10-Q 1 g77580e10vq.txt TRIPLE-S MANAGEMENT CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] 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) PUERTO RICO 66-0555678 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1441 F.D. ROOSEVELT AVENUE SAN JUAN, PUERTO RICO 00920 (Address of principal executive offices) (Zip code) (787) 749-4949 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 1 ------------------------------------ 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. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. TITLE OF EACH CLASS OUTSTANDING AT JUNE 30, 2002 ------------------- ---------------------------- Common Stock, $40.00 par value 9,611 ================================================================================ TRIPLE-S MANAGEMENT CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31 2001 3 Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001 4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the three months and six months ended June 30, 2002 and 2001 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 6 and 2001 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 44 PART II - OTHER INFORMATION Item 1. Legal Proceedings 43 Item 4. Submissions of Matters to a Vote of Security Holders 43 Item 5. Other Information 45 Item 6. Exhibits and Reports on Form 8-K 46 SIGNATURES 47
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Dollar amounts in thousands)
(UNAUDITED) JUNE 30, DECEMBER 31, 2002 2001 ------------------------------------------------------------------------------------------------------------------------- ASSETS Investments and cash: Securities held for trading, at fair value: Fixed maturities $ 36,329 38,107 Equity securities 45,814 50,743 Securities available for sale, at fair value: Fixed maturities 311,154 286,505 Equity securities 40,301 37,829 Securities held to maturity, at amortized cost: Fixed maturities 2,388 3,779 Cash and cash equivalents 80,026 80,970 ------------------------------------------------------------------------------------------------------------------------- Total investments and cash 516,012 497,933 ------------------------------------------------------------------------------------------------------------------------- Premiums and other receivables, net 93,230 74,872 Deferred policy acquisition costs 11,480 9,550 Property and equipment, net 37,744 39,090 Other assets 31,602 34,613 ------------------------------------------------------------------------------------------------------------------------- Total assets $ 690,068 656,058 ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Claim liabilities: Claims processed and incomplete, and future policy benefits $ 123,076 114,599 Unreported losses 107,584 103,240 Unpaid loss-adjustment expenses 12,825 11,601 ------------------------------------------------------------------------------------------------------------------------- Total claim liabilities 243,485 229,440 ------------------------------------------------------------------------------------------------------------------------- Unearned premiums 61,241 58,306 Individual retirement annuities 14,186 17,426 Liability to Federal Employees Health Benefits Program 7,781 12,130 Accounts payable and accrued liabilities 102,667 97,078 Loans payable to bank 53,717 55,650 ------------------------------------------------------------------------------------------------------------------------- Total liabilities 483,077 470,030 ------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, $40 par value. Authorized 12,500 shares; issued and outstanding 9,611 and 9,714 at June 30, 2002 and December 31, 2001, respectively 384 389 Additional paid-in capital 150,406 150,405 Operating reserve 29,968 14,250 Accumulated other comprehensive income - net unrealized gain on securities available for sale 26,233 20,984 ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 206,991 186,028 ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 690,068 656,058 -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 3 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) For the three months and six months ended June 30, 2002 and 2001 (Dollar amounts in thousands)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2002 2001 2002 2001 --------- --------- --------- --------- REVENUES: Premiums earned, net $ 308,478 275,902 618,320 554,366 Amounts attributable to self-funded arrangements 37,427 33,034 72,265 66,337 Less amounts attributable to claims under self-funded arrangements (36,379) (30,821) (68,837) (63,008) --------- --------- --------- --------- 309,526 278,115 621,748 557,695 Net investment income 6,359 6,362 12,349 12,560 Net realized investment gains (losses) 6 1,571 (150) 2,380 Net unrealized investment gain (loss) on trading securities (5,662) (838) (5,377) (3,124) Other income, net 211 4,484 424 4,532 --------- --------- --------- --------- Total revenue 310,440 289,694 628,994 574,043 --------- --------- --------- --------- BENEFITS AND EXPENSES: Claims incurred 260,878 249,420 532,651 493,555 Operating expenses, net of reimbursement for services 38,642 32,967 77,353 66,943 Interest expense 872 1,435 1,991 3,047 --------- --------- --------- --------- Total benefits and expenses 300,392 283,822 611,995 563,545 --------- --------- --------- --------- Income before taxes 10,048 5,872 16,999 10,498 --------- --------- --------- --------- INCOME TAX EXPENSE: Current 318 203 517 491 Deferred 463 114 764 286 --------- --------- --------- --------- Total income taxes 781 317 1,281 777 --------- --------- --------- --------- Net income $ 9,267 5,555 15,718 9,721 --------- --------- --------- --------- Basic net income per share as if the Company operated as a for-profit organization $ 0.79 0.40 1.37 0.73 --------- --------- --------- --------- Basic net income per share as if Triple-S, Inc. operated as a not-for-profit organization $ 0.30 0.27 0.59 0.54 --------- --------- --------- ---------
See accompanying notes to unaudited consolidated financial statements. 4 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income (Unaudited) For the three months and six months ended June 30, 2002 and 2001 (Dollar amounts in thousands)
2002 2001 ----------------------------------------------------------------------------------------------------------- BALANCE AT APRIL 1 $ 189,547 170,679 Stock redemption (1) -- Comprehensive income: Net income 9,267 5,555 Net unrealized change in investment securities 8,178 902 ----------------------------------------------------------------------------------------------------------- Total comprehensive income 17,445 6,457 ----------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30 $ 206,991 177,136 ----------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1 $ 186,028 159,693 Stock redemption (4) 1 Comprehensive income: Net income 15,718 9,721 Net unrealized change in investment securities 5,249 7,721 ----------------------------------------------------------------------------------------------------------- Total comprehensive income 20,967 17,442 ----------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30 $ 206,991 177,136 -----------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 5 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30, 2002 and 2001 (Dollar amounts in thousands)
SIX MONTHS ENDED JUNE 30, 2002 2001 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Premiums collected $ 600,770 538,515 Cash paid to suppliers and employees (72,893) (63,821) Claims losses and benefits paid (518,601) (495,396) Interest received 11,331 13,396 Proceeds from trading securities sold or matured: Fixed securities sold 76,122 12,609 Equity securities 9,609 11,148 Acquisitions of investments in trading portfolio: Fixed maturities (74,557) (14,979) Equity securities (10,137) (13,187) Interest paid (1,320) (2,285) Expense reimbursement from Medicare 5,982 6,017 Contingency reserve funds from FEHBP -- 4,226 --------- -------- Net cash provided by (used in) operating activities 26,306 (3,757) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments sold or matured: Securities available for sale: Fixed maturities sold 15,597 626 Fixed maturities matured 57,392 54,877 Equity securities 2,642 3,104 Securities held to maturity: Fixed maturities matured 1,433 -- Acquisitions of investments: Securities available for sale: Fixed maturities (96,264) (70,733) Capital expenditures (3,250) (2,851) Proceeds from sale of property and equipment 922 339 --------- -------- Net cash used in investing activities (21,528) (14,638) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in outstanding checks in excess of bank balances (151) 7,491 Payments of long term debt (1,933) (1,183) Redemption of common stocks (4) 1 Proceeds from individual retirement annuities 791 1,254 Surrenders of individual retirement annuities (4,425) (2,153) --------- -------- Net cash provided by (used in) financing activities (5,722) 5,410 --------- -------- Net decrease in cash and cash equivalents (944) (12,985) Cash and cash equivalents at beginning of the period 80,970 33,566 --------- -------- Cash and cash equivalents at end of the period $ 80,026 20,581 --------- --------
See accompanying notes to unaudited consolidated financial statements. 6 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) (1) BASIS OF PRESENTATION The accompanying consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries (the "Corporation") are unaudited, except for the balance sheet information as of December 31, 2001, which is derived from the Corporation's audited consolidated financial statements, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, the consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation's Form 10-A for the year ended December 31, 2001. 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 six months ended June 30, 2002 are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform to the current period presentation. (2) SEGMENT INFORMATION The following tables summarize the operations by major operating segment for the three months and six months ended June 30, 2002 and 2001: 7 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- THREE MONTHS ENDED JUNE 30, 2002 Premiums earned, net $ 167,296 123,079 14,364 3,845 -- 308,584 Amounts attributable to self-funded arrangements 37,321 -- -- -- -- 37,321 Less: Amounts attributable to claims under self-funded arrangements (36,379) -- -- -- -- (36,379) Intersegment premiums earned/service revenues 684 -- -- -- 12,691 13,375 ---------- ---------- ---------- ---------- ---------- ---------- 168,922 123,079 14,364 3,845 12,691 322,901 Net investment income 2,759 1,297 1,656 571 -- 6,283 Realized gain (loss) on sale of securities 113 (170) 71 (8) -- 6 Unrealized loss on trading securities (4,442) (387) (833) -- -- (5,662) Other 62 (8) 30 29 -- 113 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 167,414 123,811 15,288 4,437 12,691 323,641 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ 8,612 (1,097) 936 1,249 354 10,054 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 6,898 (555) 1,411 1,523 207 9,484 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 137,558 113,711 8,287 1,322 -- 260,878 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 22,752 10,465 5,141 1,274 12,337 51,969 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 1,739 -- 117 14 -- 1,870 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 206 190 -- 173 -- 569 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 449 145 147 741 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 8 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- THREE MONTHS ENDED JUNE 30, 2001 Premiums earned, net $ 151,403 109,026 12,050 3,266 -- 275,745 Amounts attributable to self-funded arrangements 33,191 -- -- -- -- 33,191 Less: Amounts attributable to claims under self-funded arrangements (30,821) -- -- -- -- (30,821) Intersegment premiums earned/service revenues 212 -- -- -- 2,261 2,473 ---------- ---------- ---------- ---------- ---------- ---------- 153,985 109,026 12,050 3,266 2,261 280,588 Net investment income 2,650 1,156 1,842 620 -- 6,268 Realized gain (loss) on sale of securities 1,654 (50) (33) -- -- 1,571 