We are the largest managed care company in Puerto Rico, serving approximately one million members across all regions, and hold a leading market position covering
approximately 25% of the population. We have the exclusive right to use the Blue Shield name and mark throughout Puerto Rico and have over 45 years of experience in the managed care industry.
We offer a broad portfolio of managed care and related products in the Commercial, Medicare and the Reform (similar to Medicaid) markets.
We serve a full range of customer sectors, from corporate accounts, federal and local government employees and individuals to Medicare recipients and Reform enrollees, with a wide range
of managed care products. We market our managed care products through both an extensive network of independent agents and brokers located throughout Puerto Rico as well as an internal salaried sales
also offer complementary products and services, including life insurance and property and casualty insurance. As a result of our acquisition of GA Life in January 2006, we are
the leading provider of life insurance policies in Puerto Rico.
In the year ended December 31, 2006, we generated total revenue of approximately $1.6 billion, of which approximately 88% was derived from our managed care businesses and
12% from our life insurance and property and casualty insurance businesses. In the nine months ended September 30, 2007, we generated total revenue of approximately $1.2 billion, of
which approximately 87% was derived from our managed care businesses and 13% from our life insurance and property and casualty insurance businesses.
The managed care industry has experienced significant changes over the last twenty years. An increasing focus on health care costs by employers, the government
and consumers has led to the growth of alternatives to traditional indemnity health insurance, such as HMOs and PPOs, which the managed care industry has introduced to attempt to contain the cost of
health care by negotiating contracts with hospitals, physicians and other providers to deliver health care to plan members at favorable rates. These products usually feature medical management and
other quality and cost optimization measures such as pre-admission review and approval for certain non-emergency services, pre-authorization of certain outpatient
surgical procedures, network credentialing to determine that network doctors and hospitals have the required certifications and expertise, and various levels of care management programs to help
members better understand and navigate the medical system. In addition, providers may have incentives to achieve certain quality measures or may share medical cost risk. Members generally pay
co-payments, coinsurance and deductibles when they receive services. While the distinctions between the various types of plans have lessened over recent years, PPO products generally
provide reduced benefits for out-of-network services, while traditional HMO products generally provide little to no reimbursement for non-emergency
out-of-network utilization. An HMO plan may also require members to select one of the network primary care physicians to coordinate their care and approve any specialist or
other services. The federal government provides hospital and medical insurance benefits to eligible persons aged 65 and over as well as to certain other qualified persons pursuant to the Medicare
program, including the Medicare Advantage program. The federal government also offers prescription drug benefits to Medicare eligibles, both as part of the Medicare Advantage program and on a stand-
alone basis, pursuant to Medicare Part D (also referred to as PDP stand alone product). In addition, the government of the Commonwealth of Puerto Rico
government of Puerto Rico) provides managed care coverage to the medically indigent population of Puerto Rico through the Reform program.
economic factors and greater consumer awareness have resulted in the increasing popularity of products that offer larger, more extensive health care provider networks, more
member choice related to coverage, physicians and hospitals, and a desire for greater flexibility for customers to assume larger deductibles and co-payments in return for lower premiums.
We believe that we are well-positioned to respond to these market preferences due to the breadth and flexibility of our product offering and size of our provider networks.
The Blue Cross Blue Shield Association (BCBSA) had 39 independent licensees as of December 31, 2006. We are licensed by BCBSA to use both the "Blue Shield" name and mark
throughout Puerto Rico. Most of the BCBSA licensees have the right to use both the "Blue Shield" and "Blue Cross" marks in their designated geographic territories. We are not licensed to use the "Blue
Cross" mark in Puerto Rico. A different BCBSA licensee has the right to use the "Blue Cross" mark in Puerto Rico. The number of people enrolled in Blue Cross Blue Shield (BCBS) plans has been steadily
increasing, from 65.2 million in 1994 to 98.6 million at December 31, 2006, which represents 32.7% of the U.S. population. The BCBS plans work cooperatively in a number of ways
that create significant market advantages, especially when competing for very large, multi-state employer groups. For example, all BCBS plans participate in the BlueCard program, which effectively
creates a national "Blue" network. Each plan is able to take advantage of other BCBS plans' broad provider networks and negotiated provider reimbursement rates where a member covered by a policy in
one state or territory lives or travels outside of the state or territory in which the policy under which he or she is covered is written. This program is referred to as BlueCard, and is a source of
revenue for providing member services in Puerto Rico for individuals who are customers of other BCBS plans and at the same time provide us a significant network in the U.S. BlueCard also provides a
significant competitive advantage to us because Puerto Ricans frequently travel to the continental United States.
Total annual premiums in Puerto Rico for the life insurance market approximate $700 million. The main products in the market are ordinary life, cancer and
other dreaded diseases, term life, disability and annuities. The main distribution channels are through independent agents. In recent years banks have established general agencies to sell many life
products, such as term life and credit life.
The total property and casualty insurance market in Puerto Rico in terms of gross premiums written for 2006 was approximately $1.8 billion. There are
relatively few new sources of business in this segment, and property and casualty insurance companies compete for existing accounts through aggressive pricing, more favorable policy terms and better
quality of services. The main lines of business in Puerto Rico are personal and commercial auto, commercial multi peril, fire and allied lines and other general liabilities. Approximately 70% of the
market is written by the top six companies in terms of market share, and approximately 80% of the market is written by companies incorporated under the laws of, and which operate principally in,
It is estimated that the Puerto Rican property and casualty insurance market has between $80 billion and $90 billion of insured value, while the industry has capital and
surplus of approximately $1.1 billion. As a result, the market is highly dependent on reinsurance and some local carriers have diversified their operations outside of Puerto Rico, particularly
Our Competitive Strengths
Strong Brand Recognition and Reputation in Puerto Rico.
We believe that the strength of the Triple-S brand, which
we have built through our longstanding presence in Puerto Rico, and our exclusive license to use the Blue Shield mark, gives us a significant competitive advantage. With an operating history of over
45 years, Triple-S is the second largest locally-owned company and one of the most widely recognized brands in Puerto Rico based on several studies conducted in recent years. We
have a loyal customer base with an average yearly customer retention rate of over 90% in our corporate accounts business since 2003. In addition, we believe we enjoy a strong competitive advantage as
a result of our participation in the Blue Cross Blue Shield Association's BlueCard program, which provides our members with coverage for medical attention throughout the United States, the primary
travel destination of Puerto Rico residents.
Leading Market Positions with Broad Range of Managed Care Products.
We are the largest managed care company in Puerto Rico
according to filings with the Commissioner of Insurance. We serve approximately one million Blue Shield members across all regions of Puerto Rico and hold a leading market position covering
approximately 25% of the population. We enjoy leading market positions in many customer sectors, including corporate accounts, Medicare Supplement, federal government employees and individual
accounts. We offer customized managed care products including health maintenance organizations (HMOs) to our Medicare Advantage and Reform customers and preferred provider organizations (PPOs) on both
a fully insured and self-funded basis to our Commercial customers, and as a result we believe that we have the most comprehensive range of managed care products in Puerto Rico.
Broad Provider Networks.
We believe we have the broadest geographic coverage of any managed care provider in Puerto Rico,
including hospital and physician networks consisting of some of the most well-recognized physicians and hospitals in Puerto Rico. This is important to large corporate accounts, which
typically require that a single managed care provider cover all of their employees. For example, we believe that a number of corporate clients have contracted with us because we offer an
island-wide provider network, as well as access to U.S. providers through the BlueCard program. We maintain strong provider relationships in all of our markets.
Commitment to Quality Care.
We have demonstrated our commitment to quality care, implementing a number of disease management
and health education programs, including programs that target asthma, diabetes, heart failure, hypertension and selected nutritional-related conditions, as well as a prenatal program and a medication
therapy management program. We have had a contract with McKesson Health Solutions since 1998 pursuant to which they provide to us 24-hour nurse triage (for all of our customer sectors) and
utilization management program services for the Reform segment, Medicare Advantage programs and certain Commercial customers.
Strong Complementary Businesses.
To enhance our relationships with managed care customers, we offer life, disability and
property and casualty insurance products designed to complement the sale of our managed care products and services. As a result of our recent acquisition of GA Life, we are the leading provider of
life insurance policies in Puerto Rico. Our broad range of managed care and complementary products provides us with significant opportunities to develop additional points of distribution, particularly
among the insurance agencies of Puerto Rico-based financial institutions. In addition, approximately 42% of the sales agents employed by us are licensed to sell both life insurance and
managed care products.
Proven and Experienced Management Team.
We have been a market leader in managed care in Puerto Rico for over 45 years
and believe that the extensive experience of our management team provides us with a strong competitive advantage. We also have a strong record of management
which has allowed for efficiency of operations and retention of valuable knowledge. Our senior management team has an average of 13 years of experience at Triple-S.
Expand Operating Margins and Realize Operating Efficiencies.
Our managed care business was exempt from Puerto Rico income
taxes from 1979 until 2003, and was operated as if it was a not-for-profit until that time, as required by the terms of the exemption. Accordingly, starting in 2004 we began to
increase our efforts to manage medical costs and generate profits as a for-profit managed care company. Even more recently, in anticipation of becoming a public company and to compete more
effectively, we have begun to implement or, in some cases, expect to implement, a number of initiatives to reduce utilization and overall medical costs. Some of these initiatives include:
unprofitable customer contracts or permitting such contracts to lapse;
our provider network;
existing Reform sector disease management programs to other sectors, such as Commercial and Medicare;
radiology benefits management initiatives to reduce spending on high-tech imaging; and
our pharmacy network.
believe that increased scale in each of our segments will provide efficiencies and greater opportunities to sustain profitable growth.
Grow Medicare Advantage Business.
We intend to leverage our brand recognition to further penetrate the Medicare Advantage
market. We entered the Medicare Advantage market in 2005 and as of September 30, 2007 had approximately 11.3% of the Medicare Advantage market in Puerto Rico. As of December 31, 2006,
Puerto Rico had over 600,000 persons eligible for Medicare. Puerto Rico is a particularly attractive growth opportunity, as the population over the age of 65 is expected to grow at an average of 2.4%
per annum between 2005 and 2010, as compared to 1.7% in the continental United States, according to the Puerto Rico Planning Board and U.S. Census Bureau. We believe our Medicare Advantage business
will continue to grow, driven by the following:
our position in the Reform business to expand our Medicare Advantage coverage of dual-eligibles. As of December 31, 2006, approximately 35% of
Medicare beneficiaries in Puerto Rico were considered dual-eligibles, persons eligible for Reform and Medicare.
the conversion of Medicare Supplement members to the more comprehensive benefits structure offered by the higher revenue-generating Medicare Advantage products. In
addition, we expect to grow our Medicare Advantage business through the conversion of Medicare Part D prescription drug plan members to Medicare Advantage products.
Develop New Products to Attract and Retain Customers.
We intend to leverage our strong brand recognition and extensive
history to drive profitable growth by introducing new products to the Puerto Rico market. Our particular focus is on the commericial sector within our managed care segment, where we intend to
introduce new products such as reduced benefits packages targeted at part-time employees, a new preferred provider network targeted at low salary industries and the uninsured, various new
products for individual markets, a lower cost limited provider network and other new group products. We believe that such new products will also help us to retain existing customers by meeting their
evolving needs for managed care products. We believe that Puerto Rico is a highly cost-effective market in which to introduce new products because of its dense population.
Pursue Cross-Selling and Related Opportunities.
To expand our relationships with our managed care customers, we intend to
capitalize on cross-selling opportunities by taking advantage of our leading brand name and using our internal and external sales forces to sell both managed care and complementary products such as
life and disability and property and casualty insurance. Only 13 of our 30 largest corporate customers currently purchase both managed care and complementary products from us. We believe that our
acquisition of GA Life, through which we acquired individual life insurance products and a substantial sales force, will allow us to further capitalize on cross-selling opportunities. We have
established relationships with leading financial institutions in Puerto Rico, which we believe will allow us to develop our business opportunities in property and casualty and life insurance products
through these institutions' agency operations.
Disciplined Expansion Strategy.
We believe that profitable growth, both organic and through acquisitions, is an important
part of our business. Increased scale can allow us to improve operating margins, while maintaining competitive prices for our products. We believe that we have the ability to efficiently integrate
acquisitions, as evidenced by our integration of GA Life. We intend to focus on acquiring managed care plans that expand our product offering. We also may seek to expand our business outside Puerto
Rico in the Caribbean or the continental United States, with a particular focus on Hispanic communities, although we currently are not able to sell our managed care products in these areas under the
Blue Shield name and will not be able to do so in any area in which a licensee already operates. In addition, we believe that Puerto Rico's Reform managed care model is similar to that of many U.S.
states' Medicaid programs. We may seek to leverage our expertise in the Reform business by expanding into the U.S. Medicaid managed care market via a joint venture with a U.S. managed care company or
Puerto Rico Economy
The economy of Puerto Rico is closely linked to that of the mainland United States, as most of the external factors that affect the Puerto Rico economy (other
than the price of oil) are determined by the policies and results of the United States. These external factors include exports, direct investment, the amount of federal transfer payments, the level of
interest rates, the rate of inflation, and tourist expenditures. During the fiscal year ended June 30, 2006, approximately 83% of Puerto Rico's exports went to the United States mainland, which
was also the source of approximately 51% of Puerto Rico's imports. In the past, the economy of Puerto Rico has generally followed economic trends in the overall United States economy. However, in
recent years economic growth in Puerto Rico has lagged behind growth in the United States.
dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services. The manufacturing sector has undergone fundamental changes over the
years as a result of increased emphasis on higher wage, high technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors, professional and scientific instruments, and
certain high technology machinery and equipment. The services sector, including finance, insurance, real estate, wholesale and retail trade, and tourism, also plays a major role in the economy. It
ranks second to manufacturing in contribution to the gross domestic product and leads all sectors in providing employment.
Preliminary figures for fiscal year 2006 show that gross product increased from $53.6 billion (in current dollars) for fiscal 2005 to $56.7 billion (in current dollars) for
fiscal 2006. Real gross national product, however, is projected to decline by 1.4% for fiscal year 2007, although a slight increase of 0.8% is expected for fiscal year 2008. Personal income, both
aggregate and per capita, has increased consistently each fiscal year from 1985 to 2006. In fiscal year 2006, aggregate personal income was $50.9 billion and personal income per capita was
$12,997. Personal income, however, is expected to decline by 1.2% in fiscal year 2007. Average total employment increased from 1,253,400 in fiscal 2006 to 1,262,900 for fiscal 2007. Unemployment,
although at relatively low historical levels, remains above
the United States average. The average unemployment rate decreased from 11.7% in fiscal 2006 to 10.4% in fiscal 2007.
Future growth in the Puerto Rico economy will depend on several factors including the condition of the United States economy, the relative stability in the price of oil imports, the
exchange value of the United States dollar, the level of interest rates and changes to existing tax incentive legislation. The major factors affecting the economy at this point are, among others, the
high oil prices, the slowdown of economic activity in the U.S., the continuing economic uncertainty generated by the fiscal crisis affecting the government of Puerto Rico and the effects on economic
activity of the implementation of a new sales tax that entered into effect on November 14, 2006. See "Risk FactorsRisks
Relating to Our BusinessThe geographic concentration of our business in Puerto Rico may subject us to economic downturns in the region".
Products and Services
We offer a broad range of managed care products, including HMOs, PPOs, Medicare Supplement and Medicare Part D. Managed care products represented 87.9%,
88.6%, 92.7% and 92.3% of our consolidated premiums earned, net for the nine months ended September 30, 2007 and the years ended December 31, 2006, 2005 and 2004, respectively. We design
our products to meet the needs and objectives of a wide range of customers, including employers, individuals and government entities. Our customers either contract with us to assume underwriting risk
or self-fund underwriting risk and rely on us for provider network access, medical cost management, claim processing, stop-loss insurance and other administrative services. Our
products vary with respect to the level of benefits provided, the costs paid by employers and members, including deductibles and co-payments, and the extent to which our members' access to
providers is subject to referral or preauthorization requirements.
care generally refers to a method of integrating the financing and delivery of health care within a system that manages the cost, accessibility and quality of care. Managed care
products can be further differentiated by the types of provider networks offered, the ability to use providers outside such networks and the scope of the medical management and quality assurance
programs. Our members receive medical care from our networks of providers in exchange for premiums paid by the individuals or their employers and, in some instances, a cost-sharing payment
between the employer and the member. We reimburse network providers according to pre-established fee arrangements and other contractual agreements.
currently offer the following managed care plans:
Health Maintenance Organization (HMO).
