Leadership in Finance: Triple-S Management’s Juan Jose Román

During a time when the economy and credit markets were shaky, the CFO helped transform his company from a closely held, non-profit insurance group ...
Marie LeoneMay 14, 2009

Juan Jose Román, the finance chief of Triple-S Management Corp., has been steeped in the insurance business since he was an auditor working in KPMG’s San Juan, Puerto Rico office in the late 1980s. While with the Big Four firm, Román specialized in audits of insurance industry clients. Then in 1996, after eight years in public accounting, he made a logical jump. He moved to Triple-S Inc., where he became the vice president of finance for a division known as Triple-C, the company’s Medicaid unit.

Triple-C was launched only six months before Román, now 43, joined the company. “I spent a lot of times with our actuaries, developing the formulas and schedules and [claims] reserve for the group,” noted Román. That operational experience paid off. He eventually was tapped to run Triple-C, and then, in 2002, was named CFO of Triple-S Management Corp., the holding company that comprises Triple-S Inc., life insurer Triple-S Vida, and Triple-S Propiedad, a property and casualty (P&C) carrier. With operations based in Puerto Rico, Triple-S generates $1.7 billion in revenues for the fiscal year ending December 31, 2008.

Triple-S was started in 1959 by a group of physicians and dentists who wanted to offer patients another choice in their insurance plans. Before Triple-S, most insurance programs in Puerto Rico focused on hospital visits, rather than the treatment received by doctors and dentists. “The doctors wanted to create a market for their services,” Román said recently.

Despite being formed as a profit-making venture, Triple-S shareholder-owners at first operated the insurer as if it were a non-profit. Increased access to care by doctors and dentists, rather than earnings, was its primary goal. In 1965, the company officially declared its intention to become a non-profit, a prerequisite for becoming the Blue Shield licensee it eventually became in that year.

Still, it wasn’t until 1979that Triple-S was granted tax-exempt status. Then in 1997, it restructured, creating a for-profit holding company. In 2003,  it negotiated with the Puerto Rican government to terminate its tax-exempt status, resulting in a $52 million payment. The payment was part of a settlement with the commonwealth’s Treasury Department involving the accumulated statutory income that was distributed by Triple-S Inc. to the holding company, Triple-S Management. The holding company went public in December 2007. 

Román’s route to the C-suite has been what many would call typical. But the company’s last six years have been anything but ordinary. As finance chief, Román guided Triple-S through a transformation that converted a closely-held, non-profit organization via an initial public offering into a New York Stock Exchange-traded insurance powerhouse that serves 30% of the population of Puerto Rico with its managed-care services.

Triple-S Roman“OTTI is probably one of the biggest challenges any CFO has to deal with because the rules are not specific regarding what is meant by ‘other than temporary.’”
Triple-S Management CFO
Juan-Jose Román

For now, the company’s decision to go public seems to have paid off. In the first-quarter results for 2009 it released on May 5, Triple-S reported a 12.4% year-over-year increase in operating revenue to $474 million, and a 13.3% boost in total revenues to $469 million, according to data provided by CapitalIQ. The total revenue number takes into account $1.7 million in net realized losses linked to securities trading and $2.5 million of net unrealized losses for the purpose of boosting reserves for unrecoverable claims and debts.

The company is apparently feeling more secure about its liquidity and perhaps its ability to collect from its creditors. In 2008, Triple-S posted net unrealized losses of $6.2 million, a bit less than two-thirds more than the $2.5 million it feels it needs in this quarter.

In March, met with Román in New York to talk about how the company is dealing with a sagging economy, capital raising, and accounting issues. Following is an edited version of the interview with Román.

Taking a non-profit company public is an unusual undertaking. How did the shareholders react to the idea?
At the time, the average age of the majority of our shareholders was over 70. They were the original founders of the company, the original doctors and dentists, and they were ready to cash out.

And the staff, how did they react?
The changeover [may look] quick and easy. But there was a lot of preparation that went into making it happen, a lot of cultural changes. For example, we [will] start paying taxes, so tax strategy became a new focus of the finance department. Then we had to prepare and file financial results with the Securities and Exchange Commission. So we needed to get up to speed on SEC reporting regulations really quickly. We also expanded the finance staff from 98 in 2002, when I became CFO, to 132 in 2009. We have separate groups for our managed care, P&C, and life insurance groups. Each group has a controller that reports up to me. At the holding- company level we have about five people in finance that manage all the SEC reporting, the consolidation of all the entities, taxes, investment and strategy. And we guide the budget process.

When Triple-S restructured to become a for-profit company you paid the Puerto Rican government $52 million. What was that payment based on, and what effect did making it have on your company?
We made a calculation as to how much we should have paid [in taxes] for all those years [since 1979]. It wasn’t back taxes or a fee. It was a very simple calculation. The government said: “Whatever your statutory net income was for all these years, multiply it by the top tax rate” – which in Puerto Rico is 39%. Without any deduction, just statutory net income by 39%, that’s what you have to pay to get out of tax exemption and of the requirement to operate as a non-profit entity. The net income was based on our statutory filings. The $52 million was significant, considering our capital was $350 million at the time.