Unrealized gain (loss)on trading securities (1,200) (23) 385 -- -- (838) Other 4,327 (13) 46 9 -- 4,369 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 161,416 110,096 14,290 3,895 2,261 291,958 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ (4,875) (25) (328) 752 103 (4,373) ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 2,155 692 1,687 1,052 79 5,665 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 138,393 101,501 8,052 1,474 -- 249,420 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 20,467 7,550 4,326 1,040 2,158 35,541 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 985 -- 109 15 -- 1,109 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 400 354 -- 239 -- 993 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 225 90 24 339 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 9 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- SIX MONTHS ENDED JUNE 30, 2002 Premiums earned, net $ 332,294 247,526 30,452 7,658 -- 617,930 Amounts attributable to self-funded arrangements 72,655 -- -- -- -- 72,655 Less: Amounts attributable to claims under self-funded arrangements (68,837) -- -- -- -- (68,837) Intersegment premiums earned/service revenues 1,352 -- -- -- 24,165 25,517 ---------- ---------- ---------- ---------- ---------- ---------- 337,464 247,526 30,452 7,658 24,165 647,265 Net investment income 5,317 2,485 3,234 1,161 -- 12,197 Realized gain (loss) on sale of securities (61) (167) 16 62 -- (150) Unrealized loss on trading securities (4,056) (653) (668) -- -- (5,377) Other 97 (22) 100 53 -- 228 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 338,761 249,169 33,134 8,934 24,165 654,163 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ 9,547 (1,633) 1,097 1,602 770 11,383 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 10,425 (407) 3,143 2,287 475 15,923 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 283,362 229,695 16,088 3,506 -- 532,651 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 44,555 19,464 13,267 2,550 23,395 103,231 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 2,830 -- 240 27 -- 3,097 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 419 417 -- 395 -- 1,231 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 636 196 295 1,127 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 10 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT --------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE and LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- SIX MONTHS ENDED JUNE 30, 2001 Premiums earned, net $ 303,449 217,604 27,058 5,941 -- 554,052 Amounts attributable to self-funded arrangements 66,651 -- -- -- -- 66,651 Less: Amounts attributable to claims under self-funded arrangements (63,008) -- -- -- -- (63,008) Intersegment premiums earned/service revenues 423 -- -- -- 4,560 4,983 ---------- ---------- ---------- ---------- ---------- ---------- 307,515 217,604 27,058 5,941 4,560 562,678 Net investment income 5,197 2,281 3,648 1,242 -- 12,368 Realized gain on sale of securities 2,217 90 38 30 -- 2,375 Unrealized loss on trading securities (2,372) (307) (445) -- -- (3,124) Other 4,245 (41) 115 17 -- 4,336 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 316,802 219,627 30,414 7,230 4,560 578,633 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ (6,389) 1,011 396 1,064 357 (3,561) ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 2,036 2,330 3,302 1,733 252 9,653 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 273,157 201,695 15,880 2,823 -- 493,555 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 40,747 14,898 10,782 2,054 4,203 72,684 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 2,016 -- 217 29 -- 2,262 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 863 703 -- 482 -- 2,048 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 450 138 105 693 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 11 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) Balance Sheet Items
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- AS OF JUNE 30, 2002 Segment assets $ 318,087 102,555 187,817 51,081 941 660,481 ---------- ---------- ---------- ---------- ---------- ---------- Significant noncash item - net change in unrealized gain on securities available for sale $ 3,721 376 447 422 -- 4,966 ---------- ---------- ---------- ---------- ---------- ---------- AS OF DECEMBER 31, 2001 Segment assets $ 287,893 105,319 179,184 50,410 515 623,321 ---------- ---------- ---------- ---------- ---------- ---------- Significant noncash item - net change in unrealized gain on securities available for sale $ 1,036 1,368 1,091 990 -- 4,485 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 12 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 -------- -------- -------- -------- TOTAL REVENUES Total revenues for reportable segments $310,950 289,697 629,998 574,073 Total revenues for other segments 12,691 2,261 24,165 4,560 -------- -------- -------- -------- 323,641 291,958 654,163 578,633 Elimination of intersegment earned premiums (684) (212) (1,352) (423) Elimination of intersegment service revenues (12,691) (2,261) (24,165) (4,560) Unallocated amount - revenues from external sources 174 209 348 393 -------- -------- -------- -------- (13,201) (2,264) (25,169) (4,590) -------- -------- -------- -------- Consolidated total revenues $310,440 289,694 628,994 574,043 -------- -------- -------- -------- PROFIT AND LOSS UNDERWRITING INCOME Underwriting income (loss) for reportable segments $ 9,700 (4,476) 10,613 (3,918) Underwriting income for other segments 354 103 770 357 -------- -------- -------- -------- 10,054 (4,373) 11,383 (3,561) Elimination of TSM charge - rent expense 1,546 1,546 3,092 3,092 TSM general and administrative expenses (1,594) (1,445) (2,731) (2,334) -------- -------- -------- -------- (48) 101 361 758 -------- -------- -------- -------- Consolidated underwriting income (loss) $ 10,006 (4,272) 11,744 (2,803) -------- -------- -------- -------- NET INCOME (LOSS) Net income for reportable segments $ 9,277 5,586 15,448 9,401 Net income for other segments 207 79 475 252 -------- -------- -------- -------- 9,484 5,665 15,923 9,653 -------- -------- -------- -------- Elimination of TSM charges: Rent expense 1,546 1,546 3,092 3,092 Interest expense 206 400 419 863 -------- -------- -------- -------- 1,752 1,946 3,511 3,955 -------- -------- -------- -------- Unallocated amounts related to TSM: General and administrative expenses (1,594) (1,445) (2,731) (2,334) Interest expense (509) (842) (1,179) (1,862) Other revenues (expenses) from external sources 134 231 194 309 -------- -------- -------- -------- (1,969) (2,056) (3,716) (3,887) -------- -------- -------- -------- Consolidated net income (loss) $ 9,267 5,555 15,718 9,721 -------- -------- -------- --------
13 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS OTHER SIGNIFICANT ITEMS
THREE MONTHS ENDED JUNE 30, 2002 ------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ------------------------------------------------------------------------------------------------------------- Claims incurred $ 260,878 - 260,878 Operating expenses 51,969 (13,327) 38,642 Depreciation expense 1,870 291 2,161 Interest expense 569 303 872 Income taxes 741 40 781
THREE MONTHS ENDED JUNE 30, 2001 ------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS* TOTALS ------------------------------------------------------------------------------------------------------------- Claims incurred $ 249,420 - 249,420 Operating expenses 35,541 (2,574) 32,967 Depreciation expense 1,109 336 1,445 Interest expense 993 442 1,435 Income taxes 339 (22) 317
* Adjustments represent TSM operations and the elimination of intersegment charges. 14 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 ----------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ------------------------------------------------------------------------------------------------------------ Claims incurred $ 532,651 - 532,651 Operating expenses 103,231 (25,878) 77,353 Depreciation expense 3,097 576 3,673 Interest expense 1,231 760 1,991 Income taxes 1,127 154 1,281
SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------------------------------------------------------------------------------ SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ------------------------------------------------------------------------------------------------------------ Claims incurred $ 493,555 - 493,555 Operating expenses 72,684 (5,741) 66,943 Depreciation expense 2,262 672 2,934 Interest expense 2,048 999 3,047 Income taxes 693 84 777
* Adjustments represent TSM operations and the elimination of intersegment charges. 15 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31, 2002 2001 ---------------------------------------------------------------------------------------------------- ASSETS Total assets for reportable segments $ 659,540 622,806 Total assets for other segments 941 515 --------------------------------------------------------------------------------------------------- 660,481 623,321 --------------------------------------------------------------------------------------------------- Elimination entries - intersegment receivables (8,835) (5,677) --------------------------------------------------------------------------------------------------- Unallocated amounts: Parent cash, cash equivalents and investments 8,681 7,909 Parent net property and equipment 29,498 30,018 Parent other assets 243 487 --------------------------------------------------------------------------------------------------- 38,422 38,414 --------------------------------------------------------------------------------------------------- Consolidated assets $ 690,068 656,058 ---------------------------------------------------------------------------------------------------
OTHER SIGNIFICANT ITEMS
AS OF JUNE 30, 2002 ---------------------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ---------------------------------------------------------------------------------------------------------------------------- Significant noncash item - net change in unrealized gain on securities available for sale $ 4,966 253 5,249 AS OF DECEMBER 31, 2001 --------------------------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS --------------------------------------------------------------------------------------------------------------------------------- Significant noncash item - net change in unrealized gain on securities available for sale $ 4,485 139 4,624
* Adjustments represent TSM operations and the elimination of intersegment charges. 16 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) (3) PREMIUMS AND OTHER RECEIVABLES Premiums and other receivables as of June 30, 2002 and December 31, 2001 were as follows:
(UNAUDITED) JUNE 30 DECEMBER 31, (dollar amounts in thousands) 2002 2001 --------------------------------------------------------------------------------------------- Premiums $ 50,825 40,373 Self-funded group receivables 13,385 11,241 FEHBP 10,983 5,379 Accrued interest 4,912 4,833 Reinsurance recoverable on paid losses 14,735 13,371 Other 10,978 11,353 --------------------------------------------------------------------------------------------- 105,818 86,550 Less allowance for doubtful receivables 12,588 11,678 --------------------------------------------------------------------------------------------- Total premiums and other receivables $ 93,230 74,872 ---------------------------------------------------------------------------------------------
(4) CLAIM LIABILITIES The activity in the total claim liabilities for the three months ended June 30, 2002 and 2001 is as follows:
(UNAUDITED) THREE MONTHS ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 ---------------------------------------------------------------------------------------------------- Claim liabilities at beginning of the period $ 251,700 184,895 Reinsurance recoverable on claim liabilities (11,749) (10,087) ---------------------------------------------------------------------------------------------------- Net claim liabilities at beginning of the period 239,951 174,808 ---------------------------------------------------------------------------------------------------- Incurred claims and loss adjustment expenses: Current period insured events 258,309 248,597 Prior period insured events 2,569 823 ---------------------------------------------------------------------------------------------------- Total 260,878 249,420 ---------------------------------------------------------------------------------------------------- Payments of losses and loss adjustment expenses: Current period insured events 248,766 230,619 Prior period insured events 19,928 20,434 ---------------------------------------------------------------------------------------------------- Total 268,694 251,053 ---------------------------------------------------------------------------------------------------- Net claim liabilities at end of the period 232,135 173,175 Reinsurance recoverable on claim liabilities 11,350 10,256 ---------------------------------------------------------------------------------------------------- Claim liabilities at end of the period $ 243,485 183,431 ----------------------------------------------------------------------------------------------------
17 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) The activity in the total claim liabilities for the six months ended June 30, 2002 and 2001 is as follows:
(UNAUDITED) SIX MONTHS ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 -------------------------------------------------------------------------------------------------- Claim liabilities at beginning of the period $ 229,440 183,231 Reinsurance recoverable on claim liabilities (10,062) (7,636) ----------------------------------------------------------------------------------------------- Net claim liabilities at beginning of the period 219,378 175,595 ----------------------------------------------------------------------------------------------- Incurred claims and loss adjustment expenses: Current period insured events 536,325 496,364 Prior period insured events (3,674) (2,809) ----------------------------------------------------------------------------------------------- Total 532,651 493,555 ----------------------------------------------------------------------------------------------- Payments of losses and loss adjustment expenses: Current period insured events 403,151 367,855 Prior period insured events 116,743 128,120 ----------------------------------------------------------------------------------------------- Total 519,894 495,975 ----------------------------------------------------------------------------------------------- Net claim liabilities at end of the period 232,135 173,175 Reinsurance recoverable on claim liabilities 11,350 10,256 ----------------------------------------------------------------------------------------------- Claim liabilities at end of the period $ 243,485 183,431 -----------------------------------------------------------------------------------------------
(5) NET INCOME (LOSS) AVAILABLE TO STOCKHOLDERS AND NET INCOME (LOSS) PER SHARE The Corporation presents only basic earnings per share, which amount consists of the net income (loss) that could be available to common stockholders divided by the weighted-average number of common shares outstanding for the period. The Corporation is a for-profit organization that operates as a not-for-profit organization by virtue of a resolution approved by a majority of the stockholders of the Corporation. As a result, the Corporation does not declare or distribute dividends. This resolution could be amended anytime by the affirmative vote of a majority of the stockholders and thus, dividends could be available for distribution subject to the applicable obligations and responsibilities under the General Corporation Law of Puerto Rico or any contract to which the Corporation is a party. 18 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) In the event that the stockholders of the Corporation decide to operate the Corporation as a for-profit organization and the Board of Directors of the Corporation decides to declare and distribute dividends, the amount of net income (loss) that could be available for distribution would exclude Triple-S, Inc.'s ("TSI") net income, due to TSI's tax-exempt status. TSI's tax-exempt status was obtained through an income tax ruling issued by the Treasury Department of Puerto Rico and reaffirmed through a letter dated July 3, 2001. For purposes of computing the basic earnings per share presented in the consolidated statement of operations, the Corporation considers the operations of TSI as if TSI operated without the income tax exemption. Under this scenario, in order to determine the net income (loss) that could be available to stockholders, the Corporation estimates the Puerto Rico income taxes that would have otherwise resulted from TSI's operations and deducts such amount from the results of operations of each period. TSI's estimate of Puerto Rico income taxes, computed for such purposes, was determined as for an other than life insurance entity, as such term is defined in the Puerto Rico Internal Revenue Code of 1994, as amended. The effective tax rate used was 39% for the three months and six months ended June 30, 2002 and 2001. The following tables set forth the net income that could be available to stockholders if TSI operated without the tax exemption for the three months and six months ended June 30, 2002 and 2001 (dollar amounts in thousands). THREE MONTHS ENDED MARCH 30, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 ------------------------------------------------------------------------------ Net income for the period $ 9,267 5,555 Less tax effect on TSI operations 1,617 1,620 ------------------------------------------------------------------------------ Net income available to stockholders $ 7,650 3,935 ------------------------------------------------------------------------------ (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 ---------------------------------------------------------------------------- Net income for the period $ 15,718 9,721 Less tax effect on TSI operations 2,493 2,488 ---------------------------------------------------------------------------- Net income available to stockholders $ 13,225 7,233 ---------------------------------------------------------------------------- 19 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) The following tables set forth the computation of basic earnings per share for the three months and six months ended June 30, 2002 and 2001 (dollar amounts in thousands, except for outstanding shares). THREE MONTHS ENDED MARCH 31, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 ----------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 7,650 3,935 ---------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,626 9,886 ---------------------------------------------------------------------------- Basic net income per share $ 0.79 0.40 ---------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 ------------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 13,225 7,233 ------------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,650 9,886 ------------------------------------------------------------------------------- Basic net income per share $ 1.37 0.73 ------------------------------------------------------------------------------- Should the Corporation decide to preserve the tax exemption granted to TSI, then dividends cannot be declared or distributed from the earnings and profits generated from TSI's operations. The following tables set forth the resulting net income that would otherwise be available for distribution after excluding the net result of operations of TSI for the three months and six months ended June 30, 2002 and 2001 (dollar amounts in thousands). 20 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) THREE MONTHS ENDED MARCH 31, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 ------------------------------------------------------------------------------- Net income for the period $ 9,267 5,555 Less TSI operations 6,343 2,842 ------------------------------------------------------------------------------- Net income available to stockholders $ 2,924 2,713 ------------------------------------------------------------------------------- (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 ---------------------------------------------------------------------------- Net income for the period $ 15,718 9,721 Less TSI operations 10,018 4,365 ---------------------------------------------------------------------------- Net income available to stockholders $ 5,700 5,356 ---------------------------------------------------------------------------- The following tables set forth the computation of basic net income per share for the three months and six months June 30, 2002 and 2001 if the Corporation excludes TSI's results of operations (dollar amounts in thousands, except for outstanding shares):
THREE MONTHS ENDED MARCH 31, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 ---------------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 2,924 2,713 ---------------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,626 9,886 ---------------------------------------------------------------------------------- Basic net income per share $ 0.30 0.27 ----------------------------------------------------------------------------------
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 --------------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 5,700 5,356 --------------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,650 9,886 --------------------------------------------------------------------------------- Basic net income per share $ 0.59 0.54 ---------------------------------------------------------------------------------
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations of Triple-S Management Corporation ("TSM") and its subsidiaries (the "Corporation") for the period from January 1, 2002 to June 30, 2002. Therefore, the following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-A filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2001. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This form and other publicly available documents may include statements that may 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 Corporation's belief regarding future events, any of which, by their nature, are inherently uncertain and outside of the Corporation's control. These statements may address, among other things, 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 conditions 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. The Corporation 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. STRUCTURE OF THE ORGANIZATION 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's subsidiaries: o TSI, a health insurance company serving two major segments: the Commercial Program and the Commonwealth of Puerto Rico Healthcare Reform Program (the "Healthcare Reform") of the Commonwealth of Puerto Rico. 22 o Seguros Triple-S, Inc. ("STS"), a property and casualty insurance company. o Seguros de Vida Triple-S, Inc. ("SVTS"), a life and disability insurance and annuity products company. In addition to the insurance subsidiaries mentioned above, TSM has the following subsidiaries: Interactive Systems, Inc. ("ISI") and Triple-C, Inc. ("TCI"). ISI provides data processing services to Triple-S Management Corporation and its subsidiaries. Effective October 1, 2001, TCI was activated and commenced operations as part of a strategic positioning in the health industry to take advantage of new market opportunities. It is currently engaged as the third-party administrator in the administration of the Healthcare Reform business. The Healthcare Reform business was administered through a division of TSI until September 30, 2001. It also provides healthcare advisory services and other health-related services to TSI. TSM is organized as a for-profit organization that operates as a not-for-profit organization by virtue of a resolution approved by a majority of the stockholders of the Corporation. As a result, TSM does not declare or distribute dividends. This resolution could be amended anytime by the affirmative vote of a