We offer HMO plans that provide our Reform and Medicare Advantage members with health
care coverage for a fixed monthly premium in addition to applicable member co-payments. Health care services can include emergency care, inpatient hospital and physician care, outpatient
medical services and supplemental services, such as dental, vision, behavioral and prescription drugs, among others. Members must select a primary care physician within the network to provide and
assist in managing care, including referrals to specialists. During the
third quarter of 2005, we launched
, our Medicare Advantage product for dual eligibles (individuals that are eligible for both the
Reform and Medicare Advantage), and in 2006 we launched a supplemental product sponsored by the government of Puerto Rico called Medicare Platino. We also launched our new HMO Medicare Advantage
product for the non-dual eligible population earlier this year.
Preferred Provider Organization (PPO).
We offer PPO managed care plans that provide our Commercial and Medicare Advantage
members and their dependent family members with health care coverage in exchange for a fixed monthly premium from our member or the member's employer. In
addition, we provide our PPO members with access to a larger network of providers than our HMO. In contrast to our HMO product, we do not require our PPO members to select a primary care physician or
to obtain a referral to utilize in-network specialists. We also provide coverage for PPO members who access providers outside of the network. Out-of-network
benefits are generally subject to a higher deductible and coinsurance. In addition, we offer national in-network coverage to our PPO members through the BlueCard program. As a PPO under
the Medicare Advantage program, effective January 1, 2005 we launched
, our PPO Medicare Advantage policy, under which we provide
extended health coverage to Medicare beneficiaries.
For our members who purchase our PPO and some of our Medicare Advantage products, we offer the BlueCard program.
The BlueCard program offers these members in-network benefits through the networks of the other Blue Cross Blue Shield plans in the United States and certain U.S. territories. In addition,
the BlueCard Worldwide program provides our PPO members with coverage for medical assistance worldwide. We believe that the national and international coverage provided through this program allows us
to compete effectively with large national insurers.
We offer Medicare Supplement products, which provide supplemental coverage for many of the medical
expenses that the basic Medicare program does not cover, such as deductibles, coinsurance and specified losses that exceed the Federal program's maximum benefits.
Prescription Drug Benefit Plans.
Every Medicare beneficiary must be given the opportunity to select a prescription drug plan
through Medicare Part D, largely funded by the federal government. We are required to offer a Medicare Part D prescription drug plan to our enrollees in every area in which we operate.
We offer prescription drug benefits under Medicare Part D pursuant to our Medicare Advantage plans as well as on a stand-alone basis. Our PDP stand-alone product, called
, was launched in
2006. In May 2005, we launched the Drug Discount Card for local government employees and individuals. As of
September 30, 2007, we had enrolled approximately 17,000 members in this program. We plan to extend the program to members in group plans without drug coverage during 2007.
We serve as fiscal intermediary for the Medicare Part B program in Puerto Rico and the U.S.
Virgin Islands, for which we receive reimbursement of all direct costs and allocated overhead expenses, based on an approved budget by the Centers for Medicare and Medicaid Services (CMS). This
program is subject to change. See "RegulationFiscal Intermediary" included in this Item.
Administrative Services Only.
In addition to our fully insured plans, we also offer our PPO products on a
self-funded or ASO basis, under which we provide claims processing and other administrative services to employers. Employers choosing to purchase our products on an ASO basis fund their
own claims but their employees are able to access our provider network at our negotiated discounted rates. We administer the payment of claims to the providers but we do not bear any insurance risk in
connection with claims costs because we are reimbursed in full by the employer. For certain self-funded plans, we provide stop loss insurance pursuant to which we assume some of the
medical risk for a premium. The administrative fee charged to self-funded groups is generally based on the size of the group and the scope of services provided.
We offer a wide variety of life, accident and health and annuity products to all markets in Puerto Rico. Among these are group life and life individual insurance
products. Life insurance premiums represented 6.1%, 5.7%, 1.2% and 1.3% of our consolidated premiums earned, net for the nine months ended September 30, 2007 and the years ended
December 31, 2006, 2005 and 2004. GA Life markets in-home service life and supplemental health products through a network of company-employed agents.
Ordinary life, cancer and dreaded diseases, credit and pre-need life products are marketed through independent agents. We are the principal company in Puerto Rico that offers guaranteed
issue, funeral and cancer policies directly to people in their homes in the lower and middle income market segments. We also market our group life coverage through our managed care subsidiary's
network of exclusive agents.
We offer a wide range of property and casualty insurance products. Property and casualty insurance premiums represented 6.3%, 5.9%, 6.3% and 6.6% of our
consolidated premiums earned, net for the
nine months ended September 30, 2007 and the years ended December 31, 2006, 2005 and 2004. Our predominant lines of business are commercial multiple peril, commercial property
mono-line policies, auto physical damage, auto liability and dwelling insurance. The segment's commercial lines target small to medium size accounts. We generate a majority of our dwelling
business through our strong relationships with financial institutions. In the first half of 2008, we intend to expand our auto insurance business, which will write personal auto policies at discounted
rates for preferred risks. During the nine months ended September 30, 2007, we generated our premiums in the property and casualty insurance segment primarily from the following lines of
Line of Business
Percentage of Total Segment
Revenues for the Nine Months Ended
September 30, 2007
Commercial multi-peril line of business
Dwelling and commercial property mono-line businesses
Due to our geographical location, property and casualty insurance operations in Puerto Rico are subject to natural catastrophic activity, in particular hurricanes
and earthquakes. As a result, local insurers, including us, rely on the international reinsurance market. The property and casualty insurance market has been affected by increased costs of reinsurance
during the last year due to severe catastrophic losses in 2005, which are also expected to cause reinsurance costs to continue to increase in the near future.
We maintain an extensive reinsurance program as a means of limiting the impact on our surplus in the event of a catastrophe. Our policy is to enter into reinsurance agreements with
reinsurers considered to be financially sound. Over 90% of our reinsurers have an A.M. Best rating of "A-" or better, or an equivalent rating from other rating agencies. During the
nine months ended September 30, 2007, 42.9% of the premiums written in the property and casualty insurance segment were ceded to reinsurers. Although these reinsurance arrangements do not
relieve us of our direct obligations to our insureds, we believe that the risk of our reinsurers not paying balances due to us is low.
Marketing and Distribution
Our marketing activities concentrate on promoting our strong brand, quality care, customer service efforts, size and quality of provider networks, flexibility of
plan designs, financial strength and breadth of product offerings. We distribute our products through several different channels, including our salaried and commission-based internal sales force,
direct mail, independent brokers and agents and telemarketing staff. We also use our website to market our products.
Our branding and marketing efforts include "brand advertising", which focuses on the Triple-S name and the Blue Shield mark, "acquisition marketing",
which focuses on attracting new customers, and "institutional advertising", which focuses on our overall corporate image. We believe that the strongest element of our brand identity is the
"Triple-S" name. We seek to leverage what we believe to be the high name recognition and comfort level that many existing and potential customers associate with this brand. Acquisition
marketing consists of business-to-business marketing efforts which are used to generate leads for brokers and our sales force as well as
direct-to-consumer marketing which is used to add new customers to our direct pay businesses. Institutional advertising is used to promote key corporate interests and overall
company image. We believe that these efforts support and further our competitive brand advantage. We will continue to utilize the Triple-S name and the Blue Shield mark for all managed
care products and services in Puerto Rico.
Managed Care Segment.
We rely principally on our internal sales force and a network of independent brokers and agents to
market our products. Individual policies and Medicare Advantage products are sold entirely through independent agents who exclusively sell our individual products, and group products are sold through
our 70 person internal sales force as well as our approximately 350 independent brokers and agents. We believe that each of these marketing methods is optimally suited to address the specific needs of
the customer base to which it is assigned. In the Reform sector, those notified by the government of Puerto Rico that they are eligible to participate in the Reform may enroll in the program at our
competition exists among managed care companies for brokers and agents with demonstrated ability to secure new business and maintain existing accounts. The basis of competition
for the services of such brokers and agents are commission structure, support services, reputation and prior relationships, the ability to retain clients and the quality of products. We pay
commissions on a monthly basis based on premiums paid. We believe that we have good relationships with our brokers and agents, and that our products, support services and commission structure are
highly competitive in the marketplace.
Life Insurance Segment.
In our life insurance segment, we offer our insurance products through our own network of brokers and
independent agents, as well as group life insurance coverage through our managed care network of agents. We place a majority of our premiums (51% in the nine months ended September 30, 2007 and
47% in 2006) through direct selling to customers in their homes. GA Life employs over 500 full-time active agents and managers and utilizes approximately 1,200 independent agents and
brokers. We pay commissions on a monthly basis based on premiums paid. In addition, GA Life has approximately 200 agents that are licensed to sell certain of our managed care products.
Property and Casualty Insurance Segment.
In our property and casualty insurance segment, business is exclusively subscribed
through 20 general agencies, including our insurance agency, Signature Insurance Agency, Inc. (SIA), where business is placed by independent insurance agents and brokers. During the nine months
ended September 30, 2007, SIA placed approximately 51% of STS's total premium volume. SIA placed approximately 52%, 52% and 53% of total premium volume of our property and casualty insurance
subsidiary, Seguros Triple-S, Inc. (STS), during the years ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2006, SIA was the third largest
insurance agency in Puerto Rico in terms of premiums written. The general agencies contracted by our property and casualty insurance subsidiary remit premiums net of their respective commission.
We offer our products in the managed care segment to four distinct market sectors in Puerto Rico. The following table sets forth enrollment information with
respect to each sector at September 30, 2007:
September 30, 2007
Percentage of Total
The Commercial accounts sector includes corporate accounts, U.S. federal government employees, individual accounts, local government employees, and Medicare
Corporate accounts consist of small (2 to 50 employees) and large employers (over 50 employees). Employer
groups may choose various funding options ranging from fully insured to self-funded financial arrangements or a combination of both. While self-funded clients participate in
our managed care networks, the clients bear the claims risk, except to the extent that such self-funded clients maintain stop loss coverage, including with us.
U.S. Federal Government Employees.
For more than 40 years, we have maintained our leadership in the provision of
managed care to U.S. federal government employees in Puerto Rico. We provide our services to federal employees in Puerto Rico under the Federal Employees Health Benefits Program pursuant to a direct
contract with the United States Office of Personnel Management (OPM). We are one of two companies in Puerto Rico that has such a contract with OPM. Every year, OPM allows other insurance companies to
compete for this business, provided such companies comply with the applicable requirements for service providers. This contract is subject to termination in the event of noncompliance not corrected to
the satisfaction of OPM.
We provide managed care services to individuals and their dependent family members who contract these
services directly with us though our network of independent brokers. We provide individual and family contracts. We assume the risk of both medical and administrative costs in return for a monthly
Local Government Employees.
We provide managed care services to the local government employees of Puerto Rico through a
government-sponsored program whereby we assume the risk of both medical and administrative costs for its members in return for a monthly premium. The government qualifies on
an annual basis the managed care companies that participate in this program and sets the coverage, including benefits, co-payments and amount to be contributed by the government. Employees
then select from one of the authorized companies and pays for the difference between the premium of the selected carrier and the amount contributed by the government.
We offer Medicare Supplement products, which provide supplemental coverage for many of the medical
expenses that the basic Medicare program does not cover, such as deductibles, coinsurance and specified losses that exceed the Federal program's maximum benefits.
In 1994, the government of Puerto Rico privatized the delivery of services to the medically indigent population in Puerto Rico, as defined by the government, by
contracting with private managed care companies instead of providing health services directly to such population. The government divided Puerto Rico into eight geographical areas and by
December 31, 2001, the Reform had been fully implemented in each of these areas. Each geographical area is awarded to a managed care company doing business in Puerto Rico through a competitive
bid process. As of December 31, 2006, the Reform provided healthcare coverage to over 1.5 million people. Mental health and drug abuse benefits are currently offered to Reform
beneficiaries by behavioral healthcare companies and are therefore not part of the benefits covered by us.
Reform program is similar to the Medicaid program, a joint federal and state health insurance program for medically indigent residents of the state. The Medicaid program is
structured to provide states the flexibility to establish eligibility requirements, benefits provided, payment rates, and program administration rules, subject to general federal guidelines.
The government has adopted several measures to control the increase of Reform expenditures, which represented approximately 12% of total government expenditures during its fiscal year
ended June 30, 2006, including closer and continuous scrutiny of participants' (members') eligibility, decreasing the number of areas in order to take advantage of economies of scale and
establishing disease management programs. In addition, the government of Puerto Rico began a pilot project in 2003 in one of the eight geographical areas under which it contracted services on an ASO
basis instead of contracting on a fully insured basis. This project was subsequently extended to the Metro-North region, which was served by us until October 31, 2006. All other areas that we
currently serve remain with the fully-insured model; however, the government may implement such ASO program in the future. If it is adopted in any areas served by us during the contract period, we
would not generate premiums in the Reform business but
instead administrative service fees. On the other hand, the government has expressed its intention to evaluate different alternatives of providing health services to Reform beneficiaries.
The government of Puerto Rico has also implemented a plan to allow dual-eligibles enrolled in the Reform to move from the Reform program to a Medicare Advantage plan under
which the government, rather than the insured, will assume all of the premiums for additional benefits not included in traditional Medicare programs, such as the deductibles and
co-payments of prescription drug benefits. Many qualified Reform participants from areas served by us began moving to the government-sponsored plan in January 2006, and
approximately 61,000 of such participants did so in the year ended December 31, 2006. During the first nine months of 2007, approximately 1,600 participants from areas served by us moved to the
We provide managed care services to Reform members in the North and Southwest regions. We have participated in the Reform program since 1995. The premium rates for each Reform contract
are negotiated annually. The contracts include a provision, however, that if the net income for any given contract year, as defined therein, resulting from the provision of services there under
exceeds 2.5% of earned premiums, the insurance company is required to return 75.0% of the excess to the government. If the contract renewal process is not completed by a contract's expiration date,
the contract may be extended by the government, upon acceptance by us, for any subsequent period of time if deemed to be in the best interests of the beneficiaries and the government. The terms of a
contract, including premiums, can be renegotiated if the term of the contract is extended. Each contract is subject to termination in the event of non-compliance by the insurance company
not corrected or cured to the satisfaction of the government entity overseeing the Reform, or in the event that the government determines that there is an insufficiency of funds to finance the Reform.
For additional information
please see "Risk FactorsRisks Relating to Our BusinessWe are dependent on a small number of government contracts to generate a significant amount of the revenues of our
managed care business".
Medicare is a federal program administered by CMS that provides a variety of hospital and medical insurance benefits to eligible persons aged 65 and over as well
as to certain other qualified persons. Medicare, with the approval of the Medicare Modernization Act, started promoting managed care organizations (MCOs), a sponsored Medicare product that offers
benefits similar to or better than the traditional Medicare product, but where the risk is assumed by the MCOs. This is called Medicare Advantage. We entered into the Medicare Advantage market in 2005
and have contracts with CMS to provide extended Medicare coverage to Medicare beneficiaries under our
policies. Under these annual contracts, CMS pays us a set premium rate
based on membership that is adjusted for demographic factors and health status. In addition, for certain of our Medicare Advantage products the member will also pay an additional premium for
Every Medicare beneficiary must be given the opportunity to select a prescription drug plan through Medicare Part D, largely funded by the federal
government. We are required to offer a Medicare Part D prescription drug plan to our enrollees in every area in which we operate. We offer prescription drug benefits under Medicare
Part D pursuant to our Medicare Advantage plans as well as on a stand-alone basis. Our stand-alone prescription drug plan, called
launched in 2006.
Our life insurance customers consist primarily of individuals, which hold approximately 320,000 policies, and insure approximately 1,800 groups.
Our property and casualty insurance segment targets small-to-medium sized accounts with low to average exposures to catastrophic losses.
Our dwelling insurance line of business aims for rate stability and seeks accounts with a very low exposure to catastrophic losses. Our auto physical damage and auto liability customer bases consist
primarily of commercial accounts.
Underwriting and Pricing
We strive to maintain our market leadership by providing all of our managed care members with the best health care coverage at reasonable cost. Disciplined
underwriting and appropriate pricing are core strengths of our business and we believe are an important competitive advantage. We continually review our underwriting and pricing guidelines on a
product-by-product and customer group-by-group basis in order to maintain competitive rates in terms of both price and scope of benefits. Pricing is
based on the overall risk level and the estimated administrative expenses attributable to the particular segment. During the second quarter of 2007, we began implementing modifications to our small
group underwriting process to enable us to perform a health risk assessment, based on demographics, claims experience and other variables, at the inception of the contract.
claims database enables us to establish rates based on our own experience and provides us with important insights about the risks in our service areas. We tightly manage the overall
rating process and have processes in place to ensure that underwriting decisions are made by properly
personnel. In addition, we have developed and implemented a utilization review and fraud and abuse prevention program.
have been able to maintain relatively high retention rates in the corporate accounts sector of our managed care business and since 2003 have maintained our overall market share. The
retention rate in our corporate accounts, which is the percentage of existing business retained in the renewal process, has been over 90% in the last four years.
