such as asbestos and pollution, have not affected STS’s portfolio. STS maintains a comprehensive reinsurance program as a means of protecting its surplus in the event of a catastrophe.
In addition to its catastrophic reinsurance coverage, STS is required by local regulatory authorities to establish and maintain a trust fund (the Trust) to protect STS from its dual exposure to hurricanes and earthquakes. The Trust is intended to be used as STS’s first layer of catastrophe protection. As of December 31, 2003 and 2002, STS had $21.8 million and $20.8 million, respectively, invested in securities deposited in the Trust (see note 19 of the audited consolidated financial statements).
Considering the significance of reinsurance in protecting its capital base and ensuring ongoing operations, STS is aware of the need to exercise careful business judgment in the selection and approval of its reinsurers. Management believes that a comprehensive and sound reinsurance program has been established to provide the level of protection that STS desires. These reinsurance arrangements do not relieve STS from its direct obligations to its insureds. However, STS believes that the credit risk arising from recoverable balances of reinsurance, if any, is immaterial. STS’ policy is to
enter into reinsurance agreements only with reinsurers considered to be financially sound. The segment’s policy is to require an A.M. Best rating of A- or better or an equivalent rating from other rating agencies.
Effective January 2002, the Office of the Commissioner of Insurance of Puerto Rico deregulated premium rates for certain classes, subdivisions or combinations of insurance in the property and liability lines, in order to promote the economic activity of the insurance industry in Puerto Rico. During the year 2003, the Commissioner of Insurance extended the deregulation period, originally expiring on December 31, 2003, for an additional year.
As of late 2001, pricing began to affect somewhat the local property and casualty insurance market, but at a lower pace than for its United States of America peers. However, the increase in reinsurance costs affected the property and casualty insurance market in Puerto Rico in the same degree as affected in the United States of America. STS’ prompt reaction to these factors, as well as the continued careful underwriting of property risks, should help preserve strong results while accommodating the higher reinsurance costs.
The Corporation’s property and casualty insurance segment has experienced strong operating results over the past three years, and its profitability measures have outperformed industry averages and larger competitors within the local insurance market. Such results have been achieved in an environment of unfavorable market conditions, including soft demand, increased competition, a closed marketplace and rising reinsurance costs affecting Puerto Rico.
Management believes that STS’ commitment to sound underwriting practices, efficient claims reserve monitoring, extensive catastrophe reinsurance programs, and underwriting expense controls, have enabled it to maintain one of the best combined ratios in the local industry. STS, as well as most of its property and casualty peers, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. A controlled business expansion in the commercial market and better underwriting performance of its auto business, evidenced by declining loss ratios, have also contributed to such favorable results. In addition, prudent reinsurance utilization through a sound strategy to control exposures by means of a strict underwriting criteria and protection of retained exposures have also enhanced underwriting results.
LIFE AND DISABILITY INSURANCE SEGMENT
The Corporation participates in the life and disability insurance market through SVTS. The life and disability insurance segment premiums represented 1.4%, 1.2% and 1.2% of the Corporation’s consolidated total premiums for the years 2003, 2002 and 2001, respectively.
SVTS offers a wide variety of life, disability and investment products. Among these are group life insurance, group long and short-term disability insurance, credit life insurance, and the administration of individual retirement accounts and flexible premium deferred annuities. The group life insurance and the long-term disability business represent 43% and 33% of the segment’s business during the 2003, respectively. SVTS’ insurance products are mainly offered to consumers in Puerto Rico through its own network of brokers and independent agents. Also, the segment markets its group life coverage through TSI’s network of exclusive agents. Approximately 27% and 22% of the segment’s premiums during the years 2003 and 2002, respectively, was subscribed through TSI’s agents.
SVTS insures approximately 1,600 groups which represent approximately 350 thousand lives. This makes SVTS the second largest provider of group life insurance in Puerto Rico, with a market share of approximately 18% in 2002. The segment’s nearest competitors in the group life insurance market in Puerto Rico and their related market share as of December 31, 2002 are Cooperativa de Seguros de Vida de Puerto Rico (31%) and National Life Insurance Co. (8%). Cooperativa de Seguros de Vida de Puerto Rico is also the leader in the group life insurance market.