majority of the stockholders and thus, dividends could be available for distribution, subject to the applicable obligations and responsibilities under the General Corporations Law of Puerto Rico or any contract to which the Corporation is a party. In the event the stockholders of the Corporation decide to operate the Corporation as a for-profit organization and the Board of Directors of the Corporation decides to declare and distribute dividends, the amount of net income (loss) that could be available for distribution would exclude TSI's net income due, to TSI's tax exempt status. TSI's tax-exempt status was obtained through an income tax ruling issued by the Treasury Department of Puerto Rico and reaffirmed through a letter dated July 3, 2001. As a result of the above conditions, the portion of the consolidated net income (loss) disclosed in the consolidated financial statements and in this Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form, corresponding to the Health Insurance - Commercial and the Health Insurance - Healthcare Reform segments, is not available for distribution to shareholders. RECENT DEVELOPMENTS In 1994, the Commonwealth of Puerto Rico (the "Commonwealth") privatized the delivery of services to the medically indigent population in Puerto Rico, by contracting with private health insurance companies instead of providing health services directly to such population. The Commonwealth originally divided the Island into ten geographical areas. Each geographical area was awarded to a health insurer doing business in Puerto Rico through a competitive process requesting proposals from the industry. Prior to June 30, 2002, TSI's Healthcare Reform segment provided coverage to beneficiaries in the following geographical areas: North, Northwest, Metro-North and Southwest (awarded to TSI effective October 1, 2001). These four areas had a total enrollment of 23 approximately 753,000 beneficiaries, which represented approximately 40.4% of the total eligible beneficiaries of the population. All 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. TSI participated in the bidding process and submitted proposals to renew each of the existing contracts and also to serve additional geographical areas. Commencing on July 1, 2002, TSI was awarded three of the eight geographical areas: North, Metro-North and Southwest. The three areas granted to TSI are expected to have a total enrollment of 688,000 qualified members, which represent approximately 39.2% of the total eligible beneficiaries. The expected enrollment is approximately 5.7% less than the average enrollment as of June 30, 2002. The decrease in enrollment was not significant and premium rates were increased by approximately 6.3%. All Healthcare Reform contracts were negotiated for a term of three years; premium rates, however, are negotiated annually. As of July 1, 2002, three local insurance companies are participating in the Healthcare Reform: TSI, Humana and Medical Card Systems. Effective January 2002, the Office of the Commissioner of Insurance of Puerto Rico suspended filing requirements of premium rates for certain classes, subdivisions or combinations of insurance in order to promote the economic activity in the insurance industry in Puerto Rico. The classes, subdivisions or combinations of insurance covered by this deregulation are related to commercial property and liability risks. Smart Solutions Insurance Agency, a wholly-owned subsidiary of SVTS, began operations effective July 2002. This insurance agency was created to distribute the individual insurance products that are to be offered by the life and disability insurance segment. ADOPTION OF ACCOUNTING STANDARD Effective January 1, 2002, the Corporation adopted the Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The adoption of this standard did not have a material impact on the Corporation's financial position or results of operations. GENERAL INFORMATION Substantially all of the revenues of the Corporation are generated from premiums earned and investment income. Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. A 24 portion of the claims incurred for each period consists of a management and actuarial estimate of claims incurred but not reported to the segment during the period. Each segment's results of operations depend largely on their ability to accurately predict and effectively manage these claims. Administrative expenses comprise general, selling, commissions, depreciation and payroll and payroll related expenses. The Corporation (on a consolidated basis and for each reportable segment), along with most insurance entities, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. The loss ratio is the claims incurred divided by the premiums earned, net and fee revenue. The expense ratio is the operating expenses divided by the premiums earned, net and fee revenue. The combined ratio is the sum of the loss ratio and the expense ratio. These ratios are relative measurements that describe, for every $100 of premiums earned, net and fee revenue, the costs of claims and operating expenses. The combined ratio represents the total cost per $100 of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting loss. 25 CONSOLIDATED OPERATING RESULTS The analysis in this section provides an overall view of the consolidated statements of operations and key financial information. 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 SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED EARNED PREMIUMS, NET AND FEE REVENUE: Health Insurance - Commercial Program $ 168,238 153,773 336,112 307,092 Health Insurance - Healthcare Reform 123,079 109,026 247,526 217,604 Property and casualty 14,364 12,050 30,452 27,058 Life and disability 3,845 3,266 7,658 5,941 --------------------------------------------------------------------------------------------------------------------- 309,526 278,115 621,748 557,695 --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED CLAIMS INCURRED $ 260,878 249,420 532,651 493,555 CONSOLIDATED OPERATING EXPENSES 38,642 32,967 77,353 66,943 --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATING COSTS $ 299,520 282,387 610,004 560,498 --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED LOSS RATIO 84.3% 89.7% 85.7% 88.5% CONSOLIDATED EXPENSE RATIO 12.5% 11.9% 12.4% 12.0% --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED COMBINED RATIO 96.8% 101.5% 98.1% 100.5% --------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 6,359 6,362 12,349 12,560 REALIZED GAIN (LOSS) ON SALE OF SECURITIES 6 1,571 (150) 2,380 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (5,662) (838) (5,377) (3,124) --------------------------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 703 7,095 6,822 11,816 --------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE: Current $ 318 203 517 491 Deferred 463 114 764 286 --------------------------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED INCOME TAX EXPENSE $ 781 317 1,281 777 --------------------------------------------------------------------------------------------------------------------- Consolidated net income (loss) per segment: Health Insurance - Commercial Program $ 6,898 2,155 10,425 2,036 Health Insurance - Healthcare Reform (555) 692 (407) 2,330 Property and casualty 1,411 1,687 3,143 3,302 Life and disability 1,523 1,052 2,287 1,733 Other (10) (31) 270 320 --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED NET INCOME $ 9,267 5,555 15,718 9,721 ---------------------------------------------------------------------------------------------------------------------
26 Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Consolidated earned premiums, net and fee revenue for the three months ended June 30, 2002 increased by $31.4 million or 11.3% when compared to the consolidated earned premiums, net and fee revenue for the same period of last year. This increase is mostly due to a combined increase of $28.5 million in the earned premiums, net and fee revenue of the Health Insurance - Commercial Program and Health Insurance - Healthcare Reform segments. o The earned premiums, net and fee revenue corresponding to the Health Insurance - Commercial segment increased by $14.5 million or 9.4% during this period. This increase in premiums for this segment is attributed to the combined effect of increased premium rates and a net increase in total enrollment. o The earned premiums corresponding to the Health Insurance - Healthcare Reform segment increased by $14.0 million or 12.9% during this period. This increase is the result of increases in membership during the period and a decrease in premium rates due to the exclusion of mental health and substance abuse benefits from the coverage of the Healthcare Reform insurance policy effective October 1, 2001. o The earned premiums of the remaining segments increased by $2.9 million or 18.9% during this period. Consolidated claims incurred for the three months ended June 30, 2002 reflect an increase of $11.5 million, or 4.6%, when compared to the claims incurred for the three months ended June 30, 2001. The increase in the consolidated claims incurred is directly related to the Corporation's increased volume of business. The consolidated loss ratio reflects a decrease of 5.4 percentage points during this period. The decrease in the loss ratio is the result of management's ability to adjust its pricing strategy to cope with the increase in claims costs and the implementation of several measures for cost containment. The consolidated expense ratio for the three months ended June 30, 2002 has remained similar to the consolidated expense ratio for the same period of the prior year, reflecting an increase of 0.6 percentage points. The consolidated realized gain on sale of securities of $6 thousand for the three months ended June 30, 2002 is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available-for-sale securities. During the three months ended June 30, 2001, the Corporation had a consolidated realized gain of $1.6 million, which was mainly due to the sale of common stocks of Popular Inc. that generated a realized gain of approximately $1.3 million. The consolidated unrealized loss on trading securities of $5.7 million and $838 thousand for the three months ended June 30, 2002 and 2001, respectively, was the result of investments held by the Health Insurance - Commercial Program, Health Insurance - Healthcare Reform and the Property and Casualty Insurance segments. This unrealized 27 loss is mostly attributed to unrealized losses in the portfolios held by such segments in equity holdings that replicate the performance of the Standard & Poors 500 Index (S&P 500 Index). The Corporation experienced higher consolidated unrealized loss during the three months ended June 30, 2002 than during the three months ended June 30, 2001. This is due to the fact that the S&P 500 Index had a better performance during the second quarter of 2001 than during the second quarter of 2002. The S&P 500 Index experienced a decrease of 13.7% at the end of the second quarter of 2002, while it experienced an increase of 5.5% during at the end of the second quarter of 2001. Total consolidated income tax expense for the three months ended June 30, 2002 increased by $464 thousand when compared to consolidated income tax expense for the same period of last year. This increase is mostly due to the following: o Increase in the deferred income tax expense of $349 thousand during this period. This increase is mostly due to the increase in the deferred income tax expense of the Property and Casualty Insurance segment of $330 thousand during this period. The increase in the deferred income tax expense in the Property and Casualty Insurance segment is due to the increase in the segment's deferred policy acquisition costs and the contributions to the catastrophe loss reserve trust fund. o Increase in the current income tax expense of $115 thousand during this period. This increase is mostly due to better results of operations of the Corporation's taxable entities and to the fact that in the year 2002, the Corporation has a new subsidiary, TCI, which is a taxable entity. Total income tax expense for TCI for the three months ended June 30, 2002 amounts to $70 thousand. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Consolidated earned premiums, net and fee revenue for the six months ended June 30, 2002 increased by $64.1 million, or 11.5%, when compared to the consolidated earned premiums, net and fee revenue for the same period of last year. This increase is mostly due to a combined increase of $59.0 million in the earned premiums, net and fee revenue of the Health Insurance - Commercial Program and Health Insurance - Healthcare Reform segments. o The earned premiums, net and fee revenue corresponding to the Health Insurance - Commercial segment increased by $29.0 million or 9.5% during this period. This increase in premiums for this segment is attributed to the combined effect of increased premium rates and a net increase in total enrollment. o The earned premiums corresponding to the Health Insurance - Healthcare Reform segment increased by $30.0 million or 13.8% during this period. This increase is the net result of increases in membership during the period and a decrease in premium rates due to the exclusion of mental health and substance 28 abuse benefits from the coverage of the Healthcare Reform insurance policy effective October 1, 2001. o The earned premiums of the remaining segments increased by $5.1 million or 24.2% during this period. Consolidated claims incurred for the six months ended June 30, 2002 reflect an increase of $39.1 million, or 7.9%, when compared to the claims incurred for the six months ended June 30, 2001. The increase in the consolidated claims incurred is directly related to the Corporation's increased volume of business. The consolidated loss ratio reflects a decrease of 2.8 percentage points during this period. The decrease in the loss ratio is the result of management's ability to adjust its pricing strategy to cope with the increase in claims costs and the implementation of several measures for cost containment. The consolidated expense ratio for the six months ended June 30, 2002 has remained similar to the consolidated expense ratio for the same period of the prior year, reflecting an increase of only 0.4 percentage points. The consolidated realized loss on sale of securities of $150 thousand for the six months ended June 30, 2002 is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available-for-sale securities. During the six months ended June 30, 2001, the Corporation had a consolidated realized gain of $2.3 million, which was mainly due to the sale of common stocks of Popular Inc. that generated a realized gain of approximately $1.3 million and also to the normal portfolio turnover of the trading and available-for-sale securities. The consolidated unrealized loss on trading securities of $5.4 million and $3.1 million for the six months ended June 30, 2002 and 2001, respectively, was the result of investments held by the Health Insurance - Commercial Program, Health Insurance - Healthcare Reform and the Property and Casualty Insurance segments. This unrealized loss is mostly attributed to losses in the portfolios held by such segments in equity holdings that replicate the performance of the Standard & Poors 500 Index (S&P 500 Index). The Corporation experienced higher consolidated unrealized loss during the six months ended June 30, 2002 than during the six months ended June 30, 2001. This is due to the fact that the S&P 500 Index had a better performance during the first six months of 2001 than during the first six months of 2002. The S&P 500 Index experienced a decrease of 13.8% during the first six months of 2002, while it experienced a decrease of 7.3% during the first six months of 2001. Total consolidated income tax expense for the six months ended June 30, 2002 increased by $504 thousand when compared to consolidated tax expense for the same period of last year. This increase is mostly due to an increase in the deferred income tax expense of $478 thousand during this period. The increase in the deferred income tax expense is mostly due to the increase in the deferred income tax expense of the Property and Casualty Insurance segment of $336 thousand during this period. The increase in the deferred income tax expense of the Property and Casualty Insurance segment is due to the 29 increase in the segment's deferred policy acquisition costs and the contributions to the catastrophe loss reserve trust fund. HEALTH INSURANCE - COMMERCIAL PROGRAM OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 ---------------------------------------------------------------------------------------------------------- ENROLLMENT: Corporate accounts 313,037 320,647 313,037 320,647 Self-funded employers 125,098 121,144 125,098 121,144 Individual accounts 84,058 76,786 84,058 76,786 Federal employees 55,677 55,847 55,677 55,847 Local government employees 43,445 41,141 43,445 41,141 ---------------------------------------------------------------------------------------------------------- TOTAL ENROLLMENT 621,315 615,565 621,315 615,565 ---------------------------------------------------------------------------------------------------------- Earned premiums $ 167,980 151,615 333,646 303,872 Amounts attributable to self-funded arrangements 37,321 33,190 72,655 66,650 Less: Amounts attributable to claims under self-funded arrangements (36,379) (30,821) (68,837) (63,008) ---------------------------------------------------------------------------------------------------------- EARNED PREMIUMS AND FEE REVENUE $ 168,922 153,984 337,464 307,514 ---------------------------------------------------------------------------------------------------------- CLAIMS INCURRED $ 137,558 138,393 283,362 273,158 OPERATING EXPENSES 22,752 20,467 44,555 40,747 ---------------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING COSTS $ 160,310 158,860 327,917 313,905 ---------------------------------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ 8,612 (4,876) 9,547 (6,391) ---------------------------------------------------------------------------------------------------------- LOSS RATIO 81.4% 89.9% 84.0% 88.8% EXPENSE RATIO 13.5% 13.3% 13.2% 13.3% ---------------------------------------------------------------------------------------------------------- COMBINED RATIO 94.9% 103.2% 97.2% 102.1% ---------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,759 2,650 5,317 5,197 REALIZED GAIN (LOSS) ON SALE OF SECURITIES 113 1,635 (61) 2,217 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (4,442) (1,200) (4,056) (2,372) ---------------------------------------------------------------------------------------------------------- TOTAL NET INVESTMENT INCOME $ (1,570) 3,085 1,200 5,042 ---------------------------------------------------------------------------------------------------------- NET INCOME $ 6,898 2,155 10,425 2,036 ----------------------------------------------------------------------------------------------------------
30 Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Earned premiums and fee revenue for the three months ended June 30, 2002 reflect an increase of $14.9 million, or 9.7%, when compared to the three months ended June 30, 2001. This increase is the result of the following: o Since the last semester of 1999, this segment monitors premium rates, particularly in the rated Corporate Accounts business. Increases in premium rates account for approximately 84.0% of the increase experienced in earned premiums and fee revenue for the period. o Total enrollment as of June 30, 2002 increased by 5,750 members, or 0.9%, when compared to the enrollment as of the same date of last year. The increase in enrollment is mostly reflected in the Individual Accounts, Self-funded Employers and Local Government Employees membership, which membership increased by 7,272, or 9.5%, 3,954, or 3.3% and 2,304, or 5.6%, during this period, respectively. The enrollment of the Corporate Accounts groups decreased by 7,610 members, or 2.4%, during this period. The net increase in enrollment as of June 30, 2002 compared to the enrollment as of June 30, 2001 represents approximately 16.0% of the increase experienced in the earned premiums and fee revenue for the period. Claims incurred during the three months ended June 30, 2002 decreased by $835 thousand or 0.6% when compared to the same period in 2001. This decrease is due to a decrease in the loss ratio of 8.5 percentage points during this period. The improvement in the loss ratio is the result of better premium pricing and claims costs containment measures established by the segment throughout the years. As a result of these cost containment initiatives, cost and utilization trends have remained at levels consistent with pricing and margin objectives. During the three months ended June 30, 2002, the utilization trends of the segment were lower than expected, fact that has a direct impact in the loss ratio. The operating expenses for the three months ended June 30, 2002 reflect an increase of $2.3 million, or 11.2%, when compared to the three months ended June 30, 2001. This increase is due to the increase in the costs incurred in the acquisition of new business, such as marketing and commission expenses, and in payroll and payroll related expenses. The expense ratio for the three months ended June 30, 2002 increased only 0.2 percentage points compared to the three months ended June 30, 2001. 31 Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Earned premiums and fee revenues for the six months ended June 30, 2002 reflect an increase of $29.9 million, or 9.7%, when compared to the six months ended June 30, 2001. This increase is the result of the following: o Since the last semester of 1999, this segment monitors premium rates, particularly in the rated Corporate Accounts business. Increases in premium rates account for approximately 75.0% of the increase experienced in earned premiums and fee revenue for the period. o Total enrollment as of June 30, 2002 increased by 5,750 members, or 0.9%, when compared to the enrollment as of the same date of last year. The increase in enrollment is mostly reflected in the Individual Accounts, Self-funded Employers and Local Government Employees membership, which membership increased by 7,272, or 9.5%, 3,954, or 3.3% and 2,304, or 5.6%, during this period, respectively. The enrollment of the Corporate Accounts groups decreased by 7,610 members, or 2.4%, during this period. The net increase in enrollment as of June 30, 2002 when compared to the enrollment as of June 30, 2001 represents approximately 25.0% of the increase experienced in the earned premiums and fee revenue for the period. Claims incurred during the six months ended June 30, 2002 increased by $10.2 million, or 3.7%, when compared to the same period in 2001. This increase is due to the increase in membership, together with a decrease in the loss ratio of 4.8 percentage points during this period. The improvement in the loss ratio is the result of better premium pricing and claims costs containment measures established by the segment throughout the years. As a result of these cost containment initiatives, cost and utilization trends have remained at levels consistent with pricing and margin objectives. In addition, the implementation of pharmacy costs containment programs have maintained pharmacy costs trends at single digit numbers during the six months ended June 30, 2002. The operating expenses for the six months ended June 30, 2002 reflect an increase of $3.8 million, or 9.3%, when compared to the six months ended June 30, 2001. This increase is due to the increase in the costs incurred in the acquisition of new business, such as marketing and commission expenses, and in payroll and payroll related expenses. The expense ratio for the six months ended June 30, 2002 decreased only 0.1 percentage points compared to the six months ended June 30, 2001. 