In our managed care segment, the rates are set prospectively, meaning that a fixed premium rate is determined at the beginning of each contract year and revised at renewal. We
renegotiate the premiums of different groups in the corporate accounts subsector as their existing annual contracts become due. We set rates for individual contracts based on the most recent
semi-annual community rating. We consider the actual claims trend of each group when determining the premium rates for the following contract year. Rates in the Reform, PDP and Medicare
Advantage sectors and for federal and local government employees are set on an annual basis through negotiations with the U.S. Federal and Puerto Rico governments, as applicable.
Effective January 1, 2006, payments for Medicare Advantage plans are based on a competitive bidding process that may decrease the amount of premiums paid to us or cause us to
increase the benefits we offer without a corresponding increase in premiums. As a result of the competitive bidding process, in order to maintain our current level of profitability we may in the
future be required to reduce benefits
or charge our members an additional premium, either of which could make our health plans less attractive to members and adversely affect our membership. For further information, see "Risk
FactorsRisks Relating to Our BusinessThe revised rate calculation system for Medicare Advantage established by the MMA could reduce our profitability" and
"RegulationFederal RegulationThe 2003 Medicare Modernization Act2006 Bidding Process". In addition, we may be subject to lower Medicare Advantage rates in the
future if Congress enacts the Children's Health and Medicare Protection Act of 2007 (H.R. 3162). If enacted as currently proposed, H.R. 3162, which was passed by the U.S. House of
Representatives on August 1, 2007, and as of the date of this prospectus was under consideration by the U.S. Senate, would gradually reduce Medicare Advantage rates over a four-year
period to ensure financial neutrality with the traditional fee-for-service Medicare program. See "Risks Related to the Regulation of Our IndustryCMS's risk
adjustment payment system and budget neutrality factors may make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations,"
and "RegulationFederal RegulationLegislative and Regulatory Initiatives".
Our individual life insurance business has been priced using mortality, morbidity, lapses and expense assumptions which approximate actual experience for each
line of business. We review pricing assumptions on a regular basis. Individual insurance applications are reviewed by using common underwriting standards in use in the United States, and only those
applications that meet these commonly used underwriting requirements are approved for policy issuance. Our group life insurance business is written on a group-by-group basis.
We develop the pricing for our group life business based on mortality and morbidity experience and estimated expenses attributable to each particular line of business.
The property and casualty insurance sector has experienced soft market conditions in Puerto Rico in recent periods, principally as a result of the deregulation of
commercial property rates since 2001. Notwithstanding these conditions, our property and casualty segment has maintained its leadership position in the property insurance sector by following prudent
underwriting and pricing practices.
core business is comprised of small and medium-sized accounts. We have attained positive results through attentive risk assessment and strict adherence to underwriting guidelines,
combined with maintenance of competitive rates on above-par risks designed to maintain a relatively high retention ratio. Underwriting strategies and practices are closely monitored by
senior management and constantly updated based on market trends, risk assessment results and loss experience. Commercial risks in particular are fully reviewed by our professionals.
Quality Initiatives and Medical Management
We utilize a broad range of focused traditional cost containment and advanced care management processes across various product lines. We continue to enhance our
management strategies, which seek to control claims costs while striving to fulfill the needs of highly informed and demanding managed care consumers. One of these strategies is the reinforcement of
disease and case management programs, which empower consumers by educating them and engaging them in actively maintaining or improving their own health. Early identification of patients and
inter-program referrals are the focus of these programs, which allow us to provide integrated service to our customers based on their specific conditions. The disease management programs include
programs which target asthma, diabetes and selected nutrition related conditions, a prenatal program which focuses on preventing prenatal complications and promoting adequate nutrition, and a
medication therapy management program aimed at plan members who are identified as having a potential for high drug usage. In addition, we have had a contract with McKesson Health Solutions since 1998
pursuant to which they provide to us a 24-hour telephone-based triage program and health information services for all our sectors. McKesson also provides utilization management and disease
management program services for the Reform sector. These programs are also available in the Medicare Advantage sector and we intend to expand to the Commercial sector the programs not currently
offered in that sector, such as the congestive heart failure disease management program. Other strategies include innovative partnerships and business alliances with other entities to provide new
products and services such as an employee assistance program and the promotion of evidence-based protocols and patient safety programs among our providers. We also employ registered nurses and social
workers to manage individual cases and coordinate healthcare services. We have implemented a hospital concurrent review program, the goal of which is to monitor the appropriateness of high admission
rate diagnoses and unnecessary stays. These services and programs include pre-certification and concurrent review hospital discharge services for acute patients, as well as disease
management programs for the chronic care population and nurse case managers for complex population members.
addition, we have developed and provide a variety of services and programs for the acute, chronic and complex populations. The services and programs seek to enhance quality by
eliminating inappropriate hospitalizations or services. We also encourage the usage of formulary and generic drugs, instead of non-formulary therapeutic equivalent drugs, through benefit
design and member and physician interactions and have implemented a three-tier formulary which offers three co-payment levels: the lowest level for generic drugs, a higher
level for brand-name drugs and the highest level for brand-name drugs that are not on the formulary. We have also established an exclusive pharmacy network with discounted
rates. In addition, through arrangements with our pharmacy benefit manager, we are able to obtain discounts and rebates on certain medications based on formulary listing and market share.
We have developed and implemented integrated and reliable information technology systems that we believe have been critical to our success. Our systems collect
and process information centrally and support our core administrative functions, including premium billing, claims processing, utilization management, reporting, medical cost trending, as well as
certain member and provider service functions, including enrollment, member eligibility verification, claims status inquiries, and referrals and authorizations.
We have substantially completed a system conversion process related to our property and casualty insurance business, which was begun in April 2005, at an estimated cost of
In addition, we have selected Quality Care Solutions, Inc. to assess and implement new core business applications for our managed care segment. We expect the assessment to be
completed in the fourth quarter of 2007, at which point we plan to convert our managed care system over time by line of business, with the first line of business expected to be converted in the first
half of 2009. We expect the managed care conversion process to be completed by 2013 at a total cost of approximately $40.0 million.
new core business applications are intended to provide functionality and flexibility to allow these entities to offer new services and products and facilitate the integration of
future acquisitions. They are also designed to improve customer service, enhance claims processing and contain operational expenses.
Approximately 98% of member services are provided through one of our contracted provider networks and the remaining 2% of member services are provided by
out-of-network providers. Our relationships with managed care providers, physicians, hospitals, other facilities and ancillary managed care providers are guided by standards
established by applicable regulatory authorities for network development, reimbursement and contract methodologies. As of December 31, 2006, we had provider contracts with 4,286 primary care
physicians, 2,991 specialists and 62 hospitals.
is generally our philosophy not to delegate full financial responsibility to our managed care providers in the form of capitation-based reimbursement. For certain ancillary services,
such as behavioral health services, and primary services in the Reform business and
product, we generally enter into capitation
arrangements with entities that offer broad-based services through their own contracts with providers. We attempt to provide market-based reimbursement along industry standards. We seek to ensure that
providers in our networks are paid in a timely manner, and we provide means and procedures for claims adjustments and dispute resolution. We also provide a dedicated service center for our providers.
We seek to maintain broad provider networks to ensure member choice while implementing effective management programs designed to improve the quality of care received by our members.
We promote the use of electronic claims billing to our providers. Approximately 90% of claims are submitted electronically through our fully automated claims processing system, and our
"first-pass rate", or the rate at which a claim is approved for payment after the first time it is processed by our system without human intervention, for physician claims has averaged
over 90% for the last two years.
the Reform sector, we have a network of Independent Practice Associations (IPAs) which provide managed care services to our Reform beneficiaries in exchange for a capitation fee. The
IPA assumes the costs of certain primary care services provided and referred by its primary care physicians (PCPs), including procedures and in-patient services not related to risks
assumed by us. We retain the risk associated with services provided to beneficiaries under this arrangement, such as: neonatal, obstetrical, AIDS, cancer, cardiovascular and dental services, among
believe that physicians and other providers primarily consider member volume, reimbursement rates, timeliness of reimbursement and administrative service capabilities along with the
"non-hassle" factor or reduction of non-value added administrative tasks when deciding whether to contract with a managed care plan. As a result of our established position in
the Puerto Rican market, the strength of the Triple-S name and our association with the BCBSA, we believe we have strong relationships with hospital and provider networks leading to a
strong competitive position in terms of hospital count, number of providers and number of in-network specialists.
We generally contract for hospital services to be paid on an all-inclusive per diem basis, which
includes all services necessary during a hospital stay. Negotiated rates vary among hospitals based on the complexity of services provided. We annually evaluate these rates and revise them, if
Fee-for-service is our predominant reimbursement methodology for physicians, except for
the Reform sector. Our physician rate schedules applicable to services provided by in-network physicians are pegged to a resource-based relative value system fee schedule and then adjusted
for competitive rates in the market. This structure is similar to reimbursement methodologies developed and used by the federal Medicare system and other major payers. Payments to physicians under the
Medicare Advantage program are based on Medicare fees. In the Reform sector, we make payments to certain of our providers in the form of capitation-based reimbursement.
are provided to our members through our network providers with whom we contract directly. Members seeking medical treatment outside of Puerto Rico are served by providers in
these areas through the BlueCard program, a third-party national provider network.
We subcontract our triage call center, utilization management and disease management, mental and substance
abuse health services for federal government employees and other large ASO accounts, and pharmacy benefits management services through contracts with third parties.
addition, we contract with a number of other ancillary service providers, including laboratory service providers, home health agency providers and intermediate and
long-term care providers, to provide access to a wide range of services. These providers are normally paid on either a fee schedule or fixed per day or per case basis.
The insurance industry in Puerto Rico is highly competitive and is comprised of both local and foreign entities. The approval of the Gramm-Leach-Bliley Act of
1999, which applies to financial institutions domiciled in Puerto Rico, has opened the insurance market to new competition by allowing financial institutions such as banks to enter into the insurance
business. At the moment, several banks in Puerto Rico have established subsidiaries that operate as insurance agencies.
The managed care industry is highly competitive, both nationally and in Puerto Rico. Competition continues to be intense due to aggressive marketing, business
consolidations, a proliferation of new products and increased quality awareness and price sensitivity among customers. Industry participants compete for customers based on the ability to provide a
total value proposition which we believe includes quality of service and flexibility of benefit designs, access to and quality of provider networks, brand recognition and reputation, price and
believe that our competitive strengths, including our leading presence in Puerto Rico, our Blue Shield license, the size and quality of our provider network, the broad range of our
product offerings, our strong complementary businesses and our experienced management team, position us well to satisfy these competitive requirements.
Competitors in the managed care segment include national and local managed care plans. We currently have approximately 980,000 members enrolled in our managed care segment at
September 30, 2007, representing approximately 25% of the population of Puerto Rico. Our market share in terms of premiums written in Puerto Rico was estimated at over 25% for the year ended
December 31, 2006. We offer a variety of managed care products, and are the leader by market share in almost every sector, as measured by the share of premiums written. Our nearest competitor
is Medical Card Systems Inc., which had a market share of approximately 22% for the year ended December 31, 2006.
Our other largest competitors in the managed care segment are Aveta Inc. (or MMM Healthcare) and Humana Inc.
As a result of the GA Life acquisition, we are the leading provider of life insurance products in Puerto Rico. In the life insurance segment, we are the only life
insurance company that distributes our products through home service. However, we face competition in each of our product lines, in particular from Cooperativa de Seguros de Vida de Puerto Rico and
National Life Insurance Company. In the ordinary life sector, our main competitors are National Life Insurance Company and Americo Financial Life and Annuity Insurance Company. In group life
insurance, our main competitors are Hartford Life, Inc., Universal Life Insurance Company and Metropolitan Life Insurance Company. In the cancer sector, our main competitors are National Life
Insurance Company, Trans-Oceanic Life Insurance Company, Universal Life Insurance Company and American Family Insurance.
The property and casualty insurance market in Puerto Rico is extremely competitive. In addition, soft market conditions prevailed during 2006 in Puerto Rico. In
the local market, such conditions mostly affected commercial risks, precluding rate increases and even provoking lower premiums on both renewals and new business. Property and casualty insurance
companies tend to compete for the same accounts through more favorable price and/or policy terms and better quality of services. We compete by reasonably pricing our products and providing efficient
services to producers, agents and clients. We believe that our knowledgeable, experienced personnel are also an incentive for our customers to conduct business with us.
In 2006, we were the fourth largest property and casualty insurance company in Puerto Rico, as measured by direct premiums, with a market share of approximately 9%. Our nearest
the property and casualty insurance market in Puerto Rico in 2006 were National Insurance Company and Integrand Assurance Company. The market leaders in the property and casualty insurance market in
Puerto Rico in 2006 were Universal Insurance Group, Cooperativa de Seguros Múltiples de Puerto Rico and MAPFRE Corporation.
Blue Shield License
We have the exclusive right to use the Blue Shield name and mark for the sale, marketing and administration of managed care plans and related services in Puerto
Rico. We believe that the Blue Shield name and mark are valuable brands of our products and services in the marketplace. The license agreements, which have a perpetual term (but which are subject to
termination under circumstances described below), contain certain requirements and restrictions regarding our operations and our use of the Blue Shield name and mark.
Upon the occurrence of any event causing the termination of our license agreements, we would cease to have the right to use the Blue Shield name and mark in Puerto Rico. We also would no
longer have access to the BCBSA networks of providers and BlueCard Program. We would expect to lose a significant portion of our membership if we lose these licenses. Loss of these licenses could
significantly harm our ability to compete in our markets and could require payment of a significant fee to the BCBSA. Furthermore, if our licenses were terminated, the BCBSA would be free to issue a
new license to use the Blue Shield name and marks in Puerto Rico to another entity, which would have a material adverse affect on our business, financial condition and results of operations. See "Risk
FactorsThe termination or modification of our license agreements to use the Blue Shield name and mark could have an adverse effect on our business, financial condition and results of
which could result in termination of our license agreements include, but are not limited to:
to maintain our total adjusted capital at 200% of Health Risk-Based Capital Authorized Control Level, as defined by the National Association of Insurance
Commissioners (NAIC) Risk Based Capital (RBC) model act;
to maintain liquidity of greater than one month of underwritten claims and administrative expenses, as defined by the BCBSA, for two consecutive quarters;
to satisfy state-mandated statutory net worth requirements;
financial insolvency; and
change of control not otherwise approved by the BCBSA or a violation of the BCBSA voting and ownership limitations on our capital stock.
BCBSA license agreements and membership standards specifically permit a licensee to operate as a for-profit, publicly-traded stock company, subject to certain governance
and ownership requirements.
Pursuant to our license agreements with BCBSA, at least 80% of the revenue that we earn from health care plans and related services in Puerto Rico, and at least 66.7% of the revenue that
we earn from (or at least 66.7% of the enrollment for) health care plans and related services both in the United States and in Puerto Rico together, must be sold, marketed, administered, or
underwritten through use of the Blue Shield name and mark. This may limit the extent to which we will be able to expand our health care operations, whether through acquisitions of existing managed
care providers or otherwise, in areas where a holder of an exclusive right to the Blue Shield name and mark is already present. Currently, the Blue Shield name and mark is licensed to other entities
in all markets in the continental United States, Hawaii, and Alaska.
to the rules and license standards of the BCBSA, we guarantee our subsidiaries' contractual and financial obligations to their respective customers. In addition, pursuant to the
rules and license standards of the BCBSA, we have agreed to indemnify the BCBSA against any claims asserted against it resulting from our contractual and financial obligations.
Each license requires an annual fee to be paid to the BCBSA. The fee is determined based on a per-contract charge from products using the Blue Shield name and mark. The
annual BCBSA fee for the year 2007 is $926,631. During the years ended December 31, 2006 and, 2005, we paid fees to the BCBSA in the amount of $964,956 and $791,587, respectively. The BCBSA is
a national trade association of 39 Blue Cross Blue Shield licensees (also known as "Member Plans"), the primary function of which is to promote and preserve the integrity of the Blue Cross Blue Shield
names and marks, as well as to provide certain coordination among the Member Plans. Each Blue Cross Blue Shield Member Plan is an independent legal organization and is not responsible for obligations
of other BCBSA Member Plans. With a few limited exceptions, we have no right to market
products and services using the Blue Shield names and marks outside our Blue Shield licensed territory.
do not have the authority to use the Blue Cross name and marks in Puerto Rico.