To continue its growth in the life insurance market in Puerto Rico, SVTS plans to introduce new products and services within the group and individual insurance business in the coming years. To distribute its individual insurance products, SVTS created a wholly-owned subsidiary, Smart Solutions Insurance Agency Corporation, which began operations during 2002.
FINANCIAL INFORMATION ABOUT SEGMENTS
Total revenue (with intersegment premiums/service revenues shown separately), net income and total assets attributable to the reportable segments are set forth in note 3 to the consolidated financial statements for the years ended December 31, 2003, 2002 and 2001.
TRADEMARKS
The Corporation considers its trademarks of “Triple-S” and “SSS” very important and material to all segments in which it is engaged. In addition to these, other trademarks used by TSM’s subsidiaries that are considered important have been duly registered with the Department of State of Puerto Rico and the United States Patent and Trademark Office. It is the Corporation’s policy to register all its important and material trademarks in order to protect its rights under applicable corporate and intellectual property laws.
HUMAN RESOURCES AND LABOR MATTERS
As of February 29, 2004, the Corporation had 1,399 full-time employees and 296 temporary employees. TSI has a collective bargaining agreement with the Unión General de Trabajadores, which represents 366 of TSI’s 763 regular employees. The collective bargaining agreement expires on July 31, 2006. The Corporation considers its relations with employees to be good.
Item 2.
Item 2. Properties
TSM owns a seven story (including the basement floor) building located at 1441 F.D. Roosevelt Avenue, in San Juan, Puerto Rico where the main offices of TSM, TSI and ISI are located, and two adjacent buildings, one that houses TCI and certain offices of TSI, and the adjoining parking lot. In addition, TSM is the owner of five floors of a fifteen-story building located at 1510 F.D. Roosevelt Avenue, in Guaynabo, Puerto Rico. These floors house the Internal Auditing Office of TSM, SVTS, STS and some divisions of TSI. The Corporation is planning the construction, on land already owned, of a new five-floor building that will basically house the operations of some divisions of TSI and STS and the operations of ISI, including its mainframe facilities. ISI’s mainframe facilities are currently located in a leased property that will be vacated once the project is completed. In addition, as part of this project the Corporation is also planning the construction of a multi-level parking building which will add approximately 500 parking spaces. The cost of this project is estimated to be approximately $22.0 million. This project is expected to be completed during 2006.
In addition to the properties described above, TSM or its subsidiaries are parties to operating leases that are entered into in the ordinary course of business.
TSM believes that the facilities of the Corporation are in good condition and that the facilities, together with anticipated capital improvements and additions, are adequate to meet its operating needs for the foreseeable future. The need for expansion, upgrading and refurbishment of facilities is continually evaluated in order to remain competitive and to take advantage of market opportunities.
Item 3.
Item 3. Legal Proceedings.
(a)
As of December 31, 2003, the Corporation is a defendant in various lawsuits arising out of the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the Corporation’s consolidated financial position or results of operations.
(b)
Drs. Carlyle Benavent and Ibrahim Pérez (the plaintiffs) caused the initiation of an administrative proceeding before the Puerto Rico Insurance Commissioner against TSI and TSM alleging the illegality of the repurchase and subsequent sale of 1,582 shares of TSI’s common stock due to the fact that the ultimate purchasers of said shares where selected on an improper and selective basis by the Corporation in violation of the Puerto Rico Insurance Code. The plaintiffs alleged that they were illegally excluded from participation in the sale of shares by TSI due to the illegally selective nature of the sale of shares and that, consequently, the sale of shares should be annulled.
On December 1996, the Commissioner of Insurance issued an order to annul the sale the 1,582 shares that TSI had repurchased from the estate of deceased stockholders. Consequently, the sale of 1,582 shares was cancelled and the purchase price was returned to each former stockholder. In the year 2000, the Commissioner of Insurance further ordered that all corporate decisions undertaken by TSI through the vote of its stockholders on record, be ratified in a stockholders’ meeting or in a subsequent referendum.
