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.