Under the rules and license standards of the BCBSA, other Blue Cross Blue Shield Plans must make available their
provider networks to members of the BlueCard program in a manner and scope as consistent as possible to what such member would be entitled to in his or her home region. Specifically, the Host Plan
(located where the member receives the service) must pass on discounts to BlueCard members from other Plans that are at least as great as the discounts that the providers give to the Host Plan's local
members. The BCBSA requires us to pay fees to any Host Blue Cross Blue Shield Plan whose providers submit claims for health care services rendered to our members who receive care in their service
area. Similarly, we are paid fees for submitting claims and
providing other services to members of other Blue Cross Blue Shield Plans who receive care in our service area.
We are required to estimate the ultimate amount of claims which have not been reported, or which have been received but not yet adjudicated, during any accounting
period. These estimates, referred to as claim liabilities, are recorded as liabilities on our balance sheet.
We estimate claim reserves in accordance with Actuarial Standards of Practice promulgated by the Actuarial Standards Board, the committee of the American Academy of Actuaries that
establishes the professional guidelines and standards for actuaries to follow. A degree of judgment is involved in estimating reserves. We make assumptions regarding the propriety of using existing
claims data as the basis for projecting future payments. For additional information regarding the calculation of claim liabilities, see "Management's Discussion and Analysis of Financial Condition and
Results of OperationsCritical Accounting Policies and EstimatesClaim Liabilities".
Our investment philosophy is to maintain a largely investment-grade fixed income portfolio, provide adequate liquidity for expected liability durations and other
requirements, and maximize total return through active investment management.
evaluate the interest rate risk of our assets and liabilities regularly, as well as the appropriateness of investments relative to our internal investment guidelines. We operate
within these guidelines by maintaining a diversified portfolio, both across and within asset classes.
decisions are centrally managed by investment professionals based on the guidelines established by management and approved by our finance committee. Our internal investment
group is comprised of the CFO, an investment officer, a cash management officer and a treasury operations officer. The internal investment group uses an external investment consultant and manages our
short-term investments, fixed income portfolio and equity securities of Puerto Rican corporations that are classified as available for sale. In addition, we use GE Asset Management, Lord
Abbett and State Street Global Advisor as portfolio managers for our trading securities.
The board of directors monitors and approves investment policies and procedures. The investment portfolio is managed following those policies and procedures, and any exception must be
reported to our board of directors.
For additional information on our investments, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative
Disclosures About Market RiskMarket Risk Exposure".
We consider our trademarks of "Triple-S" and "SSS" very important and material to all segments in which we are engaged. In addition to these, other
trademarks used by our subsidiaries that are considered important have been duly registered with the Department of State of Puerto Rico and the United States Patent and Trademark Office. It is our
policy to register all our important and material trademarks in order to protect our rights under applicable corporate and intellectual property laws. In addition, we have the exclusive right to use
the "Blue Shield" mark in Puerto Rico. See "Blue Shield License".
As of September 30, 2007, we had 2,278 full-time employees and 301 temporary employees. Our managed care subsidiary has a collective bargaining
agreement with the Unión General de Trabajadores, which represents approximately 45% of our managed care subsidiary's 781 regular employees. The collective bargaining agreement expires
on July 31, 2012. We consider our relations with employees to be good.
We own a seven story (including the basement floor) building located at 1441 F.D. Roosevelt Avenue, in San Juan, Puerto Rico, and two adjacent buildings, as well
as the adjoining parking lot. In addition, we own five floors of a fifteen-story building located at 1510 F.D. Roosevelt Avenue, in Guaynabo, Puerto Rico. The properties are subject to liens
under our credit facilities. See "Management's Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital Resources".
addition to the properties described above, we or our subsidiaries are parties to operating leases that are entered into in the ordinary course of business.
believe that our facilities are in good condition and that the facilities, together with capital improvements and additions currently underway, are adequate to meet our operating
needs for the
foreseeable future. The need for expansion, upgrading and refurbishment of facilities is continually evaluated in order to keep facilities aligned with planned business growth and corporate strategy.
History and Corporate Information
We have been owned since our inception in 1959 by doctors and dentists that are or were providers in our managed care networks. We were incorporated under the
laws of Puerto Rico in January 1999 as part of a reorganization pursuant to which our current holding company structure was created. The purpose of the reorganization was to increase our
flexibility, as holding companies are not insurance companies within the meaning of the Puerto Rico Insurance Code and are therefore generally not subject to the limitations applicable to insurance
companies. Pursuant to the reorganization, shares of our predecessor managed care company Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS) were exchanged for shares of a newly-created
holding company, Triple-S Management Corporation (TSM), and SSS transferred the ownership of its wholly-owned subsidiaries and sold all of its real estate holdings to TSM. SSS was merged
into Triple-S Salud, Inc., which subsequently changed its name to Triple-S, Inc. (TSI), our managed care subsidiary.
order to enhance our product offering, in the 1980s we commenced property and casualty insurance operations through the establishment of our subsidiary Seguros de Vida
Triple-S (STS) and life insurance operations through the establishment of our former subsidiary Seguros de Vida Triple-S, which was merged into GA Life in June 2006.
These lines of business have grown to become significant market participants in Puerto Rico.
1979 until 2002, our managed care subsidiary and its predecessor companies were exempt from Puerto Rico income taxes pursuant to a ruling issued by the Department of the Treasury of
Puerto Rico (the Department of Treasury). On July 31, 2003, we and our managed care subsidiary executed a closing agreement with the Department of Treasury which terminated our managed care
subsidiary's tax exemption effective December 31, 2002. Accordingly, effective January 1, 2003 our managed care subsidiary became subject to Puerto Rico income taxes. The termination was
the result of a new public policy of the Department of Treasury which provided that entities organized as for-profit corporations, such as our managed care subsidiary, were no longer
entitled to the tax exemptions under the Puerto Rico tax code.
to the closing agreement, we agreed to pay taxes in respect of our managed care subsidiary's accumulated statutory net income since 1979.
The tax exemption ruling contained a prohibition on declaring dividends. Accordingly, until December 31, 2002, the amount of our net income available for distribution to
shareholders had excluded amounts derived from our managed care subsidiary's results of operations. Following the termination of the tax exemption effective December 31, 2002, the earnings of
our managed care subsidiary became available for distribution to our shareholders and in 2007 and 2006, the board declared and paid cash dividends in the aggregate amount of $2.5 and
$6.2 million, respectively. Prior to the January 2006 dividend, we had not declared or distributed any dividends on our common stock since our inception in 1959.
History of Puerto Rico
Puerto Rico, the fourth largest of the Caribbean islands, is located approximately 1,600 miles southeast of New York. The population of Puerto Rico was
approximately 3.9 million in 2005, as estimated by the U.S. Census Bureau. The San Juan metropolitan area, Puerto Rico's principal economic hub which includes the municipalities surrounding San
Juan, had a population of approximately 1.5 million in 2005.
Puerto Rico came under United States sovereignty pursuant to the Treaty of Paris in 1898. Puerto Ricans have been citizens of the United States since 1917. The United States and Puerto
Rico share a common defense, market, and currency. Puerto Rico exercises virtually the same control over its internal affairs as do the 50 states. It differs from the states, however, in its
relationship with the federal government. The people of Puerto Rico are citizens of the United States but may not vote in national elections. They are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives but no vote. Most federal taxes, except those such as Social Security taxes which are imposed by mutual consent, are not levied in Puerto
Rico. No federal income tax is collected from Puerto Rico residents on income earned in Puerto Rico, except for certain federal government employees who are subject to taxes on their salaries.
Constitution of Puerto Rico provides for the separation of powers of the executive, legislative, and judicial branches of government. The Governor is elected every four years. The
Legislative Assembly consists of a Senate and a House of Representatives, the members of which are elected for four-year terms. The highest court within the local jurisdiction is the
Supreme Court of Puerto Rico. Puerto Rico constitutes a District in the Federal Judiciary and has its own United States District Court. Decisions of this court may be appealed to the United States
Court of Appeals for the First Circuit and from there to the Supreme Court of the United States.
Various litigation claims and assessments against us have arisen in the ordinary course of business, including but not limited to, our activities as an insurer
and employer. Furthermore, the Commissioner of Insurance, as well other federal and government of Puerto Rico authorities, regularly make inquiries
and conduct audits concerning our compliance with applicable insurance and other laws and regulations.
Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such claims, assessments, audits and lawsuits would not have a material
adverse effect on our consolidated financial position or results of operations. However, given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain matters
could have a material adverse effect on our operating results and/or cash flows. Where our management believes that a loss is both probable and estimable, such amounts have been recorded. In other
cases, it is at least reasonably possible that we may incur a loss related to one or more of the mentioned pending
lawsuits or investigations, but we are unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.
Additionally, we may face various potential litigation claims that have not to date been asserted, including claims from persons purporting to have contractual rights to acquire shares
of the Corporation on favorable terms or to have inherited such shares notwithstanding applicable transfer and ownership restrictions. See "Risk FactorsRisks Relating to Our Capital
On September 4, 2003, José Sánchez and others filed a putative class action complaint against us, present and former
directors of the board of directors and our managed care subsidiary, and others, in the United States District Court for the District of Puerto Rico, alleging violations under the Racketeer Influenced
and Corrupt Organizations Act (RICO). The class action complaint, which was amended on March 24, 2005, seeks damages in excess of $40 million. The plaintiffs purport to represent, among
others, providers of medical products and services covered under policies issued or administered by the defendants, as well as the subscribers to those policies. Among other allegations, the suit
alleges a scheme to defraud the plaintiffs by acquiring control of our managed care subsidiary through illegally capitalizing our managed care subsidiary and later converting it to a for profit
corporation and depriving the shareholders of their ownership rights. The plaintiffs base their allegations on the alleged decisions of our managed care subsidiary's board of directors and
shareholders, purportedly made in 1979, to operate with certain restrictions in order to turn our managed care subsidiary into a charitable corporation. On May 4, 2006, the Court issued an
Opinion and Order awarding summary judgment in favor of all the defendants, thereby dismissing the case. Plaintiffs filed a notice of appeal before the United States Court of Appeals for the First
Circuit. On June 13, 2007, the First Circuit issued its Opinion confirming the summary judgment entered by the District Court. The plaintiffs did not move for any type of
post-judgment relief before the Court of Appeals. On September 11, 2007, the plaintiffs filed a petition for certiorari with the U.S. Supreme Court, which was docketed on
September 17, 2007. We filed an opposition to the petition for certiorari on October 17, 2007.
On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the Corporation, TSI and
others in the Court of First Instance for San Juan, Superior Section, alleging, among other things, violations by the defendants of provisions of the Puerto Rico Insurance Code, antitrust violations,
unfair business practices, breach of contract with providers, and damages in the amount of $12.0 million. The plaintiffs also asserted that, in light of TSI's former tax-exempt
status, the assets of TSI belong to a charitable trust held in the benefit of the people of Puerto Rico (the "charitable trust claim"). They also requested that we sell shares to them pursuant to a
contract with TSI dated August 16, 1989 regarding the acquisition of shares. We believe that many of the allegations brought by the plaintiffs in this complaint have been resolved in favor of
the Corporation and TSI in previous cases brought by the same plaintiffs in the United States District Court for the District of Puerto Rico and in the local courts. The defendants, including us and
TSI, answered the complaint, filed a counterclaim and filed several motions to dismiss.
On May 9, 2005, the plaintiffs amended the complaint to allege causes of action similar to those dismissed in the Sánchez case and to seek damages of approximately
$207.0 million. Defendants moved to dismiss all claims in the amended complaint. Plaintiffs opposed the motions to dismiss and defendants filed corresponding replies. In 2006, the Court held
several hearings concerning these dispositive motions and stayed all discovery until the motions were resolved.
On January 19, 2007, the Court denied a motion by the plaintiffs to dismiss the defendants' counterclaim for malicious prosecution and abuse of process. The Court ordered
plaintiffs to answer
the counterclaim by February 20, 2007. Although they filed after the required date, plaintiffs filed an answer to the counterclaim.
On February 7, 2007, the Court dismissed the charitable trust, RICO and violation of due process claims as to all of the plaintiffs. The tort, breach of contract and violation of
the Puerto Rico corporations' law claims were dismissed only against certain of the physician plaintiffs. The Court allowed the count based on antitrust to proceed, and in reconsideration allowed the
charitable trust and RICO claims to proceed. We appealed to the Puerto Rico Court of Appeals the denial of the motion to dismiss as to the antitrust allegations and the Court's decision to reconsider
the claims previously dismissed.
On May 30, 2007 the Puerto Rico Court of Appeals granted leave to replead the RICO and antitrust claims only to the physician plaintiffs, consistent with certain requirements set
forth in its opinion, to
allow the physician plaintiffs the opportunity to cure the deficiencies and flaws the Court found in plaintiffs allegations. The Court dismissed the charitable trust claim as to all plaintiffs,
denying them the opportunity to replead that claim, and dismissed the RICO and antitrust claims as to the non-physician plaintiffs. Also, the Court of Appeals granted leave to replead a
derivative claim capacity on behalf of the Corporation to the lone shareholder plaintiff. The plaintiffs moved for the reconsideration of this judgment. On July 18, 2007 the Court of Appeals
denied the plaintiffs motion for reconsideration, which has granted plaintiffs leave to replead certain matters. On August 17, 2007, plaintiffs filed a petition for certiorari by the Puerto
Rico Supreme Court, which we opposed on August 27, 2007. On October 16, 2007, the plaintiffs filed an Urgent Motion for acceptance of their petition for certiorari in light of the
allegations of improper political contributions made with the Corporation's funds by our former CEO, Miguel Vázquez Deynes, while in office. We do not believe that the alleged activity
referenced by Mr. Vázquez Deynes relates to the claims asserted in this case by plaintiffs or to legal issues presented in the petition for certiorari. We opposed the Urgent
Motion on October 30, 2007. The plaintiffs' petition for certiorari was denied by the Puerto Rico Supreme Court on November 9, 2007.
On May 22, 2003, a putative class action suit was filed by Kenneth A. Thomas, M.D. and Michael Kutell, M.D., on behalf of themselves and all others
similarly situated and the Connecticut State Medical Society against BCBSA and substantially all of the other Blue Cross and Blue Shield plans in the United States, including our managed care
subsidiary. The case is pending before the U.S. District Court for the Southern District of Florida, Miami District.
individual plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants, which they
allege have resulted in a loss of their property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that
the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered, medically
necessary services they render.
class action complaint alleges that the health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of
their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.
Management believes that our managed care subsidiary was brought to this litigation for the sole reason of being associated with the BCBSA. However, on June 18, 2004 the
plaintiffs moved to amend the complaint to include the Colegio de Médicos y Cirujanos de Puerto Rico (a compulsory association grouping all physicians in Puerto Rico), Marissel
Velázquez, M.D., President of the Colegio de Médicos y Cirujanos de Puerto Rico, and Andrés Meléndez, M.D., as plaintiffs against our
managed care subsidiary.
Later Marissel Velázquez, M.D. voluntarily dismissed her complaint against our managed care subsidiary.
Our managed care subsidiary, along with the other defendants, moved to dismiss the complaint on multiple grounds, including but not limited to arbitration and applicability of the
McCarran Ferguson Act.
The parties have been ordered to engage in mediation by the District Court, and twenty four plans, including our managed care subsidiary, are actively participating in the mediation
efforts. The mediation resulted in the creation of a Settlement Agreement that was filed with the Court on April 27, 2007, and on May 31, 2007, the District Court preliminarily approved
the Settlement Agreement. We have recorded an accrual for the estimated settlement, which is included within the accounts payable and accrued liabilities in our unaudited consolidated financial
statements as of and for the nine months ended September 30, 2007. A final approval hearing for the Settlement Agreement was held on November 14, 2007 but no order approving the
settlement had been issued as of the date of this prospectus.
On October 23, 2007, Ivonne Houellemont, Ivonne M. Lens and Antonio A. Lens, heirs of Dr. Antonio Lens-Aresti, a former shareholder of
TSI, filed a suit against TSI in the Court of First Instance for San Juan, Superior Section. The plaintiffs are seeking the return of 16 shares (prior to giving effect to the
3,000-for-one stock split) that were redeemed in 1996, a year after the death of Dr. Lens-Aresti, or compensation in the amount of $40,000 per share which
they allege is a share's present value, alleging that they were fraudulently induced to submit the shares for redemption in 1996. At the time of Dr. Lens-Aresti's death, the bylaws
of TSI would not have permitted the plaintiffs to inherit Dr. Lens-Aresti's shares, as those bylaws provided that in the event of a shareholder's death, shares could be redeemed at
the price originally paid for them or could be transferred only to an heir who was either a doctor or dentist. The plaintiffs' complaint also states that they purport to represent as a class all heirs
of the TSI's former shareholders whose shares were redeemed upon such shareholders' deaths. On October 31, 2007, the Corporation filed a motion to dismiss the claims as barred by the applicable
statute of limitations.