In March 2002, the Commissioner of Insurance stated that the ratification of the corporate reorganization was not required and that TSI had complied with the Commissioner’s order of October 1999 related to the
corporate reorganization. Thereafter, the plaintiffs filed a petition for review of the Commissioner’s determination before the Puerto Rico Circuit Court of Appeals.
On October 2002, the Court of Appeals issued an order requiring the Commissioner of Insurance to order a meeting of stockholders to ratify TSI’s corporate reorganization and the change of name of TSI from “Seguros de Servicios de Salud de Puerto Rico, Inc.” to “Triple-S, Inc.”. TSI and TSM’s filed motions of reconsideration. The Puerto Rico’s Circuit Court of Appeals granted said motions on May 18, 2003. The Circuit Court held that the Commissioner of Insurance had the authority to waive the requirement that a referendum be held to ratify TSI’s reorganization and that therefore the reorganization of TSI was approved by the stockholders, inasmuch as the votes pertaining to the 1,582 shares annulled were not decisive.
On June 26, 2003, the two stockholders presented a writ of certiorari before Puerto Rico’s Supreme Court. The writ was issued by the Supreme Court on August 22, 2003 when it ordered the Circuit Court of Appeals to forward the record of the case. On December 1, 2003, the plaintiffs filed a motion submitting their case on the basis of their original petition. TSI and TSM filed its brief on December 30, 2003, while the Commissioner of Insurance, in turn, filed a separate brief on December 31, 2003. The case is still pending before the Supreme Court.
(c)
On September 4, 2003, José Sánchez and others filed a putative class action complaint against the Corporation, present and former directors of TSM and TSI, and others, in the United States District Court for the District of Puerto Rico, alleging violations under the Racketeer Influenced and Corrupt Organizations Act, better known as the RICO Act. The suit, among other allegations, alleges a scheme to defraud the plaintiffs by acquiring control of TSI through illegally capitalizing TSI and later converting it to a non-profit corporation and depriving the stockholders of their rights. The plaintiffs base their later allegations on the supposed decisions of TSI’s board of directors and stockholders, allegedly made in 1979, to operate with certain restrictions in order to turn TSI into a charitable corporation, basically forever. While this case is still in the very early preliminary stages and has not been certified as a class action, a Motion to Dismiss has been filed by the defendants. On March 15, 2004, plaintiffs filed a response to this motion.
(d)
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 other similarly situated and the Connecticut State Medical Society against the Blue Cross and Blue Shield Association and multiple other insurance companies including TSI. The case is pending before the U.S. District Court for the Southern District of Florida, Miami District.
The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of plaintiff’s property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.
The class action complaint alleges that TSI’s health care plans are the agents of Blue Cross and Blue Shield licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.
Management believes that TSI was made a party to this litigation for the sole reason that TSI is associated with the Blue Cross and Blue Shield Association and that none of the allegations made by the plaintiffs are applicable to TSI. Therefore, TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.
Item 4.
Item 4. Submissions of Matters to a Vote of Security Holders.
Not applicable.
Part II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholders Matters.
MARKET INFORMATION
There is no established public trading market for TSM’s common stock. Sporadic sales of TSM’s common stock have been limited to redemption sales to TSM at the shares’ $40.00 par value or at the amount originally paid for the stock, since the common stock of TSM is not transferable to the general public.
TSM’s Articles of Incorporation and By-Laws establish that only physicians, dentists and certain specified healthcare organizations shall be shareholders of the Corporation. In addition, the Articles of Incorporation and By-Laws establish that no person may own more than 21 shares, or five percent (5%) or more, of the Corporation’s Voting Shares issued and outstanding.
HOLDERS
The only outstanding voting securities of TSM are shares of its common stock, par value $40.00 per share. As of March 15, 2004, there were 8,943 shares of Common Stock outstanding. The number of holders of TSM’s common stock as of March 15, 2004 is 1,765.