32 HEALTH INSURANCE - HEALTHCARE REFORM PROGRAM OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------- AVERAGE ENROLLMENT: North area 251,251 274,681 254,069 269,153 Northwest area 156,046 166,597 156,335 164,265 Metro-north area 167,529 177,851 168,458 177,381 Southwest area 150,355 - 150,836 - ------------------------------------------------------------------------------------------------------- 725,181 619,129 729,698 610,799 ------------------------------------------------------------------------------------------------------- EARNED PREMIUMS $ 123,079 109,026 247,526 217,604 ------------------------------------------------------------------------------------------------------- CLAIMS INCURRED $ 113,711 101,501 229,695 201,695 OPERATING EXPENSES 10,465 7,550 19,464 14,898 ------------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING COSTS $ 124,176 109,051 249,159 216,593 ------------------------------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ (1,097) (25) (1,633) 1,011 ------------------------------------------------------------------------------------------------------- LOSS RATIO 92.4% 93.1% 92.8% 92.7% EXPENSE RATIO 8.5% 6.9% 7.9% 6.8% ------------------------------------------------------------------------------------------------------- COMBINED RATIO 100.9% 100.0% 100.7% 99.5% ------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 1,297 1,156 2,485 2,281 REALIZED GAIN (LOSS) ON SALE OF SECURITIES (170) (32) (167) 90 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (387) (23) (653) (307) ------------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 740 1,101 1,665 2,064 ------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (555) 692 (407) 2,330 -------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Earned premiums of the Healthcare Reform segment for the three months ended June 30, 2002 increased by $14.0 million, or 12.9%, when compared to the same period of last year. This increase is the result of the following o The average enrollment for this segment increased by 106,052 insureds when comparing the average enrollment for the three months ended June 30, 2002 to the three months ended June 30, 2001. This increase is due to the fact that this segment acquired a new area, the Southwest area, effective October 1, 2001, and therefore also acquired the earned premiums for this area. o Effective October 1, 2001, the Commonwealth excluded mental health and substance abuse benefits from the coverage offered in the policy. Behavioral healthcare and mental healthcare companies now offer these benefits to the Healthcare Reform's qualified membership. The exclusion of these benefits decreased earned premiums by approximately $9.0 million during the three months ended June 30, 2002. Claims incurred during the three months ended June 30, 2002 reflect an increase of $12.2 million, or 12.0%, when compared to the three months ended June 30, 2001. This 33 increase is due to the increase in membership, together with the effect of the exclusion of mental health and substance abuse benefits from the coverage of the policy. During the three months ended June 30, 2002, the loss ratio experienced a decrease of 0.7 percentage points. Operating expenses for the three months ended June 30, 2002, increased by $2.9 million, or 38.6%, when compared to the three months ended June 30, 2001. This increase is due to the segment's increased volume of business from the acquisition of the Southwest area effective October 1, 2001. The expense ratio increased by 1.6 percentage points when compared to the three months ended June 30, 2001. The increase in the expense ratio is due to the fact that during this period the segment began the enrollment process of the new municipalities acquired effective July 1, 2002 (refer to the Recent Developments section). Therefore, the segment has incurred in expenses related to the enrollment process while earned premiums will not be received until July 2002. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Earned premiums of the Healthcare Reform segment for the six months ended June 30, 2002 increased by $29.9 million, or 13.8%, when compared to the same period of last year. This increase is the result of the following: o The average enrollment for this segment increased by 118,899 insureds when comparing the average enrollment for the six months ended June 30, 2002 to the six months ended June 30, 2001. This increase is due to the fact that this segment acquired a new area, the Southwest area, effective October 1, 2001, and therefore also acquired the earned premiums for this area. o Effective October 1, 2001, the Commonwealth excluded mental health and substance abuse benefits from the coverage offered in the policy. Behavioral healthcare and mental healthcare companies now offer these benefits to the Healthcare Reform's qualified membership. The exclusion of these benefits decreased earned premiums by approximately $18.0 million during the six months ended June 30, 2002. Claims incurred during the six months ended June 30, 2002 reflect an increase of $28.0 million, or 13.9%, when compared to the six months ended June 30, 2001. This increase is due to the increase in membership, together with the effect of the exclusion of mental health and substance abuse benefits from the coverage of the policy. During the six months ended June 30, 2002, the loss ratio experienced an increase of 0.1 percentage points. The increase in the loss ratio is the result of higher utilization trends during the period. Operating expenses for the six months ended June 30, 2002, increased by $4.6 million, or 30.6%, when compared to the six months ended June 30, 2001. This increase is due to the segment's increased volume of business from the acquisition of the Southwest area effective October 1, 2001. The expense ratio increased by 1.1 percentage points when compared to the six months ended June 30, 2001. The increase in the expense ratio is 34 due to the fact that during this period the segment began the enrollment process of the new municipalities acquired effective July 1, 2002 (refer to the Recent Developments section). Therefore, the segment has incurred in expenses related to the enrollment process while earned premiums will not be received until July 2002. PROPERTY AND CASUALTY INSURANCE OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------- PREMIUMS WRITTEN: Commercial multiperil $ 11,075 9,993 23,484 19,361 Dwelling 4,409 4,386 8,365 8,756 Auto physical damage 3,778 2,884 8,019 6,307 Commercial auto liability 2,253 2,058 4,961 4,226 Medical malpractice 1,123 970 2,087 1,726 All other 3,235 2,672 5,581 5,633 -------------------------------------------------------------------------------------------------- Total premiums written 25,873 22,963 52,497 46,009 -------------------------------------------------------------------------------------------------- Premiums ceded (11,560) (13,502) (16,519) (19,528) Change in unearned premiums 51 2,589 (5,526) 577 -------------------------------------------------------------------------------------------------- NET PREMIUMS EARNED $ 14,364 12,050 30,452 27,058 -------------------------------------------------------------------------------------------------- CLAIMS INCURRED $ 8,287 8,052 16,088 15,880 OPERATING EXPENSES 5,141 4,326 13,267 10,782 -------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING COSTS $ 13,428 12,378 29,355 26,662 -------------------------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ 936 (328) 1,097 396 -------------------------------------------------------------------------------------------------- LOSS RATIO 57.7% 66.8% 52.8% 58.7% EXPENSE RATIO 35.8% 35.9% 43.6% 39.8% -------------------------------------------------------------------------------------------------- COMBINED RATIO 93.5% 102.7% 96.4% 98.5% -------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 1,656 1,842 3,234 3,648 REALIZED GAIN (LOSS) ON SALE OF SECURITIES 71 (33) 16 38 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (833) 385 (668) (445) -------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 894 2,194 2,582 3,241 -------------------------------------------------------------------------------------------------- NET INCOME $ 1,411 1,687 3,143 3,302 --------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Total premiums written for the three months ended June 30, 2002 increased by $2.9 million, or 12.7%, when compared to the three months ended June 30, 2001. This increase is reflected in the premiums written for the following lines of business: o The premiums written for the commercial multiperil line experienced an increase in premiums of $1.1 million, or 10.8%, during this period. This 35 increase is due to increases in premium rates as a result of the deregulation of the commercial lines. In addition, premium rates for this line were also increased in order to take into consideration the sharp increases in reinsurance costs, particularly in catastrophe related perils. o The premiums written for the auto physical damage line increased by $894 thousand, or 31.0%, during this period. This increase is concentrated in the commercial business and is also attributed to the deregulation of premium rates, mostly as a result of the elimination of credits or discounts in the commercial accounts. Approximately 60.0% of the increase in total premiums written is due to an increase in premium rates. The remaining 40.0% is attributed to an increase in the volume of business. Premiums ceded to reinsurers during the three months ended June 30, 2002 decreased by $1.9 million, or 14.4%, when compared to the same period for the prior year. This reduction is the result of the following: o The property and casualty segment has increased its risk retention of the commercial property portfolio. The increased retention, which decreases the amounts of premiums ceded to reinsurers, retains more premiums of this profitable line. o Catastrophe reinsurance increased by over 40% during this period. This increase is due to recent worldwide catastrophes. The property and casualty loss ratio experienced a decrease of 9.1 percentage points during the three months ended June 30, 2002 as compared to the same period of the prior year. This decrease is mostly the result of favorable underwriting results of the multiperil line of business (resulting from increases in premium rates as a consequence of deregulation) and increased retention of the segment's profitable lines of business. In addition, the segment's medical malpractice line of business experienced an improvement in its loss ratio as a result of premium rate increases of approximately 60% (which were effective during April 2001) and strict adherence to underwriting practices and reinsurance constraints. The operating expenses for the three months ended June 30, 2002 increased by $815 thousand, or 18.8%, when compared to the operating expenses for the three months ended June 30, 2001. The expense ratio, however, decreased by 0.1 percentage points during this period. The increase in operating expenses is the result of the decrease in reinsurance commission income from the proportional reinsurance treaties and the effect of the reinsurance portfolio transfer, together with an increase in the deferred acquisition costs, which reduce commission expense. 