On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSI predecessor stock, filed suit
against TSI and the Commissioner of Insurance in the Court of First Instance for San Juan, Superior Section. Mr. Colón-Dueño owned one share of TSI predecessor
stock that was redeemed in 1999 for its original purchase price pursuant to an order issued by the Commissioner of Insurance requiring the redemption of a total of 1,582 shares that had been
previously sold by the company. The Company appealed this Commissioner of Insurance's order to the Puerto Rico Court of Appeals, which upheld that order by decision dated March 31, 2000. The
plaintiff requests that the court direct TSI to return his share of stock and pay damages in excess of $500,000 and attorney's fees. TSI believes that this claim is meritless, as the validity of the
share repurchase was decided by the Court of Appeals in 2000, and plans to vigorously contest this matter.
On March 1, 2006 and March 3, 2006, respectively, the Puerto Rico Center for Municipal Revenue Collection (CRIM) imposed a real property tax
assessment of approximately $1.3 million and a personal property tax assessment of approximately $4.0 million upon TSI for the fiscal years 1992-1993 through
2002-2003, during which time TSI qualified as a tax-exempt entity under Puerto Rico law pursuant to rulings issued by the Puerto Rico tax authorities. In imposing the tax
assessments, CRIM contends that because a for-profit corporation, such as TSI, is not entitled to such an exemption, the rulings recognizing the tax exemption that were issued should be
revoked on a retroactive basis and property taxes should be applied to TSI for the period when it was exempt. On March 28, 2006 and
March 29, 2006, respectively, TSI challenged the real and personal property tax assessments in the Court of First Instance for San Juan, Superior Section. On October 29, 2007, the Court
entered summary judgment for CRIM affirming the real property tax assessment of approximately $1.3 million. TSI filed a motion for reconsideration of the Court's summary judgment decision on
November 14, 2007. The Court has not issued a decision with respect to the personal property tax assessment. Management believes that these municipal tax assessments are improper and currently
expects to prevail in this litigation.
On October 25, 2007, the House of Representatives of the Legislative Assembly (the "House") of the Commonwealth of Puerto Rico approved a resolution
ordering the House's Committee on Health to investigate TSI, our managed care subsidiary. The resolution states that TSI originally intended to operate as a not-for-profit entity in order to provide
low-cost health insurance and improve the health services offered by certain government agencies. The resolution orders the Committee to investigate the effects of TSI's alleged failure to provide
low-cost health insurance, among other obligations, and requires the Committee to prepare and submit a report to the House detailing its findings, conclusions and recommendations on or
prior to sixty (60) days from the approval of the resolution. The Committee may refer any finding of wrongdoing to the Secretary of Justice of the Commonwealth for further investigation. We
believe that TSI and its predecessor managed care companies have complied with such obligations in all material respects, but cannot predict the outcome of the proposed investigation and are currently
unable to ascertain the impact these matters may have on our business, if any.
The operations of our managed care business are subject to comprehensive and detailed regulation in Puerto Rico, as well as U.S. Federal regulation. Supervisory
agencies include the Commissioner of Insurance, the Health Department of the Commonwealth of Puerto Rico and the Administration for Health Insurance of the Commonwealth of Puerto Rico (ASES, for its
Spanish acronym), which administers the Reform program for the Commonwealth of Puerto Rico. Federal regulatory agencies that oversee our operations include CMS, the Office of the Inspector General of
the U.S. Department of Health and Human Services, the Office for Civil Rights, the U.S. Department of Justice, and the Office of Personnel Management. These government agencies have the right to:
suspend and revoke licenses to transact business;
many aspects of the products and services we offer;
fines, penalties and/or sanctions;
our solvency and adequacy of our financial reserves; and
our investment activities on the basis of quality, diversification and other quantitative criteria, within the parameters of a list of permitted investments set
forth in applicable insurance laws and regulations.
operations and accounts are subject to examination and audits at regular intervals by these agencies. In addition, the U.S. Federal and local governments continue to consider and
enact many legislative and regulatory proposals that have impacted, or would materially impact, various aspects of the health care system. Some of the more significant current issues that may affect
our managed care business include:
to increase healthcare regulation, including efforts to expand the tort liability of health plans;
government plans and initiatives;
and Medicare reform legislation; and
government concerns regarding fraud and abuse.
U.S. Congress is continuing to develop legislation efforts directed toward patient protection, including proposed laws that could expose insurance companies to economic damages, and
in some cases punitive damages, for making a determination denying benefits or for delaying members' receipt of benefits as well as for other coverage determinations. Similar legislation has been
proposed in Puerto Rico. Given the political process, it is not possible to determine whether any federal and/or local legislation or regulation will be enacted in 2007 or what form any such
legislation might take.
Other legislative or regulatory changes that may affect us are described below. While certain of these measures could adversely affect us, at this time we cannot predict the extent of this impact.
Federal government and the government of Puerto Rico, including the Commissioner of Insurance, have adopted laws and regulations that govern our business activities in various ways.
These laws and regulations may restrict how we conduct our business and may result in additional burdens and costs to us. Areas of governmental regulation include:
forms, including plan design and disclosures;
rates and rating methodologies;
rules and procedures;
of electronically transmitted individually identifiable health information;
of claims, including timeliness and accuracy of in rates paid to providers of care; payment;
rules in contracts to administer government programs;
with affiliated entities;
on the ability to pay dividends;
of payment to providers of care;
resulting in a change of control;
rights and responsibilities;
and marketing activities;
of medical and other information and permitted disclosures;
of payment to providers of care;
on payments to providers;
of financial risk and other financial arrangements
condition (including reserves);
of new shares of capital stock;
laws and regulations are subject to amendments and changing interpretations in each jurisdiction. Failure to comply with existing or future laws and regulations could materially
and adversely affect our operations, financial condition and prospects.
Puerto Rico Insurance Laws
Our insurance subsidiaries are subject to the regulations and supervision of the Commissioner of Insurance. The regulations and supervision of the Commissioner of
Insurance consist primarily of the approval of certain policy forms, the standards of solvency that must be met and maintained by insurers and their agents, and the nature of and limitations on
investments, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations and the form and content of reports of financial condition required to be filed,
among others. In general, such regulations are for the protection of policyholders rather than security holders.
Rico insurance laws prohibit any person from offering to purchase or sell voting stock of an insurance company with capital contributed by shareholders (a stock insurer) which
constitutes 10% or more of the total issued and outstanding stock of such company or of the total issued and outstanding stock of a company that controls an insurance company, without the prior
approval of the Commissioner of Insurance. The proposed purchaser or seller must disclose any changes proposed to be made to the administration of the insurance company and provide the Commissioner of
Insurance with any information reasonably requested. The Commissioner of Insurance must make a determination within 30 days of the later of receipt of the petition or of additional information
requested. The determination of the Commissioner of Insurance will be based on its evaluation of the transaction's
on the public, having regard to the experience and moral and financial responsibility of the proposed purchaser, whether such responsibility of the proposed purchaser will affect the
effectiveness of the insurance company's operations and whether the change of control could jeopardize the interests of insureds, claimants or the company's other shareholders. Our articles prohibit
any institutional investor from owning 10% or more of our voting power, any person that is not an institutional investor from owning 5% or more of our voting power, and any person from beneficially
owning shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest in us. To the extent that a person, including an institutional
investor, acquires shares in excess of these limits, our articles provide that we will have the power to take certain actions, including refusing to give effect to a transfer or instituting
proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the articles.
Rico insurance laws also require that stock insurers obtain the Commissioner of Insurance's approval prior to any merger or consolidation. The Commissioner of Insurance cannot
approve any such transaction unless it determines that such transaction is just, equitable, consistent with the law and no reasonable objection exists. The merger or consolidation must then be
authorized by a duly approved resolution of the board of directors and ratified by the affirmative vote of two-thirds of all issued and outstanding shares of capital stock with the right
to vote thereon. The reinsurance of all or substantially all of the insurance of an insurance company by another insurance company is also deemed to be a merger or consolidation.
Rico insurance laws further prohibit insurance companies and insurance holding companies, among other entities, from soliciting or receiving funds in exchange for any new issuance
of its securities, other than through a stock dividend, unless the Commissioner of Insurance has granted a solicitation permit in respect of such transaction. The Commissioner of Insurance will issue
the permit unless it finds that the funds proposed to be secured are excessive for the purpose intended, the proposed securities and their distribution would be inequitable, or the issuance of the
securities would jeopardize the interests of policyholders or securityholders.
Rico insurance laws also limit insurance companies' ability to reinsure risk. Insurance companies can only accept reinsurance in respect of the types of insurance which they are
authorized to transact directly. Also, except for life insurance, insurance companies cannot accept any reinsurance in respect of any risk resident, located, or to be performed in Puerto Rico which
was insured as direct insurance by an insurance company not then authorized to transact such insurance in Puerto Rico. As a result,
insurance companies can only reinsure their risks with insurance companies in Puerto Rico authorized to transact the same type of insurance or with a foreign insurance company that has been approved
by the Commissioner of Insurance. Insurance companies cannot reinsure 75% or more of their direct risk with respect to any type of insurance without first obtaining the approval of the Commissioner of
Privacy of Financial and Health Information
Puerto Rico law requires that managed care providers maintain the confidentiality of financial and health information. The Commissioner of Insurance has
promulgated regulations relating to the privacy of financial information and individually identifiable health information. Managed care providers must periodically inform their clients of their
privacy policies and allow such clients to opt-out if they do not want their financial information to be shared. However, the regulations related to the privacy of health information do
not apply to managed care providers, such as us, who comply with the provisions of HIPAA. Also, Puerto Rico law requires that managed care providers provide patients with access to their health
information within a specified time and that they not charge more than a predetermined amount for such access. The law imposes various sanctions on managed care providers that fail to comply with
Managed Care Provider Services
Puerto Rico law requires that managed care providers cover and provide specific services to their subscribers. Such services include access to a provider network
that guarantees emergency and specialized services. In addition, the Office of the Solicitor for the Beneficiaries of the Reform is authorized to review and supervise the operations of entities
contracted by the Commonwealth of Puerto Rico to provide services under the Reform. The Solicitor may investigate and adjudicate claims filed by beneficiaries of the Reform against the various service
providers contracted by the Commonwealth of Puerto Rico. See "BusinessCustomersMedicare SupplementReform Sector" for more information.
Capital and Reserve Requirements
In addition to the capital and reserve requirements set forth below, the Commissioner of Insurance requires our managed care subsidiary to maintain minimum
capital of $1.0 million, our life insurance
subsidiary to maintain minimum capital of $2.5 million and our property and casualty insurance subsidiary to maintain minimum capital of $3.0 million. In addition, our managed care
subsidiary is subject to the capital and surplus licensure requirements of the BCBSA.
capital and surplus requirement of the BCBSA are based on the National Association of Insurance Commissioners' (NAIC) RBC Model Act. These capital and surplus requirements are
intended to assess the capital adequacy of life and accident and health insurers, taking into account the risk characteristics of an insurer's investments and products. The RBC Model Act set forth the
formula for calculating the risk-based capital requirements, which are designed to take into account risks, insurance risks, interest rate risks and other relevant risks with respect to an
individual insurance company's business.
RBC Model Act requires increasing degrees of regulatory oversight and intervention as an insurance company's risk-based capital declines. The level of regulatory
oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary insurance commissioner of a comprehensive financial plan for increasing its
risk-based capital to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control, in rehabilitation or liquidation proceeding. The RBC Model Act
provides for four different levels of regulatory attention depending on the ratio of the company's total adjusted capital (defined as the total of its statutory capital, surplus, asset valuation
reserve and dividend liability) to its risk-based capital. The "company action level" is triggered if a company's total adjusted capital is less than 200% but greater than or equal to 150%
of its risk-based capital. At the company action level, a company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its
capital position. A company whose total adjusted capital is between 250% and 200% of its risk-based capital is subject to a trend test. The trend test calculates the greater of any
decrease in the margin (i.e., the amount in dollars by which a company's adjusted capital exceeds it risk-based capital) between the current year and the prior year and between the current
year and the average of the past three years, and assumes that the decrease could occur again in the coming year. If a similar decrease in margin in the coming year would result in a
risk-based capital ratio of less than 190%, then company action level regulatory action will occur.
"regulatory action level" is triggered if a company's total adjusted capital is less than 150% but greater than or equal to 100% of its risk-based capital. At the
regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The "authorized control
level" is triggered if a company's total adjusted capital is less than 100% but greater than or equal to 70% of its risk-based capital, at which level the regulatory authority may take any
action it deems necessary, including placing the company under regulatory control. The "mandatory control level" is triggered if a company's total
capital is less than 70% of its risk-based capital, at which level the regulatory authority must place the company under its control.
and our insurance subsidiaries currently meet the minimum capital requirements of the Commissioner of Insurance and the BCBSA, as applicable. Regulation of financial reserves for
insurance companies and their holding companies is a frequent topic of legislative and regulatory scrutiny and proposals for change. It is possible that the method of measuring the adequacy of our
financial reserves could change and that could affect our financial condition.
Natural disasters have affected Puerto Rico greatly over the past 10 years and have prompted the local government to mandate property and casualty insurance reserves. In addition
to its catastrophic reinsurance coverage, we are required by local regulatory authorities to establish and maintain a trust fund (the Trust) to protect us from our dual exposure to hurricanes and
earthquakes. The Trust is intended to be used as our first layer of catastrophe protection whenever qualifying catastrophic losses exceed 5% of catastrophe premiums or when authorized by the
Commissioner of Insurance. Contributions to the Trust are determined by a rate (1% in 2006 and 2005), imposed by the Commissioner of Insurance on the catastrophe premiums written in that year. As of
September 30, 2007 and and December 31, 2006, we had $28.0 million and $26.5 million, respectively, invested in securities deposited in the Trust. The income generated by
investment securities deposited in the Trust becomes part of the Trust fund balance. For additional details see note 19 of the audited consolidated financial statements.
Puerto Rico insurance laws also restrict insurance companies' ability to pay dividends, as they provide that such companies can only pay cash dividends from their
available surplus funds derived from realized net profits and cannot pay dividends with funds derived from loans. Any violation of these provisions would subject us to a penalty under these laws.
Rico insurance laws are not directly applicable to us, as a holding company, since we are not an insurance company. However, we, together with our insurance subsidiaries, are
subject to the provisions of the General Corporation Law of Puerto Rico (PRGCL), which contains certain restrictions on the declaration and payment of dividends by corporations organized pursuant to
the laws of Puerto Rico. These provisions provide that Puerto Rico corporations may only declare dividends charged to their surplus or, in the absence of such surplus, net profits of the fiscal year
in which the dividend is declared and/or the preceding fiscal year. The PRGCL also contains provisions regarding the declaration and payment of dividends and directors' liability for illegal payments.
Guaranty Fund Assessments
We are required by Puerto Rico law and by the BCBSA guidelines to participate in certain guarantee associations. See "Management's Discussion and Analysis of
Financial Condition and Results of
OperationsOther ContingenciesGuarantee Association" for additional information.
Medicare is the health insurance program for retired United States citizens aged 65 and older, qualifying disabled persons, and persons suffering from
end-stage renal disease. Medicare is funded by the federal government and administered by CMS.
Medicare program, created in 1965, offers both hospital insurance, known as Medicare Part A, and medical insurance, known as Medicare Part B. In general, Medicare
Part A covers hospital care and some nursing home, hospice and home care. Although there is no monthly premium for Medicare
beneficiaries are responsible for significant deductibles and co-payments. All United States citizens eligible for Medicare are automatically enrolled in Medicare
Part A when they turn 65. Enrollment in Medicare Part B is voluntary. In general, Medicare Part B covers outpatient hospital care, physician services, laboratory services, durable
medical equipment, and some other preventive tests and services. Beneficiaries that enroll in Medicare Part B pay a monthly premium that is usually withheld from their Social Security checks.