DIVIDENDS
TSM has not declared nor paid any dividends since its incorporation. A resolution was approved by the Stockholders at the Annual Meeting held on April 27, 2003 acknowledging that the Board of Directors (the Board) may declare dividends on TSM’s common stock, subject to the Board’s determination that in its best judgment the payment of dividends is financially and legally feasible.
RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information required by this item is incorporated by reference to the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Corporation’s Annual Report.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is incorporated by reference to the section “Quantitative and Qualitative Disclosures About Market Risk” included in the Corporation’s Annual Report.
Item 8.
Item 8. Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS
For the consolidated financial statements as of December 31, 2003 and 2002 for the three years ended December 31, 2003 see Index to financial statements in “Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K” to this Form 10-K.
SELECTED QUARTERLY FINANCIAL DATA
For the selected quarterly financial data corresponding to the years 2003 and 2002, see note 24 of the consolidated financial statements as of December 31, 2003, 2002 and 2001.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures as of December 31, 2003. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of December 31, 2003.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Corporation’s 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 III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The members of the Audit Committee are Mario S Belaval-Ferrer, José Davison-Lampón, Esq., Sonia Gómez de Torres, CPA, Héctor Ledesma-Rodríguez,, Adamina Soto-Martínez, CPA, Manuel Suarez-Mendez, PE, and Vicente J Leon-Irrizarry, CPA. The Board of Directors of the Corporation has determined that Vicente J. León-Irizarry, CPA, Sonia Gómez de Torres, CPA and Adamina Soto-Martínez, CPA are “audit committee financial experts” as defined under U.S. Securities and Exchange Commission (the “SEC”) rules.
For the Code of Ethics adopted by Corporation, see Exhibit 14.1 to this Form 10-K. Other information required by this item is incorporated by reference to the sections “Directors and Executive Officers” and “Principal Holders of the Shares” included in the Corporation’s definitive Proxy Statement.
Item 11.
Item 11. Executive Compensation.
This information required by this item is incorporated by reference to the section “Executive Compensation” included in the Corporation’s definitive Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
This information required by this item is incorporated by reference to the section “Principal Holders of the Shares” included in the Corporation’s definitive Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
This information required by this item is incorporated by reference to the section “Certain Relationships and Related Transactions” included in the Corporation’s definitive Proxy Statement.
Item 14.
Item 14. Principal Accountants Fees and Services
This information required by this item is incorporated by reference to the section “Disclosure of Audit Fees” included in the Corporation’s definitive Proxy Statement.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
A. The following financial statements and reports included on pages 2 through 84 of the Financial Information 2003 section of the Corporation’s Annual Report to Shareholders are incorporated herein by reference:
B. The Corporation did not file with the Securities and Exchange Commission any Current Reports on Form 8-K during the last quarter of the year 2003.
EXHIBITS
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Dr. Fernando Ysern-Borrás
Date:
March 29, 2004
Dr. Fernando Ysern-Borrás
Director and Chairman of the Board
By:
/s/ Dr. Wilmer Rodríguez-Silva
Date:
March 29, 2004
Dr. Wilmer Rodríguez-Silva
Director and Vice-Chairman of the Board
By:
/s/ Dr. Jesús R. Sánchez-Colón
Date:
March 29, 2004
Dr. Jesús R. Sánchez-Colón
Director and Secretary of the Board
By:
/s/ Dr. Arturo Córdova-López
Date:
March 29, 2004
Dr. Arturo Córdova-López
Director and Assistant Secretary of the Board
By:
/s/ Vicente J. León-Irizarry, CPA
Date:
March 29, 2004
Mr. Vicente J. León-Irizarry, CPA
Director and Treasurer of the Board
By:
/s/ Sonia Gómez de Torres, CPA
Date:
March 29, 2004
Ms. Sonia Gómez de Torres, CPA
Director and Assistant Treasurer of the Board
By:
/s/ Ramón M. Ruiz-Comas
Date:
March 29, 2004
Ramón M. Ruiz-Comas
Director and President and Chief Executive Officer
By:
/s/ Dr. Valeriano Alicea-Cruz
Date:
March 29, 2004
Dr. Valeriano Alicea-Cruz
Director
By:
/s/ Dr. Porfirio E. Díaz-Torres
Date:
March 29, 2004
Dr. Porfirio E. Díaz-Torres
Director
By:
/s/ Mario S Belaval
Date:
March 29, 2004
Mr. Mario S Belaval
Director
By:
/s/ José Davison-Lampón, Esq.
