The Corporation (on a consolidated basis and for each reportable segment), along with most insurance entities, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. The loss ratio is the claims incurred divided by the premiums earned, net and fee revenue. The expense ratio is the operating expenses divided by the
premiums earned, net and fee revenue. The combined ratio is the sum of the loss ratio and the expense ratio. These ratios are relative measurements that describe for every $100 of premiums earned, net and fee revenue, the costs of claims and operating expenses, respectively. The combined ratio represents the total cost per $100 of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting loss.
comprise general, selling, commissions, depreciation, payroll and other related expenses. The segment's results of operations depend largely on its ability to accurately predict and effectively manage healthcare costs.
This segment has a well-diversified investment portfolio with good asset quality and a large portion invested in investment-grade, fixed income securities. The segment's investment portfolio is predominantly held in United States Treasury securities, obligations of United States government instrumentalities and obligations of state and political subdivisions, which comprise over 45% of the total portfolio value as of December 31, 2001. The remaining balance of the investment portfolio consists of an equity securities portfolio that replicates the S&P 500 Index, a corporate bonds portfolio, as well as investments in strong local stocks of sound financial institutions.
The total increase experienced in earned premiums is attributed to increased premium rates.
The operating expenses for the year ended December 31, 2002 increased by $3.0 million, or 13.3%, when compared to the operating expenses for the year ended December 31, 2001. This increase is directly related to the segment's increase in its volume of business. The expense ratio experienced an increase of 0.6 percentage points during the year 2002. The increase in the expense ratio is the result of a reduction in the reinsurance commission income, which is presented netting the commission expense of the segment. The decrease in the reinsurance commission income is due to the restructuring of the reinsurance program during the contract renewal process.
Over 80% of the increase experienced in premiums written is attributed to increased volume of business and the remaining 20% is attributed to increased premium rates.
The basic components of the cash flows from investing activities is derived from acquisitions and proceeds from investments in the available-for-sale and held-to-maturity portfolios, and capital expenditures. The Corporation monitors the duration of its investment portfolio and executes purchases and sales of these investments with the objective of having adequate funds available to satisfy its maturing liabilities.
(2) Guarantee Association - To operate in Puerto Rico, insurance companies, such as TSM's insurance subsidiaries, are required to participate in guarantee associations, which are organized to pay policyholders contractual benefits on behalf of insurers declared to be insolvent. These associations levy assessments, up to prescribed limits, on a proportional basis, to all member insurers in the line of business in which the insolvent insurer was engaged. During the year 2002, the Corporation paid an assessment in connection with insurance companies declared insolvent in the amount of $654. No assessments were levied against the Corporation during the years 2001 and 2000. It is the opinion of management that any possible future guarantee association assessments will not have a material effect on the Corporation's operating results and/or cash flows.