Medicare Part B generally pays 80% of the cost of services and beneficiaries pay the remaining 20% after the beneficiary has satisfied a $131 deductible. To fill the gaps in traditional
fee-for-service Medicare coverage, individuals often purchase Medicare supplement products, commonly known as "Medigap", to cover deductibles, co-payments, and
Initially, Medicare was offered only on a fee-for-service basis. Under the Medicare fee-for-service payment system, an individual can
choose any licensed physician and use the services of any hospital, healthcare provider, or facility certified by Medicare. CMS reimburses providers if Medicare covers the service and CMS considers it
"medically necessary". There is currently no fee-for-service coverage for certain preventive services, including annual physicals and well visits, eyeglasses, hearing aids,
dentures and most dental services.
an alternative to the traditional fee-for-service Medicare program, in geographic areas where a managed care plan has contracted with CMS pursuant to the
Medicare Advantage program, Medicare beneficiaries may choose to receive benefits from a managed care plan. The current Medicare managed care program was established in 1997 when Congress created a
Medicare Part C, formerly known as Medicare+Choice and now known as Medicare Advantage. Pursuant to Medicare Part C, Medicare Advantage plans contract with CMS to provide benefits at
least comparable to those offered under the traditional fee-for-service Medicare program in exchange for a fixed monthly premium payment per member from CMS. The monthly
premium varies based on the county in which the member resides, as adjusted to reflect the member's demographics and the plans' risk scores. Individuals who elect to participate in the Medicare
Advantage program often receive greater benefits than traditional fee-for-service Medicare beneficiaries including, in some Medicare Advantage plans including ours, additional
preventive services, and dental and vision benefits. Medicare Advantage plans typically have lower deductibles and co-payments than traditional fee-for-service
Medicare, and plan members do not need to purchase supplemental Medigap policies. In exchange for these enhanced benefits, members are generally required to use only the services and provider network
provided by the Medicare Advantage plan. Most Medicare Advantage plans have no additional premiums. In some geographic areas, however, and for plans with open access to providers, members may be
required to pay a monthly premium.
to 1997, CMS reimbursed health plans participating in the Medicare program primarily on the basis of the demographic data of the plans' members. One of CMS's primary directives in
establishing the Medicare+Choice program was to make it more attractive to managed care plans to enroll members with higher intensity illnesses. To accomplish this, CMS implemented a risk adjustment
payment system for Medicare health plans pursuant to the Balanced Budget Act of 1997 (BBA). This payment system was further modified pursuant to the Medicare, Medicaid and SCHIP Benefits Improvement
and Protection Act of 2000 (BIPA). CMS is phasing in this risk adjustment payment methodology with a model that bases a portion of the total CMS reimbursement payments on various clinical and
demographic factors including hospital inpatient diagnoses, additional diagnosis data from ambulatory treatment settings, hospital outpatient department and physician visits, gender, age and Medicaid
eligibility. CMS requires that all managed care companies capture, collect and submit the necessary diagnosis code information to CMS twice a year for reconciliation with CMS's internal database.
Under this system, the risk adjusted portion of the total CMS payment to the Medicare Advantage plans will equal the local rate set forth in the traditional demographic rate book, adjusted to reflect
the plan's average gender, age, and disability demographics. During 2003, risk adjusted payments accounted for only 10% of Medicare health plan payments, with the remaining 90% being reimbursed
accordance with the traditional demographic rate book. The portion of risk adjusted payments was increased to 30% in 2004, 50%, in 2005 and 75% in 2006, and has increased to 100% in 2007.
In December 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act, which
is known as the Medicare Modernization Act (MMA). The MMA increased the amounts payable to Medicare Advantage plans such as ours, expanded Medicare beneficiary healthcare options by, among other
things, creating a transitional temporary prescription drug discount card program for 2004 and 2005 and added a Medicare Part D prescription drug benefit beginning in 2006. In 2007, we
reaffirmed our commitment to Medicare beneficiaries by again offering the Part D prescription drug benefit as further described below.
of the goals of the MMA was to reduce the costs of the Medicare program by increasing participation in the Medicare Advantage program. Effective January 1, 2004, the MMA
adjusted Medicare Advantage statutory payment rates to 100% of Medicare's expected cost per beneficiary under the traditional fee-for-service program. Generally, this
adjustment resulted in an increase in payments per member to Medicare Advantage plans. Medicare Advantage plans are required to use these increased payments to improve the healthcare benefits that are
offered, to reduce premiums or to strengthen provider networks. The reforms proposed by the MMA, including in particular the increased reimbursement rates to Medicare Advantage plans, have allowed and
will continue to allow Medicare Advantage plans to offer more comprehensive and attractive benefits, including better preventive care and dental and vision benefits, while also reducing
out-of-pocket expenses for beneficiaries.
Prescription Drug Benefit.
As part of the MMA, every Medicare recipient is able to select a prescription drug plan through
Medicare Part D. Medicare Part D replaced the Medicaid Prescription Drug Coverage for beneficiaries eligible for participation under both the Medicare and Medicaid programs, or
dual-eligibles. The Medicare Part D prescription drug benefit is largely subsidized by the federal government and is additionally supported by risk-sharing with the
federal government through risk corridors designed to limit the profits or losses of the drug plans and reinsurance for catastrophic drug costs, as described below. The government subsidy is based on
the national weighted average monthly bid for this coverage, adjusted for member demographics and risk factor payments. The beneficiary will be responsible for the difference between the government
subsidy and his or her plan's bid, together with the amount of his or her plan's supplemental premium (before rebate allocations), subject to the co-pays, deductibles and late enrollment
penalties, if applicable, described below. Additional subsidies are provided for dual-eligible beneficiaries and specified low-income beneficiaries.
The Medicare Part D benefits are available to Medicare Advantage plan enrollees as well as Medicare fee-for-service enrollees. Medicare Advantage plan
enrollees who elect to participate may pay a monthly premium for this Medicare Part D prescription drug benefit (MA-PD) while fee-for-service beneficiaries
will be able to purchase a stand-alone prescription drug plan (PDP) from a list of CMS-approved PDPs available in their area. Any Medicare Advantage Member enrolling in a stand-alone PDP,
however, will automatically be disenrolled from the Medicare Advantage plan altogether, thereby resuming traditional fee-for-service Medicare. Under the standard Part D
drug coverage for 2007, beneficiaries enrolled in a stand-alone PDP will pay a $265 deductible, co-insurance payments equal to 25% of the drug costs between $265 and the initial annual
coverage limit of $2,400 and all drug costs between $2,400 and $5,451.25, which is commonly referred to as the Part D "doughnut hole". After the beneficiary has incurred $3,850 in
out-of-pocket drug expenses, the MMA provides catastrophic stop loss coverage that will cover approximately 95% of the beneficiaries' remaining
out-of-pocket drug costs for that year. MA-PDs are not required to mirror these limits, but are required to provide, at a minimum, coverage that is actuarially
equivalent to the standard drug coverage delineated in the MMA. The deductible, co-pay and coverage amounts will be adjusted by CMS on an annual basis. Each Medicare Advantage plan will be
required to offer a Part D drug
prescription plan as part of its benefits. We currently offer prescription drug benefits through our Medicare Advantage plans and also offer a stand-alone PDP. Among the options in Medicare Advantage,
we offer two MA-PD plans with no initial deductible, one of which has generic coverage with a $5 co-payment during the "doughnut hole" period. On the PDP side, we currently
offer three plans, two of which have no initial deductible and one of which has generic coverage with a $5 co-payment during the "doughnut hole" period.
CMS recently approved our plans for 2008. Our MA-PD coverage will offer two plans which will have generic coverage with a $5 co-payment during the "doughnut hole"
period, while our PDP plans for 2008 will have the same options as in 2007. The CMS standard Part D drug coverage for 2008 will have a $275 initial deductible. Its initial coverage limit will
increase from $2,400 to $2,510 and the amount of out-of-pocket expenses at which stop loss coverage will begin will increase from $3,850 to $4,050.
A "dual-eligible" beneficiary is a person who is eligible for both Medicare, because
of age or other qualifying status, and Reform, because of economic status. Health plans that serve dual-eligible beneficiaries receive a higher premium from CMS and the government of
Puerto Rico for dual-eligible members. Currently, CMS pays an additional premium, generally ranging from 30% to 45% more per member per month, for a dually-eligible beneficiary. This
additional premium is based upon the estimated incremental cost CMS incurs, on average, to care for dual-eligible beneficiaries. The government of Puerto Rico has implemented a plan to
allow dual-eligibles enrolled in the Reform to move from the Reform program to a Medicare Advantage plan under which the government, rather than the insured, will assume all of the
premiums for additional benefits not included in traditional Medicare programs, such as prescription drug benefits. All qualified Reform participants were eligible to move to the government-sponsored
plan beginning in January 2006, and as
of December 31, 2006 approximately 61,000 such participants from areas served by us did so. During the first nine months of 2007 approximately 1,600 participants from areas served by us moved
to the government-sponsored plan. By managing utilization and implementing disease management programs, many Medicare Advantage plans can profitably care for dual-eligible members. The MMA
provides subsidies and reduced or eliminated deductibles for certain low-income beneficiaries, including dual-eligible individuals. Pursuant to the MMA, as of January 1,
2006 dual-eligible individuals receive their drug coverage from the Medicare program rather than the Reform program. Companies offering stand-alone PDPs with bids at or below the regional
weighted average bid resulting from the annual bidding process received a pro-rata allocation and auto-enrollment of the dual-eligible beneficiaries within the
Although Medicare Advantage plans will continue to be paid on a capitated PMPM basis, as of
January 1, 2006 CMS uses a new rate calculation system for Medicare Advantage plans. The new system is based on a competitive bidding process that allows the federal government to share in any
cost savings achieved by Medicare Advantage plans. In general, the statutory payment rate for each county, which is primarily based on CMS's estimated per beneficiary
fee-for-service expenses, was relabeled as the "benchmark" amount, and local Medicare Advantage plans will annually submit bids that reflect the costs they expect to incur in
providing the base Medicare Part A and Part B benefits in their applicable service areas. If the bid is less than the benchmark for that year, Medicare will pay the plan its bid amount,
risk adjusted based on its risk scores, plus a rebate equal to 75% of the amount by which the benchmark exceeds the bid, resulting in an annual adjustment in reimbursement rates. Plans will be
required to use the rebate to provide beneficiaries with extra benefits, reduced cost sharing, or reduced premiums, including premiums for MA-PD and other supplemental benefits. CMS will
have the right to audit the use of these proceeds. The remaining 25% of the excess amount will be retained in the statutory Medicare trust fund. If a Medicare Advantage plan's bid is greater than the
benchmark, the plan will be required to charge a premium to enrollees equal to the difference between the bid amount and the benchmark, which is expected to make such plans less competitive.
Sales and Marketing.
The marketing and sales activities of our insurance and managed care
subsidiaries are closely regulated
by CMS and ASES. For example, our sales and marketing materials must be approved in advance by the applicable regulatory authorities, and they often impose other regulatory restrictions on our
Annual Enrollment and Lock-in.
Prior to the MMA, Medicare beneficiaries were permitted to enroll in a Medicare
managed care plan or change plans at any point during the year. As of January 1, 2006, Medicare beneficiaries have defined enrollment periods, similar to commercial plans, in which they can
select a Medicare Advantage plan, stand-alone PDP, or traditional fee-for-service Medicare. The initial enrollment period for 2006 began November 15, 2005 and ended on
May 15, 2006 for a MA-PD or stand-alone PDP. In addition, beneficiaries had an open election period from January 1, 2006 through June 30, 2006 in which they could make
or change an equivalent election. In future years, the annual enrollment period for PDPs will be from November 15 through December 31 of each year, and enrollment in Medicare Advantage
plans will occur from November 15 through March 31 of the subsequent year. Enrollment on or prior to December 31 will be effective as of January 1 of the following year and
enrollment on or after January 1 and within the enrollment period will be effective as of the first day of the month following the date on which the enrollment occurred. After these defined
enrollment periods end, generally only seniors turning 65 during the year, Medicare beneficiaries who permanently relocate to another service area, dual-eligible beneficiaries and others
who qualify for special needs plans and employer group retirees will be permitted to enroll in or change health plans during that plan year. Eligible beneficiaries who fail to timely enroll in a
Part D plan will be subject to the penalties described above if they later decide to enroll in a Part D plan. The new annual "lock-in" created by the MMA will change the way
we and other managed care companies market our services to and enroll Medicare beneficiaries in ways we cannot yet fully predict. The recently adopted Tax Relief and Health Care Act of 2006 allows
Medicare beneficiaries to enroll throughout the year only in Medicare Advantage plans that do not offer Part D prescription drug coverage. In one of our products we do offer such coverage, thus
in that particular product we can only enroll new Medicare Advantage members between November 15 and December 31 each year. We offer another product which does not offer the
Part D prescription drug coverage and that is open for enrollment during the entire year. In addition, we can enroll MA members from other carriers through March 31st of the next
calendar year. Dual-eligibles are allowed to enroll throughout the year.
As set forth in the MMA, the Federal government, through CMS, will replace the current Title 18 fiscal
intermediary (Fl) and carrier contracts with competitively procured contracts that conform to the Federal Acquisition Regulation under the new Medicare Administrative Contractor (MAC) contracting
authority. CMS has six years, between 2006 and 2011, to complete the transition of Medicare fee-for-service claims processing activities from the FI's and carriers to the
MAC's. We are currently engaged in the analysis and evaluation of this transition process and the effect that it may have on our existing organizational structure as a Medicare carrier.
Fraud and Abuse Laws.
The federal anti-kickback provisions of the Social Security Act and its regulations
prohibit the payment, solicitation, offering or receipt of any form of remuneration (including kickbacks, bribes, and rebates) in exchange for the referral of federal healthcare program patients or
any item or service that is reimbursed by any federal health care program. In addition, the federal regulations include certain safe harbors that describe relationships that have been determined by
CMS not to violate the federal anti-kickback laws. Relationships that do not fall within one of the enumerated safe harbors are not a per se violation of the law, but will be subject to
enhanced scrutiny by regulatory authorities. Failure to comply with the anti-kickback provisions may result in civil damages and penalties, criminal sanctions, administrative remedies,
such as exclusion from the applicable federal health care program.
Federal False Claims Act.
Federal regulations also strictly prohibit the presentation of false claims or the submission of
false information to the federal government. Under the federal False Claims Act, any person or entity that has knowingly presented or caused to be presented a false or fraudulent request for payment
from the federal government or who has made a false statement or used a false record in the submission of a claim may be subject to treble damages and penalties of up to $11,000 per claim. The federal
government has taken the position that claims presented in relationships that violate the anti-kickback statute may also be considered to be violations of the federal False Claims Act.
Furthermore, the federal False Claims Act permits private citizen "whistleblowers" to bring actions on behalf of the federal government for violations of the Act and to share in the settlement or
judgment that may result from the lawsuit.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorizes the U.S. Department of Health and Human Services (HHS) to issue standards for
administrative simplification, as well as privacy and security of medical records and other individually identifiable health information. The regulations under the HIPAA Administrative Simplification
section impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors. HIPAA Administrative Simplification section requirements apply to
self-funded group plans, health insurers and HMOs, health care clearinghouses and health care providers who transmit health information electronically (covered entities). Regulations
adopted to implement HIPAA Administrative Simplification also require that business associates acting for or on behalf of HIPAA-covered entities be contractually obligated to meet HIPAA standards. The
regulations of the Administrative Simplification section establish significant criminal penalties and civil sanctions for noncompliance.
HHS has released rules mandating the use of new standard formats with respect to certain health care transactions (e.g. health care claims information, plan eligibility, referral
certification and authorization,
claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules requiring the use of standardized
code sets and unique identifiers by employers and providers. Our managed care subsidiary was required to comply with the transactions and code set standards by October 16, 2003 and with the
employer identifier rules by July 2004 and believes that it is in material compliance with all relevant requirements. Our managed care subsidiary was required to comply with provider identifier
rules by May 2007 and believes that it is in material compliance with all relevant requirements.
also sets standards relating to the privacy of individually identifiable health information. In general, these regulations restrict the use and disclosure of medical records and
other individually identifiable health information held by health plans and other affected entities in any form, whether communicated electronically, on paper or orally, subject only to limited
exceptions. In addition, the regulations provide patients new rights to understand and control how their health information is used. HHS has also published security regulations designed to protect
member health information from unauthorized use or disclosure. Our managed care subsidiary is currently in material compliance with these security regulations.
federal legislation includes the Gramm-Leach-Bliley Act, which applies to financial institutions domiciled in Puerto Rico. The Gramm-Leach-Bliley Act generally placed restrictions
on the disclosure of non-public information to non-affiliated third parties, and required financial institutions including insurers, to provide customers with notice regarding
how their non-public personal information is used, including an opportunity to "opt out" of certain disclosures. The Gramm-Leach-Bliley Act also gives banks and other financial
institutions the ability to affiliate with insurance companies, which has led to new competitors in the insurance and health benefits fields in Puerto Rico.
The provision of services to certain employee welfare benefit plans is subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), a
complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor (DOL). ERISA regulates certain aspects of the relationships
between us, the employers who maintain employee welfare benefit plans subject to ERISA and participants in such plans. Some of our administrative services and other activities may also be subject to
regulation under ERISA. In addition, certain states require licensure or registration of companies providing third-party claims administration services for benefit plans. We provide a variety of
products and services to employee welfare benefit plans that are covered by ERISA. Plans subject to ERISA can also be subject to state laws and the question of whether ERISA preempts a state law has
been, and will continue to be, interpreted by many courts.