Date:
March 29, 2004
Mr. José Davison-Lampón, Esq.
Director
By:
/s/ José Arturo Álvarez-Gallardo
Date:
March 29, 2004
Mr. José Árturo Álvarez-Gallardo
Director
By:
/s/ Juan José León-Soto, Esq.
Date:
March 29, 2004
Mr. Juan José León-Soto, Esq.
Director
By:
/s/ Héctor Ledesma
Date:
March 29, 2004
Mr. Héctor Ledesma
Director
By:
/s/ Dr. Fernando L. Longo
Date:
March 29, 2004
Dr. Fernando L. Longo
Director
By:
/s/ Wilfredo López-Hernández
Date:
March 29, 2004
Dr. Wilfredo López-Hernández
Director
By:
/s/ Dr. Manuel A. Marcial-Seoane
Date:
March 29, 2004
Dr. Manuel A. Marcial-Seoane
Director
By:
/s/ Adamina Soto-Martínez, CPA
Date:
March 29, 2004
Ms. Adamina Soto-Martínez, CPA
Director
By:
/s/ Manuel Suárez-Méndez, P.E.
Date:
March 29, 2004
Mr. Manuel Suárez-Méndez, P.E.
Director
SCHEDULE II
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Financial Statements
December 31, 2003, 2002 and 2001
(With Independent Auditors’ Report Thereon)
Independent Auditors’ Report
The Board of Directors and Stockholders
Triple-S Management Corporation:
Under date of March 15, 2004 we reported on the consolidated balance sheets of Triple-S Management Corporation and Subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2003 as contained in the 2003 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2003. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the Item 15. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG LLP
March 15, 2004
San Juan, Puerto Rico
Stamp No. 1902105 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Balance Sheets
December 31, 2003 and 2002
(Dollar amounts in thousands)
See accompanying Independent Auditors’ Report.
See accompanying Notes to Financial Statements.
* Eliminated on consolidation.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Earnings
Years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
See accompanying Independent Auditors’ Report.
See accompanying Notes to Financial Statements.
* Eliminated on consolidation.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Stockholders’ Equity and Comprehensive Income
Years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
See accompanying Independent Auditors’ Report.
See accompanying Notes to Financial Statements.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
See accompanying Independent Auditors’ Report.
See accompanying Notes to Financial Statements.
* Eliminated on consolidation.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
(1)
Organization
Triple-S Management Corporation (the Company or TSM) was incorporated under the laws of the Commonwealth of Puerto Rico on January 17, 1997 principally, among other things, as the holding company of entities primarily involved in the insurance industry.
The Company has the following wholly owned subsidiaries that are subject to the regulations of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance): (1) Triple-S, Inc. (TSI) which provides hospitalization and health benefits to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations located mainly in Puerto Rico; (2) Seguros de Vida Triple-S, Inc. (SVTS), which is engaged in the underwriting of life and disability insurance policies and the administration of individual retirement annuities; and (3) Seguros Triple-S, Inc. (STS), which is engaged in the underwriting of property and casualty insurance policies. The Company and TSI are members of the Blue Cross and Blue Shield Association (BCBSA).
The Company also has two other wholly owned subsidiaries, Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TC). ISI is mainly engaged in providing data processing services to the Company and its subsidiaries. TC is mainly engaged as a third-party administrator for TSI in the administration of the Commonwealth of Puerto Rico Healthcare Reform’s business (the Reform). Also, TC provides healthcare advisory services to TSI and other health insurance-related services to the health insurance industry.