36 Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Total premiums written for the six months ended June 30, 2002 increased by $6.5 million, or 14.1%, when compared to the six months ended June 30, 2001. This increase is reflected in the premiums written for the following lines of business: o The premiums written for the commercial multiperil line experienced an increase in premiums of $4.1 million, or 21.3%, during this period. This increase is due to increases in premium rates as a result of the deregulation of the commercial lines. In addition, premium rates for this line were also increased in order to take into consideration the sharp increases in reinsurance costs, particularly in catastrophe related perils. o The premiums written for the auto physical damage line increased by $1.7 thousand, or 27.1%, during this period. This increase is concentrated in the commercial business and is also attributed to the deregulation of premium rates, mostly as a result of the elimination of credits or discounts in the commercial accounts. Approximately 70.0% of the increase in total premiums written is due to an increase in premium rates. The remaining 30.0% is attributed to an increase in the volume of business. Premiums ceded to reinsurers during the six months ended June 30, 2002 decreased by $3.0 million, or 15.4%, when compared to the same period for the prior year. This reduction is the result of the following situations: o During the reinsurance contracts renewal process, STS cancelled a commercial quota share treaty. This cancellation propitiated a reinsurance portfolio transfer that resulted in the re-acquisition of the business previously ceded, and accordingly, a reduction in premiums ceded. o The property and casualty segment has increased its risk retention of the commercial property portfolio. The increased retention, which decreases the amounts of premiums ceded to reinsurers, retains more premiums of this profitable line. o Catastrophe reinsurance increased by over 40% during this period. This increase is due to recent worldwide catastrophes. The property and casualty loss ratio experienced a decrease of 5.9 percentage points during the six months ended June 30, 2002 as compared to the same period of the prior year. This decrease is mostly the result of favorable underwriting results of the multiperil (resulting from increases in premium rates as a consequence of deregulation) and auto physical damage lines of business. In addition, the segment's medical malpractice line of business experienced an improvement in its loss ratio as a result of premium rate increases of approximately 60% (which were effective during April 2001) and strict adherence to underwriting practices and reinsurance constraints. 37 The operating expenses for the six months ended June 30, 2002 increased by $2.5 million, or 23.0%, when compared to the operating expenses for the six months ended June 30, 2001. The expense ratio increased by 3.8 percentage points during this period. The increase in operating expenses and the expense ratio is the result of decreasing reinsurance commission income from the proportional reinsurance treaties and the effect of the reinsurance portfolio transfer during the beginning of 2002. LIFE AND DISABILITY INSURANCE OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------ NET EARNED PREMIUMS AND COMMISSION INCOME: Earned premiums $ 5,366 4,245 10,243 8,105 Earned premiums ceded (1,660) (1,199) (2,895) (2,465) ------------------------------------------------------------------------------------------------ Net earned premiums 3,706 3,046 7,348 5,640 ------------------------------------------------------------------------------------------------ Commission income on reinsurance 139 220 310 301 ------------------------------------------------------------------------------------------------ TOTAL $ 3,845 3,266 7,658 5,941 ------------------------------------------------------------------------------------------------ CLAIMS INCURRED $ 1,322 1,474 3,506 2,823 OPERATING EXPENSES 1,274 1,040 2,550 2,054 ------------------------------------------------------------------------------------------------ TOTAL UNDERWRITING COSTS $ 2,596 2,514 6,056 4,877 ------------------------------------------------------------------------------------------------ UNDERWRITING INCOME $ 1,249 752 1,602 1,064 ------------------------------------------------------------------------------------------------ LOSS RATIO 34.4% 45.1% 45.8% 47.5% EXPENSE RATIO 33.1% 31.8% 33.3% 34.6% ------------------------------------------------------------------------------------------------ COMBINED RATIO 67.5% 77.0% 79.1% 82.1% ------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME $ 571 620 1,161 1,242 REALIZED GAIN (LOSS) ON SALE OF SECURITIES (8) - 62 30 ------------------------------------------------------------------------------------------------ TOTAL NET INVESTMENT INCOME $ 563 620 1,223 1,272 ------------------------------------------------------------------------------------------------ NET INCOME $ 1,523 1,052 2,287 1,733 ------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Earned premiums for the three months ended June 30, 2002 increased by $1.1 million, or 26.4%, when compared to the three months ended June 30, 2001. This increase is mostly due to the segment's increased volume of business during this period. Total certificates in force in the group life and group disability business as of June 30, 2002 increased by 37,632 certificates, or 13.0%, when compared to the same period for last year. Premiums ceded to reinsurers during the three months ended June 30, 2002 reflect an increase of $461 thousand, or 38.4%, when compared to the same period of the prior year. The ratio of earned premiums ceded to earned premiums was 30.9% and 28.2% for the three months period ended June 30, 2002 and 2001, respectively. The increase of 2.7 percentage points in the earned premiums ceded to earned premiums ratio from one period to another is due to a change in the mix of business subscribed by the segment and 38 each business reinsurance policy. During this period in 2002, the segment subscribed more disability policies than in 2001. The disability insurance business has a higher cession percentage than the life insurance business. Claims incurred for the three months ended June 30, 2002 decreased by $152 thousand, or 10.3%, when compared to the three months ended June 30, 2001. The segment's loss ratio reflects a decrease of 10.7 percentage points during the same period. This decrease is due to the following: o During the three months ended June 30, 2002 and 2001, the segment recorded a release of incurred but not reported claims reserve of approximately $880 thousand and $225 thousand, respectively. This adjustment is the result of a better than expected development of this reserve. o In addition, during the year 2002, the segment has subscribed more disability policies than during 2001. The disability insurance business has a higher loss ratio than the life insurance business thus, contributing to the segment's increased loss ratio. The segment's expense ratio for the three months ended June 30, 2002 reflects an increase of 1.3 percentage points when compared to the same period of 2001. The increase of the expense ratio is mostly the result of an increase in the commission expense, payroll and payroll related expenses. The increase of these expenses is due to the increase in the volume of business noted during this period. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Earned premiums for the six months ended June 30, 2002 increased by $2.1 million, or 26.4%, when compared to the six months ended June 30, 2001. This increase is mostly due to the segment's increased volume of business during this period. Total certificates in force in the group life and group disability business as of June 30, 2002 increased by 42,094 certificates, or 15.0%, when compared to the same period for last year. Premiums ceded to reinsurers during the six months ended June 30, 2002 reflect an increase of $430 thousand, or 17.4%, when compared to the same period of the prior year. The ratio of earned premiums ceded to earned premiums was 28.3% and 30.4% for the six-month period ended June 30, 2002 and 2001, respectively. The decrease of 2.1 percentage points in the earned premiums ceded to earned premiums ratio from one period to another is due to the following: o During this period, there was a change in the estimated amount of disability premiums ceded to reinsurers. Effective January 2002, the segment estimated that approximately 61% of the premiums earned on the disability business qualified for reinsurance. In previous periods, the disability business reinsurance amount was estimated to be 75% of the disability premiums earned. The effect of this change in ceding percentage represents a decrease of approximately $101 thousand during this period. 39 o During the six months ended June 30, 2002, the segment subscribed more disability policies than during the same period of 2001. The disability insurance business has a higher cession percentage than the life insurance business. Claims incurred for the six months ended June 30, 2002 increased by $683 thousand, or 24.2%, when compared to the six months ended June 30, 2001. The segment's loss ratio reflects a decrease of 1.7 percentage points during the same period. This decrease is mostly attributed to the effect of the following: o During the six months ended June 30, 2002 and 2001 the segment recorded a release of the incurred but not reported claims reserve of approximately $880 thousand and $350 thousand, respectively. This adjustment is the result of a better than expected development of this reserve. o In addition, during the year 2002, the segment has subscribed more disability policies than during 2001. The disability insurance business has a higher loss ratio than the life insurance business, which contributes to the segment's increased loss ratio. The segment's expense ratio for the six months ended June 30, 2002 reflects a decrease of 1.3 percentage points when compared to the same period of 2001. This decrease in the expense ratio is mostly the result of cost containment measures in place, mitigated by an increase in the commission expense, payroll and payroll related expenses. The increase of these expenses is due to the increase in the volume of business noted during this period. LIQUIDITY AND CAPITAL RESOURCES Cash Flows The Corporation maintains good liquidity measures due to the quality of its assets, the predictability of its liabilities, and the duration of its contracts. The liquidity of the Corporation is primarily derived from the operating cash flows of its insurance subsidiaries. As of June 30, 2002 and December 31, 2001, the Corporation's cash and cash equivalents amounted to $80.0 million and $81.0 million, respectively. The sources of funds considered in meeting the objectives of the Corporation's operations include: cash provided from operations, maturities and sales of securities classified within the trading and available-for-sale portfolios, securities sold under repurchase agreements, and issuance of long and short-term debt. Management believes that the Corporation's net cash flows from operations are expected to sustain the operations for the next year and thereafter, as long as the operations continue showing positive results. The Corporation is continually monitoring premium rates and claims incurred to ascertain the sustainability of its net cash flows from 40 operations. In addition the Corporation has the ability to increase premium rates throughout the year in the policies' renewal process that is performed on a monthly basis. Cash Flows from Operations Most of the cash flows from operating activities are generated from the insurance subsidiaries. The basic components of the cash flows from operations are premium collections, claims payments less reinsurance premiums, and payment of operating expenses. Net cash flows provided by (used in) operating activities amounted to $26.3 million and $(3.7) million for the six months ended June 30, 2002 and 2001, respectively, an increase of $30.0 million. This increase in cash flows provided by operating activities is mainly attributed to the net effect of the following: increase in collections of premiums of $62.3 million, increase of $23.2 million in the amount of claims losses and benefits paid, and an increase of $9.1 million in the amount of cash paid to suppliers and employees. The increase in premium collections and in the amount of claims losses and benefits paid is mostly the result of the increased volume of business and increased premium rates of the operating segments. The amount of cash paid to suppliers and employees increased as a result of additional expenses generated from the acquisition of new business. This excess liquidity is available, among other things, to invest in high quality and diversified fixed income securities and, to a lesser degree, to invest in marketable equity securities. Cash Flows from Investing Activities The basic components of the cash flows from investing activities are derived from acquisitions and proceeds from investments in the available-for-sale and held-to-maturity portfolios and capital expenditures. The Corporation monitors the duration of its investment portfolio and executes the purchases and sales of these investments with the objective of having adequate funds available to satisfy its maturing liabilities. Net cash flows used in investing activities amounted to $21.5 million and $14.6 million for the six months ended June 30, 2002 and 2001, respectively. The cash flows used in investing activities during these periods are attributed to the investment of the excess cash generated from the operations. Total acquisition of investments exceeded the proceeds from investments sold or matured by $19.2 million and $12.1 million during the six months ended June 30, 2002 and 2001, respectively. 