We participate in the Health Reform of the government of Puerto Rico (the Reform) to provide health coverage to medically indigent citizens in Puerto Rico. See
The Commissioner of Insurance is currently evaluating the adoption of Rule No. 83, titled "Norms and Procedures to Regulate Insurance and Health
Maintenance Holding Company Systems and the Criteria to Evaluate the Change of Control". The most recent draft of Rule No. 83 contains certain reporting requirements as well as restrictions on
transactions between an insurer or HMO and its affiliates. Rule No. 83 would generally require insurance companies and HMOs within an insurance holding company system to register with the
Commissioner of Insurance if they are domiciled in the Commonwealth and to file with the Commissioner of Insurance certain reports describing capital structure, ownership, financial condition, certain
intercompany transactions and general business operations. In addition, Rule No. 83 would require prior notice, reporting and regulatory approval of certain material transactions and
intercompany transfers of assets as well as certain transactions between insurance companies, HMOs, their parent holding companies and affiliates. Among other restrictions, Rule No. 83 would
restrict the ability of our regulated subsidiaries to pay dividends.
Additionally, Rule No. 83 would restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. According to Rule
No. 83, no person may make an offer to acquire or to sell the issued and outstanding voting stock of an insurance company, which constitutes 10% or more of the issued and outstanding stock of
an insurance company, or of the total stock issued and outstanding of a holding company of an insurance company, without (i) filing the appropriate documentation with the Commissioner of
Insurance and (ii) obtaining the prior approval of the Commissioner of Insurance. This requirement is similar to that contained in the Insurance Code and referred to under
"RegulationPuerto Rico Insurance Laws".
In addition, on August 1, 2007, the U.S. House of Representatives passed the Children's Health and Medicare Protection Act of 2007 (H.R. 3162), which, among other things, would
amend the Social Security Act to improve the federal government's children's health insurance program and make other changes under the Medicare and Medicaid programs. H.R. 3162 includes provisions
that would gradually reduce Medicare Advantage payments over a four-year period to equalize payments for services made through Medicare Advantage plans and the traditional
fee-for-service Medicare program by 2011. The proposed reductions in Medicare Advantage rates are the result of hearings by the health subcommittee of the House Ways and Means
Committee regarding recommendations contained in MedPac's semi-annual report to Congress on Medicare payment policy dated March 1, 2007. Among
other things, MedPac reported that the federal government's spending on care for beneficiaries in a private Medicare Advantage plan is on average 12% higher than spending on care for beneficiaries
through the traditional Medicare program. MedPac recommended a gradual reduction in Medicare Advantage rates to ensure that payment rates between Medicare Advantage plans and the traditional Medicare
program are equalized. H.R. 3162 was referred to the Senate on September 4, 2007 for consideration. As of the date of this prospectus, the U.S. Senate has not addressed H.R. 3162, nor has the
U.S. Senate passed any other bill that includes the MedPac recommendations for gradual reductions in Medicare Advantage payments. We cannot provide assurances if, when or to what degree Congress may
enact H.R. 3162 or similar legislation, but any reduction in Medicare Advantage rates could have a material adverse effect on our revenue, financial position, results of operations or cash flow.
Directors and Executive Officers
Our directors and executive officers, and their respective ages as of September 30, 2007, are as follows:
Wilmer Rodríguez-Silva, M.D.
Chairman of the Board
Vicente J. León-Irizarry, C.P.A.*
Vice Chairman of the Board
Ramón M. Ruiz-Comas, C.P.A
President, Chief Executive Officer and Director
Valeriano Alicea-Cruz, M.D.
Jose Arturo Álvarez-Gallardo*
Luis A. Clavell-Rodríguez, M.D.
Arturo R. Córdova-López, M.D.
Carmen Ana Culpeper-Ramírez*
Porfirio E. Díaz-Torres, M.D.
Manuel Figueroa-Collazo, P.E., Ph.D.*
Jose Hawayek-Alemañy, M.D.
Wilfredo López-Hernandez, M.D.
Jaime Morgan-Stubbe, Esq.*
Roberto Muñoz-Zayas, M.D.*
Miguel A. Nazario-Franco*
Juan E. Rodríguez-Díaz, Esq.*
Jesús R. Sánchez-Colón, D.M.D.
Adamina Soto-Martínez, C.P.A.*
Juan J. Román-Jiménez; C.P.A.
Vice President of Finance and Chief Financial Officer
Socorro Rivas-Rodríguez, C.P.A.
President, managed care business
Arturo Carrión, C.P.A.
President, life insurance business
Eva G. Salgado
President, property and casualty insurance business
Luis A. Marini-Mir, D.M.D.
President, Reform business
Roberto O. Morales-Tirado, Esq.
President, property and casualty insurance agency
Carlos D. Torres-Díaz
President, information technology
directors who are independent for purposes of The New York Stock Exchange requirements.
Wilmer Rodríguez-Silva, M.D.
Dr. Rodríguez-Silva currently serves as chairman of our
board of directors. Since 1999, he has served on our board of directors. Dr. Rodríguez-Silva is the former chief of the Gastrointestinal Section of the San Pablo Medical Center.
He is also a member of the American College of Physicians, the American Gastroenterology Association, the American Society for Gastrointestinal Endoscopy, the Puerto Rico Medical Association, is a
former president of the Puerto Rico Society of Gastroenterology, and the American College of Gastroenterology. Dr. Rodríguez-Silva holds a B.S. degree from the University of
Puerto Rico and an M.D. degree from the University of Puerto Rico, School of Medicine.
Vicente J. León-Irizarry, C.P.A.
Since 2000, Mr. León-Irizarry
has served on our board of directors, of which he is currently vice chairman. He is a C.P.A. and since January 2002 he has been a business
consultant. He worked as consultant for Falcón-Sánchez & Associates, a certified public accounting firm, from February 2000 to December 2001, and as
a business consultant from January 1999 to February 2000. He is a member of the Puerto Rico Society of Certified Public Accountants. He holds a B.B.A. degree with a major in Accounting
from the University of Puerto Rico.
Ramón M. Ruiz-Comas, C.P.A.
Since May 2002, Mr. Ruiz-Comas has served as our
president and chief executive officer. Mr. Ruiz has also served on our board of directors since May 2002. Mr. Ruiz-Comas served as our executive vice president from
November 2001 to April 2002 and as our senior vice president and chief financial officer from February 1999 to October 2001. From 1995 to 1999,
Mr. Ruiz-Comas served as our managed care subsidiary's senior vice president of finance and from 1990 to 1995 he was vice president of finance. Prior to joining us,
Mr. Ruiz-Comas worked at KPMG LLP from 1978 to 1990. He is a Certified Public Accountant (CPA) and a member of the Puerto Rico Society of Certified Public Accountants, as well as
the American Institute of Certified Public Accountants. He holds a B.B.A. degree with a major in Accounting from the University of Puerto Rico and a
(J.D.) degree from the University of Puerto Rico, School of Law. In 2002, he attended the Advance Management Program at the University of Pennsylvania's Wharton School
Valeriano Alicea-Cruz, M.D.
Since 2000, Dr. Alicea-Cruz has served on our board of directors.
He has been an Ophthalmologist with a private practice since 1976, and has offices in two municipalities of Puerto Rico. He is an active member of the Puerto Rico Medical Association, the American
Academy of Ophthalmology, the Puerto Rican Society of Ophthalmology, the University of Puerto Rico School of Medicine Alumni Society, and the Pan-American Society of Ophthalmology. He has
served on the Medical Board of the Department of Transportation and Public Works, and the board of directors of Ojos, Inc. Dr. Alicea-Cruz holds a B.S. degree from the
University of Puerto Rico, an M.D. degree from the University of Puerto Rico, School of Medicine, and a Postgraduate Degree in Ophthalmology from the Puerto Rico Medical Center and Affiliate
José Arturo Álvarez-Gallardo.
Since 2000, Mr. Álvarez-Gallardo has served
on our board of directors. Since 1964, Mr. Álvarez-Gallardo has served in various positions with
, where he has served as president since 1998. He has served on the boards of directors of
, Bamco Products Corporation, International Shipping Agency, Menaco Corporation, and Méndez Realty Equities, Inc.
Mr. Álvarez-Gallardo holds a B.B.A. degree in Business Administration from Iona College.
Luis A. Clavell-Rodríguez, M.D.
Since 2006, Dr. Clavell-Rodríguez has served on our
board of directors, of which he is currently secretary. He currently serves as the Medical Director at the San Jorge Children's Hospital and as the Principal Investigator for the Children's Oncology
Group and the Dana Farber Acute Lymphoblastic Leukemia Consortium. He has held positions as professor of Pediatrics and Pathology at the University of Puerto Rico School of Medicine and is a former
director of Pediatric Oncology and the training program in Pediatric Hematology/Oncology. He is certified by the National Board of Medical Examiners, the American Board of Pediatrics, and the
Sub-Board of Pediatric Hematology/Oncology. He is also a member of the American Society of Hematology, American Society of Clinical Oncology and the American Society of Pediatric
Hematology/Oncology. Dr. Clavell-Rodríguez holds a B.S. degree from the Catholic University of Puerto Rico and an M.D. degree from the University of Puerto Rico, School of
Medicine. He also completed his training in pediatrics at the University of California, School of Medicine and fellowships training from Harvard Medical School, Children's Hospital Medical Center in
Boston, MA, and the Sidney Farber Cancer Institute.
Arturo R. Córdova-López, M.D.
Dr. Córdova-López has served on our board of directors. In addition, Doctor Córdova-López is an Ad-Honorem Associate
Professor of Medicine at the University of Puerto Rico, School of Medicine, since 1986. Dr. Córdova-López has served as a Staff
Pneumologist and Critical Care Consultant at Pavía Hospital since 1990. He is a member of the American Thoracic Society, the American College of Physicians, the American Lung
Association, the College of Physicians and Surgeons of Puerto Rico, the American Society of Bariatric Physicians, NAASO the Obesity Society, the "Socíedad Puertorriqueña
de Neumología", and the American College of Chest Physicians (ACCP), where he was the previous Governor for Puerto Rico. He is Board Certified in Internal Medicine, Pulmonary Diseases,
Critical Care, Managed Care Medicine, and Bariatric Medicine. He is the Medical Director and Secretary of the Board of Directors of Clínica Las Américas Guaynabo. He is
active in the private practice of Pulmonology and Bariatric Medicine. He holds a B.S. degree in Electrical Engineering from the University of Puerto Rico, an M.D. degree from the University of Puerto
Rico, School of Medicine, and an M.S. degree in Epidemiology from the Harvard University, School of Public Health. He is Board Certified in Internal Medicine, Pulmonary Diseases, Critical Care,
Managed Care Medicine, and Bariatric Medicine.
Carmen Ana Culpeper-Ramírez.
Since 2004, Ms. Culpeper-Ramírez has served on our board of
directors, of which she is currently assistant treasurer. She served as the director of the Small Business Administration (SBA) for the Puerto Rico and U.S. Virgin Islands District from
April 2004 until April 2007. From 2000 to March 2004, she was president and chief executive officer of C. Culpeper & Associates, a management consulting business, which
offered organizational development, project and financial management services. She serves as a member of the board of directors of Levitt Homes, Inc. Ms. Culpeper-Ramírez
has served as chairwoman of the board of the San Juan Human Capital Development Board, and as a member of the board of directors of Santander BanCorp, Centennial Communications Corporation and of
Intech de Puerto Rico. From 1997 to 1999, Ms. Culpeper-Ramírez worked for two years as President of the Puerto Rico Telephone Company, the tenth largest telephone company in the
United States, and was responsible for its sale to GTE/Verizon. From 1999 to 2000, she also served as president of the Puerto Rico Chamber of Commerce. She holds a B.B.A. in Finance from the
University of Puerto Rico and an M.B.A. from the University of Pennsylvania, Wharton School of Business (International Business).
Porfirio E. Díaz-Torres, M.D.
Since 2000, he has served on the board of directors of the
Corporation. Since 1988, Dr. Díaz-Torres serves as the Director of the Cardiology Division of the Cardiology and Nuclear Center in San Juan, Puerto Rico.
Dr. Díaz-Torres is also President of Old Harbor Brewery of Puerto Rico, Inc. and Di' Rome Productions, Inc. He is an active member of the American
College of Cardiologists and the American Medical Association. He is active on the medical staff of
Centro Cardiovascular de Puerto Rico y del Caribe
and Auxilio Mutuo Hospital. Dr. Díaz-Torres holds a B.B.A. degree in Business Administration from the University of Puerto Rico and an M.D. degree from
Universidad Central del Este
Antonio F. Faría-Soto.
Mr. Faría-Soto has served on our board of
directors since May 2007. From 2005 to 2006, Mr. Faría-Soto was Chairman of the Board of Directors and CEO of Doral Bank and President of Doral Money, a
subsidiary of Doral Bank. From 2003 to 2004, Mr. Faría-Soto was President and CEO of the Government Development Bank of Puerto Rico, and he served as
ex-officio member and Chairman of the Boards of AFICA (infrastructure development financing vehicle for profit and non-profit organizations), the Economic Development Bank of
Puerto Rico, the Tourism Development Fund, and the Children's Trust Fund. He also served as a member of the Boards of the Public Buildings Authority, Government Employees Retirement System
Administration, Puerto Rico Telephone Authority Holdings Corp., Puerto Rico Industrial Development Corp, Teacher's Retirement System, Ultracom, and Convention Center District Administration. Also, he
has served as a member of the Governor's Economic Development Council for the Government of Puerto Rico, and as member ex-officio of FIDA and Promo Expo. From 2002 to 2003, he served as
President of the Economic Development Bank of Puerto Rico and from 2001 to 2002 he was Commissioner of the Office of Financial Institutions. Mr. Faría-Soto holds a
B.B.A. from the Catholic University of Puerto Rico and an M.B.A. in Finance from the Inter American University of Puerto Rico.
Manuel Figueroa-Collazo, P.E., Ph.D.
Since 2004, Dr. Figueroa-Collazo has served on our board of directors. Since
1999, Dr. Figueroa-Collazo is President of VERNET, Inc., an educational software development Company located in Caguas, Puerto Rico. Dr. Figueroa-Collazo is also a member of the
Board of Directors of INTECO, Puerto Rico Products Association, EPSCOR, and
Vivero de Tecnología y Ciencia de Puerto Rico
. He has
12 years of experience in senior management positions and over twenty years of exposure at all management levels within the communications and systems industries. He was general manager for
Lucent Technologies, Mexico and a Department Head at AT&T Bell Laboratories. Dr. Figueroa-Collazo holds B.S., M.S., and Ph.D. degrees in Electrical Engineering from the Florida Institute of
Technology, and he attended Advanced Management Programs in INSEAD Fontainebleau, France, and University of Pennsylvania Wharton School of Business.
José Hawayek-Alemañy, M.D.
Since 2005, Dr. Hawayek-Alemañy has served on
our board of directors. Since 1976, he has been a professor at the University of Puerto Rico, School of Medicine. From 1988 to 1998, he was director of the Office of Graduate Medical Education at the
University of Puerto Rico, School of Medicine and, from 1998 to 2002, he was Dean of Academic Affairs at the University of Puerto Rico, School of Medicine. He is president of the OB-GYN
Section of the Puerto Rico Medical Association. Since 2000, he has represented Puerto Rico in the Maternal Mortality & Morbidity Committee of the American College of OB-GYN. From
2003 to 2005, he was Senate Member and Treasurer of the OB-GYN Section of the Medical College of Puerto Rico. He also served as president of the Medicare Carrier Advisory Committee in
Puerto Rico. He holds a B.S. degree in pre-medicine from the University of Puerto Rico, Mayagüez Campus, an M.D. degree from the University of Puerto Rico, School of
Medicine, and a specialty in OB-GYN from University Hospital.
Wilfredo López-Hernández, M.D.
Dr. López-Hernández has served on our board of directors. Dr. López-Hernández has had a private medical practice since 1979.
He was an associate professor at the University of Puerto Rico, School of Medicine, an associate professor at the San Juan Bautista School of Medicine, and chief of service at San Rafael Hospital.
Dr. López-Hernández is a partner in Quadrangle Development, SE. Since 1979, he has been a member of the Puerto Rico Urological Association,
Société International D'Urologie
, American Confederation of Urology, and the American Urological Association. He holds a
B.S. degree from the University of Puerto Rico, an M.D. degree from the University of Santiago de Compostela, Spain, and a specialty in Urology from the University of Puerto Rico, School of
Jaime Morgan-Stubbe, Esq.