A substantial majority of the Company’s business activity is with insureds located throughout Puerto Rico, and as such, the Company is subject to the risks associated with the Puerto Rico economy.
(2)
Significant Accounting Policies
The significant accounting policies followed by the Company are set forth in the notes to the consolidated financial statements of the Company incorporated by reference into Item 15 to the Form 10K.
(3)
Property and Equipment, Net
Property and equipment are composed of the following:
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
The loan and note payable previously described are secured by a lien on the Company’s land, building, and substantially all leasehold improvements, as collateral for the term of the loans under a continuing general security agreement. These credit facilities also contain loan covenants. The Company was in compliance with such covenants throughout 2002 and 2001.
Interest expense on the above debts amounted to $1,302 and $2,150 and $3,365 in the three-year period ended December 31, 2003.
(6)
Income Taxes
The Company is subject to Puerto Rico income taxes. Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries.
Under a resolution prepared by the Puerto Rico House of Representatives (the House of Representatives), during 2002 and 2003, the Banking and Insurance Committee conducted an investigation of TSI’s tax treatment under rulings issued by the Department of Treasury that granted TSI’s tax-exempt status. A similar investigation was approved by the Puerto Rico Senate. In addition, the Department of Treasury conducted an audit of TSI’s compliance with the requirements of the tax ruling. All three investigations on the tax exemption have been concluded. The Department of Treasury concluded its investigations with no findings. The House of Representatives and the Puerto Rico Senate concluded their investigations by recommending and providing for the termination of the tax exemption solely on account of TSI’s for-profit status and the fact that no other for-profit health insurer in Puerto Rico enjoys a tax exemption under Section 1101(6) of the Puerto Rico Internal Revenue Code of 1994, as amended (the P.R. Code). The Company was notified on June 18, 2003 by the Department of Treasury that the ruling recognizing TSI’s tax exemption was terminated effective December 31, 2002. The termination of the ruling responds to a new public policy set by the Department of Treasury according to which tax exemptions under Section 1106(6) of the P.R. Code will not apply to corporations organized as for-profit, which is TSI’s case.
On July 31, 2003, TSM and TSI executed a closing agreement with the Department of Treasury. In general, the terms of the closing agreement established the termination of TSI’s tax exemption effective December 31, 2002. Accordingly, since TSI’s tax status changed effective January 1, 2003, TSI is subject to Puerto Rico income taxes as an other than life insurance entity, as defined in the P.R. Code.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
The closing agreement also stipulates that TSM will pay taxes (Department of Treasury tax assessment) on TSI’s accumulated statutory net income, in accordance with the income recognition methodology applied by the Secretary of the Treasury in the closing agreement and the ruling mentioned above. This tax ruling established the following methodology for TSM to determine its tax liability:
The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to losses before income taxes as a result of the following:
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
Deferred income taxes reflect the tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The net deferred tax asset at December 31, 2003 and 2002 is composed of the following:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
(7)
Transaction with Related Parties
The following are the significant related-party transactions made for the three-year period ended December 31, 2003:
(8)
Contingencies
At December 31, 2003, the Company is defendant in various lawsuits in the ordinary course of business. In the opinion of management, with the advice of its legal counsel, the ultimate disposition of these matters
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
will not have a material adverse effect on the consolidated financial position and results of operations of the Company.
Schedule III
Triple-S Management Corporation and Subsidiaries
Supplementary Insurance Information
For the years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
[Additional columns below]
[Continued from above table, first column(s) repeated]
See accompanying independent auditors’ report to financial statements.
Schedule IV
Triple-S Management Corporation and Subsidiaries
Reinsurance
For the years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
See accompanying independent auditors’ report to financial statements.
Schedule V
Triple-S Management Corporation and Subsidiaries
Valuation and Qualifying Accounts
For the years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands)
See accompanying independent auditors’ report to financial statements.
(1)
Represents the recovery of accounts previously written-off.
(2)
Deductions represent the write-off of accounts deemed uncollectible.