You’ve indicated that you haven’t needed to go to the capital markets.
That’s correct. Times are good. We actually raised some capital assets from the IPO last year – about $70 million. [The total amount raised was about $233 million.] We have enough capital to continue with our planned growth into next year. So we don’t foresee any need to raise additional capital — at least not in the medium term — although we are pursuing acquisitions.

You paid cash to finance the $10.5-million acquisition of La Cruz Azul de Puerto Rico (Blue Cross of Puerto Rico), on May 1. How will you finance future acquisitions?
Initially, the acquisitions will be in Puerto Rico, and we have the capital for that. Because the credit market is very tight and therefore very expensive, we have decided to use our investment portfolio as a financing tool as the durations get shorter. We’re keeping our portfolio much more liquid [than in the past], and we’re using that to finance our operations.

In this environment we’re self-financing to maintain both growth and our capital. At the same time, we’re looking at some significant savings by self-financing. A debt issue would probably cost in the neighborhood of 8% to 10%. You would probably only get 1% to 3% on an investment over five years, so the spread is significant.

What leadership challenges are you facing as CFO?  What keeps you up at night?
I think it’s a combination of factors. Our investment portfolio is one. Those investments represent 75% of our assets; it’s key in terms of our operations. Certain portions of the portfolio are maturing at the same time the interest rate is really low. That impacts our investment income, and probably will for the next two years. One of the main challenges is how to manage the portfolio in this kind of environment so you get the kind of return your want.

The other big challenge is in the accounting area, OTTI — other than temporary impairments. OTTI is probably one of the biggest challenges any CFO has to deal with because the rules are not specific regarding what is meant by “other than temporary.” The analysis you have to perform within your investment portfolio is very detailed. You have to try to prove that any position you have in which the market value is lower than cost for an extended period of time will recuperate in a reasonable period of time. What does that mean?  Is it a month?  Is it more?

What do you think the standard setters are looking for?
What is reasonable and material. Those are the two key issues. So you can imagine the challenge of going over the whole portfolio for each investment. You have to do the analysis for each security, corporate bonds, even your equity —  individual stocks — and document that you understand it will recuperate in a reasonable time. For many people, that reasonable amount of time is the next month, but it’s not defined at all.

With treasury and agency securities you can state that you have the ability and intent to hold them to maturity, and you can wait until the market recuperates. But when you look at equity securities or privately issued debt, it’s not the U.S. government. So it’s an issue of discussing the credit of the specific issuer. How long do you think it would take the value to recover? For example, if you have perpetual preferred securities issued by a bank, it’s a challenge to justify a temporary impairment.

Was Triple-S exposed to the subprime mortgage or banking crisis?
We didn’t have any subprime-related securities in our portfolio, so we weren’t affected by that crisis. We did have some positions in financial institutions. We have some common stock and the impact over the last year and a half has been about $1 million to $1.5 million [in losses]. During 2008 we recorded OTTI of about $16 million, mostly related to three mutual funds that replicate the Russell 1000, the S&P 500 and large-scale growth companies. The mutual funds are all paying interest and they are well-capitalized.

Not a lot of risky bets.
Not at all.  But what happened is that they have been under their cost for more than a year. So when you do the OTTI evaluation, you have to document your analysis of whether the market will recuperate in the next 12 months. Who really knows? If I knew I would be rich.

Do you think accounting has played a bigger role than in the past with regard to your investment portfolio?
Accounting is really affecting how you manage your business. We are comfortable with our portfolio of investments. I have the intention and the ability to hold the securities.  They are performing even better than their benchmark. Even with that, I still had to make the OTTI adjustment. I already have the securities recorded at market value on my balance sheet. So now it’s a matter of taking the change in value through to the income statement.

As a public company you file financial results in generally accepted accounting principles. Will moving to international standards be a headache?
It will. First, you need to train everyone on your staff — the accounting staff and the finance group. But you also will have to discuss the impact with other executives within the company so everyone understands how the financial results will change and the effect that could have. For example, when you make a capital investment under GAAP, it’s recorded as an amortized cost. But under international standards, you can mark-to-market the value of your facilities. That may affect our real estate investments.

Will there be information-technology issues if you start filing under international financial reporting standards?
Yes, we will need to change our systems because they don’t support IFRS. We are in the process of long-term planning and we are looking very closely at new applications. We’ll have a finance person and IT person work on this together.

If President Obama’s health plan goes through, will it affect Triple-S?
That’s an interesting question because, for example, Puerto Rico doesn’t get exactly the same Medicaid benefits as the states. There is a block allocation, and a formula to determine how much each state will get. That formula is not used for Puerto Rico. We get a fixed block of funding from Medicaid that is lower than the state formula. So I think it will be a matter of our governor probably asking Obama whether Puerto Rico can be a part of that program – and trying to get more funding for our Medicaid program. But it’s hard to say because right now the plan is still just a general idea of where the president wants to go.