Mr. Morgan-Stubbe has served on our board of directors since May 2007. Since 2000 he
is an active member of the Board of Directors of the Puerto Rico Homebuilders Association and member of the Board of Trustees of the Palmas del Mar Academy. From 2002 to 2004 he served as a member of
the Board of Trustees of the Baldwin School of Puerto Rico. Since 2000 he has served as President of Palmas del Mar Properties, Inc., a land and real estate development company and owner of the
largest master planned residential-resort community in Humacao, Puerto Rico. Prior to becoming a real estate developer, Mr. Morgan was a business, corporate, real estate and tax attorney. He
worked for the law firm of Goldman Antonetti & Córdova, P.S.C. He was director of the Economic Development Administration (FOMENTO), President of the Puerto Rico Industrial
Development Company (PRIDCO), and Executive Director of the Puerto Rico Maritime Shipping Authority (Navieras de Puerto Rico), during his tenure in Government from 1993 to 1999. He graduated from
Tulane University in New Orleans in 1980 and continued graduate studies in law at the University of Puerto Rico.
Roberto Muñoz-Zayas, M.D.
Dr. Muñoz-Zayas has served on our board of directors since
May 2007. He was President of the Board of Directors of the Regional Bank of Bayamón and the Bayamón Mortgage Loan Corp. He also served as a member of the Board of
Directors of the Hospital Matilde Brenes, Inc. Dr. Muñoz-Zayas was President of the Athletics Federation of Puerto Rico, and he was President of the Colonia
Hispanoamericana de Puerto Rico, the Club Exchange in Bayamón,
and the Federation of Sport Medicine of Puerto Rico. From 1994 to 2004, Dr. Muñoz-Zayas was Medical Director of the Olympic Committee of Puerto Rico and the Caribbean Series of
Puerto Rico. He holds a B.A. degree in Science from the University of Puerto Rico, a Ph.D. degree in Medicine from the University of Santiago de Compostela, and a Post-Graduate Degree from
the Jacobi Municipal Hospital in New York.
Miguel A. Nazario-Franco.
Since 2004, Mr. Nazario-Franco has served on our board of directors.
Mr. Nazario-Franco is an active member of the boards of directors of FRG (formerly Ferré Investment Fund) and
is also a member of the Advisory Board of Cortez Industrial Organization. From 1994 to 2002, Mr. Nazario-Franco worked for Puerto Rican Cement Co., Inc. where he held various positions,
including those of president, chief executive officer, and president of the board of directors. From 1995 to 2005 he served as a member of the board of directors of
El Día, Inc. From January 1999 to August 2000, he was president of the Puerto Rico Manufacturers Association. From 2002 to 2004, he served as a member of the
Advisory Boards of the Puerto Rico Department of
Education and Consejo Asesor de la Industria de la Construcción until December 2004. He also served on the boards of directors of the Puerto Rico Aqueduct and Sewage Authority
and Compañía para el Desarrollo Integral de la Peninsula de Cantera until December 2005 and on the board of directors of Puerto Rico Electric Power Authority until
January 2006. Mr. Nazario-Franco holds a B.B.A. degree in Accounting from the University of Puerto Rico.
Juan E. Rodríguez-Díaz, Esq.
Since December 2004,
Mr. Rodríguez-Díaz has served on our board of directors. Mr. Rodríguez-Díaz is a commercial, corporate
and tax attorney authorized to practice law in Puerto Rico and New York who currently works as senior and managing partner of Totti & Rodríguez Díaz. He has worked
in various prestigious law firms including Baker & McKenzie, McConnell Valdés, and Sweeting, Pons, González & Rodríguez.
Mr. Rodríguez-Díaz also served as Undersecretary of the Department of Treasury of Puerto Rico from 1971-1973. He serves as a member of the
boards of directors of
Industrias Vassallo, Inc.
, Vassallo Research and Development, Inc., Syroco, Inc., Ochoa Industrial Sales
Corp., Ensco Caribe, Inc., Triangle Cargo Services, Inc., and Luis Ayala Colón Sucrs., Inc. Mr. Rodríguez-Díaz
holds a B.A. degree from Yale University, a J.D. degree from Harvard University and a Masters of Laws (L.L.M. in taxation) from New York University, School of Law.
Jesús R. Sánchez-Colón, D.M.D.
Dr. Sánchez-Colón has served on our board of directors. He is currently Assistant Secretary of our board of directors.
Dr. Sánchez-Colón is a dentist and has had a private practice since 1982. He is member of the College of Dental Surgeons of Puerto Rico, where he served as
secretary and auditor, and he is also a member of the American Dental Association. He currently serves as chairman of the board of directors of
Fernández & Hermanos. Inc.
He has been chairman of the board of directors of Delta Dental Plan of Puerto Rico and vice chairman of the board of
directors of the Corporation for the Economic Development of the City of San Juan. Dr. Sánchez-Colón holds a B.A. degree in Psychology from St. Louis University, a
D.M.D. degree from the University of Puerto Rico, and a Postgraduate General Practice Residency at the Veterans Administration Hospital in San Juan, Puerto Rico.
Adamina Soto-Martínez, C.P.A.
Since 2002, Ms. Soto-Martínez has
served on our board of directors. She is treasurer of our board of directors. She is currently a C.P.A. and a partner and a founding member of the firm Kevane Soto Pasarell Grant Thornton, LLP,
certified public accountants, where she has worked since 1975. Ms. Soto-Martínez is a member of the Puerto Rico Society of Certified Public Accountants and the
American Institute of Certified Public Accountants. She is a graduate of the University of Puerto Rico.
Juan J. Román-Jiménez, C.P.A.
Mr. Román-Jiménez has served
as our vice president of finance and chief financial officer since 2002. Prior to his appointment as chief financial officer, Mr. Román-Jiménez served as executive
vice-president of our Reform business from 1999 to 2002 and
vice-president of finance of Triple-C, Inc. from 1996 to 1999. Prior to joining us, Mr. Román-Jiménez worked at KPMG LLP from 1987
to 1995. He has been a Certified Public Accountant and a member of the Puerto Rico Society of Certified Public Accountants as well as the American Institute of Certified Public Accountants since 1989.
He earned a B.A. degree in Business Administration with a concentration in Accounting from the University of Puerto Rico, Rio Piedras.
Socorro Rivas-Rodríguez, C.P.A.
Ms. Rivas-Rodríguez has served as president and chief
executive officer of our managed care business since May 2002. Prior to her appointment as president and chief executive officer, Ms. Rivas-Rodríguez served in various
positions at our managed care business, including general manager from 1999 to 2002, executive vice president from 1990 to 2002, and director of internal audit from 1982 to 1990. She has been a
Certified Public Accountant since 1987 and a member of the Puerto Rico Society of Certified Public Accountants. Ms. Rivas-Rodríguez has a B.A. degree with concentrations in
mathematics and accounting from the University of Puerto Rico.
Arturo Carrión, C.P.A.
Mr. Carrión has served as president of our life insurance
subsidiary, GA Life, since 1998. Prior to this appointment, Mr. Carrión served as vice president of finance of GA Life from 1987 to 1998. Prior to joining
GA Life, Mr. Carrión worked at KPMG LLP from 1978 to 1987. He is a Certified Public Accountant and a member of the Puerto Rico Society of Certified Public Accountants.
Mr. Carrión holds a B.B.A. degree with a major in Accounting from the University of Puerto Rico.
Eva G. Salgado.
Ms. Salgado has served as president of our property and casualty insurance business since
July 2003. Prior to this appointment, Ms. Salgado served in various positions in our property and casualty insurance business, including, senior vice president of the underwriting
department from 2002 to 2003, vice-president of the underwriting department from 1997 to 2002 and vice-president of marketing. Prior to joining our property and casualty
insurance business, Ms. Salgado worked at Integrand Assurance Company as senior vice-president of the underwriting department from 1992 to 1996. Ms. Salgado holds a B.A.
degree with a concentration in Finance from the University of Puerto Rico. She also studied underwriting at the Insurance Institute of America.
Luis A. Marini-Mir, D.M.D.
Dr. Marini has been president of our Reform business since October 1999.
Prior to his appointment, Dr. Marini served as dental director of our managed care business from February 1998 to October 1999. From April 1975 to December 2000,
Dr. Marini had a pediatric dentistry private practice. Dr. Marini is a former dean of the University of Puerto Rico, School of Dentistry. Dr. Marini received a degree from the
University of Puerto Rico (Mayagüez Campus) with a concentration in pre-medicine and obtained a D.M.D. degree from the University of Puerto Rico, School of Dentistry. He
also obtained a Certificate in Pediatric Dentistry from the University of Puerto Rico, School of Dentistry.
Roberto O. Morales-Tirado, Esq.
Mr. Morales was appointed president of our insurance agency in February 2006.
Prior to being appointed to this position, Mr. Morales served as president and chief executive officer of our life insurance business from 2000 through February 2006. From 1998 to 2000,
Mr. Morales served as a consultant for us. From 1993 to 1998, Mr. Morales served as president and chief executive officer of AIG Life Insurance Company of Puerto Rico. Mr. Morales
received a B.A. degree from the University of Puerto Rico and a J.D. degree from the Interamerican University of Puerto Rico, School of Law.
Carlos D. Torres-Díaz.
Mr. Torres-Díaz has served as president
of our information technology subsidiary since 1996. Prior to his appointment, Mr. Torres-Díaz served as vice-president of systems development from
April 1990 to January 1996. Before joining us, Mr. Torres-Díaz served as EDP Administration Manager at Banco Popular de Puerto Rico. Mr. Torres
has a B.B.A. degree with a concentration in Management of Information Systems from the Interamerican University of Puerto Rico.
Composition of the Board of Directors
Our articles and bylaws provide that the board of directors shall consist of not less than nine directors, nor more than 19 directors.
Our board of directors is divided into three groups as nearly equal in number as possible, with the term of office of one class expiring each year. Each director serves for a term ending
on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected or until his successor has been elected and qualified. In the event that there
is a vacancy on the board of directors, the person elected by the board to fill the vacancy will serve the rest of the term of the person who created the vacancy and may be reelected for two
additional successive terms. In accordance with our bylaws, the president and chief executive officer, who is also a member of the board of directors, is excluded from the three groups of directors.
In addition, our articles and bylaws provide that, with the exception of the president and chief executive officer, directors may not be elected to the board for more than three terms or serve as such
for more than nine years of service. The last election of directors was held on April 29, 2007.
The terms of our Group 1 directors, Dr. Rodríguez-Silva, Dr. Córdova-López, Dr. Hawayek-Alemañy,
Dr. López-Hernández and Ms. Soto-Martínez expire at our 2008 shareholders' meeting. The terms of our Group 2 directors,
Dr. Alicea-Cruz, Mr. Álvarez-Gallardo, Dr. Clavell-Rodríguez, Dr. Díaz-Torres,
Mr. León-Irizarry and Dr. Sánchez-Colón, expire at our 2009
shareholders' meeting. The terms of our Group 3 directors, Ms. Culpeper-Ramírez, Mr. Faría-Soto, Mr. Figueroa-Collazo,
Mr. Morgan-Stubbe, Dr. Muñoz-Zayas, Mr. Nazario-Franco and Mr. Rodríguez-Díaz, expire at our 2010 shareholders'
Meetings of the Board of Directors
Scheduled meetings of the board are held at least quarterly. Special board meetings are held when convened by the Chairman, or by at least five directors. The
board of directors met 19 times during 2006 and 13 times so far in 2007. All directors, with the exception of Mr. Manuel Suárez-Méndez, attended at least 75% of
the scheduled board of directors' meetings and meetings held by Committees of which they were members. Due to family-health related issues, this percentage was not met by
we encourage directors to attend our annual meeting of shareholders, we have not adopted a formal policy that all directors must attend annual meetings of shareholders. All of our
directors attended the last annual meeting of shareholders.
The board has determined that Mr. Álvarez-Gallardo, Ms. Culpeper-Ramírez,
Mr. Faría-Soto, Mr. Figueroa-Collazo, Mr. León-Irizarry, Mr. Morgan-Stubbe, Dr. Muñoz-Zayas,
Mr. Nazario-Franco, Mr. Rodríguez-Díaz and Ms. Soto-Martínez have no material relationship with us and are
independent within the meaning of NYSE rules. The board has adopted the NYSE director independence standards as guidelines for corporate governance policy.
Board of Directors Committees
Our bylaws provide that the board of directors may, by resolution passed by a majority of the entire board, designate one or more committees. We currently have
the following standing committees: corporate governance committee, nominations committee, compensation committee and audit committee. All members of the standing committees serve for a one year term.
In addition to these standing committees, we have a number of ad hoc committees.
The duties of the nominations committee are to (i) identify and recommend individuals who are best qualified to become members of the board, who will be
presented as candidates endorsed by the board at the annual shareholders' meetings, (ii) recommend to the board the best qualified candidates to fill vacancies on the board,
(iii) evaluate the performance of the directors pursuant to criteria and objectives established by the board from time to time; (iv) establish and periodically review the qualifications
of the candidates to be endorsed by the board and (v) recommend to the board the best qualified candidates to occupy the position of our president.
The members of the committee are Mr. Nazario-Franco (Chair), Mr. Álvarez-Gallardo, Ms. Culpeper-Ramírez, Mr. Figueroa-Collazo,
Mr. Morgan-Stubbe, Dr. Muñoz-Zayas, and Mr. Rodríguez-Díaz. The board has determined all members of the nominations
committee are independent within the meaning of NYSE rules.
The duties of the corporate governance committee are to (i) examine and advise about best practices of corporate governance and ensure compliance with
these practices, (ii) develop, recommend and oversee compliance with a set of Corporate Governance Guidelines and a Code of Business Conduct and Ethics, (iii) develop and recommend a
definition of what constitutes director independence, (iv) oversee the design and implementation of director training and development programs, (v) periodically evaluate the development
and possible succession of our CEO and other executive officers, (vi) evaluate possible amendments to our articles and bylaws pursuant to best practices of corporate governance and
(vii) review the overall performance of our board and our management.
The members of the committee are Dr. Rodríguez-Silva (Chair), Mr. Álvarez-Gallardo, Dr. Clavell-Rodríguez,
Mr. Faría-Soto, Mr. León-Irizarry, Mr. Nazario-Franco, Mr. Rodríguez-Díaz,
Dr. Sánchez-Colón and Mr. Ruiz-Comas. The board has determined that Mr. Álvarez-Gallardo,
Mr. Faría-Soto, Mr. León-Irizarry, Mr. Nazario-Franco, Mr. Rodríguez-Díaz
are independent within the meaning of NYSE rules.
The duties of the compensation committee are to (i) develop, recommend and review the compensation policies for our executive officers,
(ii) recommend to the board the compensation of our executive officers and (iii) recommend to the board those changes to the compensation levels of our directors that it deems necessary.
The members of the committee are Ms. Soto-Martínez (Chair), Ms. Culpeper-Ramírez, Mr. Figueroa-Collazo,
Mr. León-Irizarry, Mr. Morgan-Stubbe and Mr. Nazario-Franco. The board has determined that all members of the compensation committee are independent
within the meaning of NYSE rules.
The audit committee reviews the following matters: (i) whether we have adequate internal controls to safeguard our assets, generate reliable financial
information and assure our compliance with applicable laws and regulations, (ii) activities of our Internal Audit Office, (iii) results from audits made by regulators, (iv) our
consolidated financial statements and (v) the annual report prepared by external auditors. In addition, the audit committee appoints the independent public accounting firm to serve as our
external auditors and the vice president of internal audit, when such position becomes vacant.
The members of the committee are Mr. León-Irizarry (Chair), Ms. Culpeper-Ramírez,
Mr. Faría-Soto, Mr. Morgan-Stubbe, Mr. Nazario-Franco and Ms. Soto-Martínez. The board has determined that all members
of the audit committee are independent within the meaning of NYSE rules.
The board of directors has determined that Mr. León-Irizarry and Ms. Soto-Martínez are the audit committee financial
Code of Business Conduct and Ethics
Our board of directors has established a code of business conduct and ethics that applies to our employees, agents, independent contractors, consultants, officers
and directors. Any waiver of the code of business conduct and ethics may be made only by our board of directors and will be promptly disclosed as required by law or stock exchange regulations. The
board of directors has not granted any waivers to the code of business conduct and ethics.
Corporate Governance Guidelines
Our board of directors has adopted corporate governance guidelines that comply with the requirements of the NYSE and the regulations of the SEC.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee is or has been one of our officers or employees. None of our executive officers served on any board of
directors' compensation committee of any other company for which any of our directors served as an executive officer at any time during 2006. Other than disclosed in "Certain Relationships and Related
Party Transactions" in this prospectus, none of the members of the compensation committee had any relationship with us requiring disclosure under Item 404 of the SEC Regulation S-K.