41 Cash Flows from Financing Activities Net cash flows (used in) provided by financing activities amounted to $(5.7) million and $5.4 million for the six months ended June 30, 2002 and 2001, respectively. The decrease of $11.1 million during this period is mainly due to the combined effect of the following: o The change in outstanding checks in excess of bank balances reflects a decrease $7.6 million during the six months ended June 30, 2002 compared to the six months ended June 30, 2001. The amount of checks in excess of bank balances represents a timing difference between the issuance of checks and the cash balance in the bank account at one point in time. o An increase in the amount of surrenders of individual retirement annuities of $2.3 million from the six months ended June 30, 2001 to the six months ended June 30, 2002. In addition, the amount of proceeds from deposits of individual retirement annuities decreased by $463 thousand during the same period. This fluctuation in the individual retirement accounts is attributed to the aggressive competition in the market for this product in Puerto Rico. o The payments of long-term debt increased from $1.2 million for the six months ended June 30, 2001 to $1.9 million for the six months ended June 30, 2002, an increase of $700 thousand. This increase is due to the scheduled principal payments of one of the credit agreements, whose repayment schedule was restructured effective August 31, 2001. Financing and Financing Capacity The Corporation has significant short-term liquidity supporting its businesses. It also has available short-term borrowings from time to time to address timing differences between cash receipts and disbursements. These short-term borrowings are mostly in the form of securities sold under repurchase agreements. As of June 30, 2002, the Corporation had $49 million in available credit under these agreements, although there is no balance due as of that date. In addition, the Corporation has two credit agreements with a commercial bank, FirstBank Puerto Rico. These credit agreements bear interest rates determined by the London Interbank Offered Rate (LIBOR) plus a margin specified by the commercial bank at the time of the agreement. As of June 30, 2002, the two credit agreements have an outstanding balance of $35.5 million and $18.2 million and an average annual interest rate of 4.8% and 3.3%, respectively. These credit agreements contain several restrictive covenants, including, but not limited to, restrictions to incur in additional indebtedness and the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of June 30, 2002, management believes the Corporation is in compliance with these covenants. Further details regarding these credit agreements are incorporated by reference in Item 2. Financial Information of the Corporation's Form 10-A filed as of December 31, 2001. 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation is exposed to certain market risks that are inherent in the Corporation's financial instruments, which arise from transactions entered into in the normal course of business. The Corporation does not enter into derivative financial instrument transactions to manage or reduce market risk or for speculative purposes, but is subject to market risk on certain of its financial instruments. The Corporation has exposure to market risk mostly in its 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 the Corporation's exposure to financial market risks since December 31, 2001. A discussion of the Corporation's market risk as of December 31, 2001 is incorporated by reference in Item 2 of the Corporation's Form 10/A. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 24, 2002, Octavio Jordan, Agripino Lugo, Ramon Vidal and others filed a suit against TSM, TSI, STS, TCI and others in the Court of First Instance, San Juan Part, alleging, among other things, violations of some provisions of the Insurance Code, anti-monopolistic practices, unfair business practices, and damages in the amount of $12 million dollars. TSM, TSI, STS and TCI have answered the complaint and TSM and TSI filed counterclaims against the plaintiffs in the case. The plaintiffs have filed a motion to dismiss the counterclaims filed by TSM and TSI. This motion is still pending. This case is still in the preliminary stages of litigation. After a review of the complaint, it appears that many of the allegations brought by the plaintiffs have been resolved in favor of TSM and TSI in previous cases brought by the same plaintiffs in the U.S. District Court for the District of Puerto Rico and by most of the plaintiffs in the local courts. As of June 30, 2002, the Corporation was defendant in various lawsuits arising in the ordinary course of business. In the opinion of management and legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial condition and results of operations of the Corporation. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS TSM held its 2002 annual meeting of shareholders on April 28, 2002 (the "Meeting") where new members to TSM's Board of Directors were elected. The candidates for election at the meeting were Dr. Wilmer Rodriguez-Silva, Dr. Arturo Cordova-Lopez, Dr. Wilfredo Lopez-Hernandez, Dr. Manuel A. Marcial-Seoane and Ms. Adamina Soto-Martinez, CPA. Dr. Wilmer Rodriguez-Silva received 4,268 votes in favor, Dr. Arturo Cordova-Lopez received 4,316 votes in favor, Dr. Wilfredo Lopez-Hernandez received 43 4,292 votes in favor, Dr. Manuel A. Marcial-Seoane received 4,306 votes in favor and Ms. Adamina Soto-Martinez, CPA, received 4,403 votes in favor. All candidates were elected. In addition the members of the Board of Directors, appointed as of May 1, 2002, Mr. Ramon Ruiz-Comas, CPA, President and Chief Executive Officer (CEO) of the Corporation, to fill the vacancy left by Mr. Miguel Vazquez-Deynes, the former President and CEO of the Corporation, who retired on April 30, 2002. As a result of these events, as of May 1, 2002 the members of the Board of Directors were as follows: Dr. Fernando J. Ysern-Borras, Chairman of the Board Dr. Wilmer Rodriguez-Silva, Vice-Chairman of the Board Dr. Jesus Sanchez-Colon, Secretary of the Board Dr. Arturo Cordova-Lopez, Assistant Secretary of the Board Mr. Vicente J. Leon-Irizarry, CPA, Treasurer of the Board Ms. Sonia Gomez de Torres, CPA, Assistant Treasurer of the Board Mr. Ramon Ruiz-Comas, CPA, President and Chief Executive Officer Dr. Fernando L. Longo Dr. Wilfredo Lopez-Hernandez Dr. Valeriano Alicea-Cruz Dr. Porfirio E. Diaz-Torres Mr. Jose Arturo Alvarez-Gallardo Mr. Jose Davison-Lampon, Esq. Mr. Juan Jose Leon-Soto, Esq. Mr. Mario S. Belaval Mr. Hector Ledesma Mr. Manuel Suarez-Mendez, P.E. Dr. Manuel A. Marcial-Seoane Ms. Adamina Soto-Martinez, CPA In addition to the election of directors, five resolutions were presented to the shareholders for their approval. Summaries of said resolutions and the voting results are as follows: Resolution 1 - Resolution to ratify the shareholders interest in continuing TSI's tax treatment as a not-for-profit entity, pursuant to the tax ruling issued by the Secretary of the Treasury of Puerto Rico. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 3,844 votes in favor, 345 votes against and 75 abstentions. This Resolution received the required votes and it was approved. Resolution 2 - Resolution to amend Article 8 of the Articles of Incorporation of the Corporation and Article 4-2 of Chapter 4 of the By-Laws of the Corporation in order to allow shareholders to transfer their shares to their spouses or heirs when they are physicians or dentists, without exceeding the established limit of twenty-one (21) shares 44 per shareholder. The adoption of this resolution required the affirmative vote of a two third majority of the common stock issued and outstanding. This Resolution received 3,863 votes in favor, 402 votes against and 90 abstentions. This Resolution did not receive the required votes and it was not approved. Resolution 3 - Resolution to amend Section C of Article 8-11 of Chapter 8 of the By-Laws of the Corporation in order to allow the Chairman of the Finance Committee to be a member of the Audit Committee and to expand the powers of the Audit Committee. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 4,118 votes in favor, 143 votes against and 64 abstentions. The Resolution received the required votes and it was approved. Resolution 4 - Resolution to amend Section F of Article 8-11 of Chapter 8 of the By-Laws of the Corporation in order to clarify that the President of the Corporation cannot be a member of the Audit Committee. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 4,161 votes in favor, 107 votes against and 65 abstentions. The Resolution received the required votes and it was approved. Resolution 5 - Resolution to analyze the medical malpractice insurance situation in Puerto Rico and inform the results of this analysis to the shareholders and TSI's participants at least every six months and to present a report of this situation in the next annual meeting of shareholders. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 4,211 votes in favor, 66 votes against and 63 abstentions. The Resolution received the required votes and it was approved. ITEM 5. OTHER INFORMATION Shareholders' proposals intended to be presented at the 2003 Annual Meeting of Shareholders must be received by the Corporation's Secretary, at its principal executive offices, located at the sixth floor of 1441 F.D. Roosevelt Avenue, San Juan, Puerto Rico, 00920, or by mail at the PO Box 363628, San Juan, Puerto Rico, 00936-3628, not later than November 27, 2002 for inclusion in the Corporation's Proxy Statement and Form of Proxy relating to the 2003 Annual Meeting of Shareholders. 45 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 3(i) Articles of incorporation of TSM Exhibit 3 (ii) By-laws of TSM Exhibit 10.1 Puerto Rico Health Insurance Contract for the Metro-North Region Exhibit 10.2 Puerto Rico Health Insurance Contract for the North Region Exhibit 10.3 Puerto Rico Health Insurance Contract for the South-West Region Exhibit 10.4 Employment Contract with Mr. Ramon Ruiz Comas, CPA Exhibit 10.5 Employment Contract with Ms. Socorro Rivas, CPA Exhibit 11 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, 2002 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 Form 10-Q. Exhibit 12 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, 2002 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 Form 10-Q.
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. Management represents that Exhibits 3(i), 3(ii), 10.4 and 10.5 are fair and accurate translations of the original documents that are in Spanish. (b) Reports on Form 8-K: On May 3, 2002, the Corporation filed a Current Report on Form 8-K, which indicated the new members elected to the Board of Directors during the Annual Stockholders' Meeting held on April 28, 2002. This Current Report also indicated the standing members of the Board of Directors and the designation, effective May 1, 2002, of Mr. Ramon Ruiz Comas, CPA as the new president and Chief Executive Officer of the Corporation. 46 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. TRIPLE-S MANAGEMENT CORPORATION Registrant Date: August 14, 2002 By: /s/ Ramon M. Ruiz-Comas -------------------------- Ramon M. Ruiz-Comas President and Chief Executive Officer Date: August 14, 2002 By: /s/ Juan J. Roman ----------------------------------- Juan J. Roman Vice President of Finance and Chief Financial Officer 47