UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

or

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                           to                        

COMMISSION FILE NUMBER:  001-33865

TRIPLE-S MANAGEMENT CORPORATION

Puerto Rico
 
66-0555678
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1441 F.D. Roosevelt Avenue
 
 
San Juan, Puerto Rico
 
00920
(Address of principal executive offices)
 
(Zip code)

(787) 749-4949
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading
Symbol(s) 
Name of each exchange on which registered 
Common Stock Class B, $1.00 par value
GTS
New York Stock Exchange (NYSE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of each class
Outstanding at September 30, 2020
   
Common Stock Class B, $1.00 par value
23,430,222






Triple-S Management Corporation
FORM 10-Q

For the Quarter Ended September 30, 2020
 
Table of Contents
 

Part I – Financial Information
3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Cautionary Statement Regarding Forward-Looking Information
34
Overview
34
Recent Developments
35
Recent Accounting Standards
38
Managed Care Membership
38
Consolidated Operating Results
39
Managed Care Operating Results
41
Life Insurance Operating Results
44
Property and Casualty Insurance Operating Results
45
Liquidity and Capital Resources
46
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
48
Item 4.  Controls and Procedures
48
Part II – Other Information
49
Item 1.  Legal Proceedings
49
Item 1A.  Risk Factors
49
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
51
Item 3.  Defaults Upon Senior Securities
51
Item 4.  Mine Safety Disclosures
51
Item 5.  Other Information
51
Item 6.  Exhibits
52
SIGNATURES
53


2

Table of Contents

Part I -  Financial Information

Item 1.  Financial Statements
Triple-S Management Corporation
Condensed Consolidated Interim Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)


 
 
September 30,
2020
   
December 31,
2019
 
Assets
           
Investments and cash:
           
Fixed maturities available for sale, at fair value
 
$
1,362,000
   
$
1,242,883
 
Fixed maturities held to maturity, at amortized cost
   
1,867
     
1,860
 
Equity investments, at fair value
   
389,078
     
287,525
 
Other invested assets, at net asset value
   
110,765
     
100,508
 
Policy loans
   
10,621
     
10,861
 
Cash and cash equivalents
   
129,603
     
109,837
 
Total investments and cash
   
2,003,934
     
1,753,474
 
Premiums and other receivables, net
   
546,959
     
567,692
 
Deferred policy acquisition costs and value of business acquired
   
243,663
     
234,885
 
Property and equipment, net
   
130,220
     
88,588
 
Deferred tax asset
   
68,637
     
77,294
 
Goodwill
   
28,614
     
28,599
 
Other assets
   
98,260
     
68,294
 
Total assets
 
$
3,120,287
   
$
2,818,826
 
Liabilities and Stockholders' Equity
               
Claim liabilities
 
$
786,920
   
$
709,258
 
Liability for future policy benefits
   
408,116
     
386,017
 
Unearned premiums
   
95,608
     
93,301
 
Policyholder deposits
   
202,663
     
189,120
 
Liability to Federal Employees' Health Benefits and Federal Employees' Programs
   
57,874
     
47,781
 
Accounts payable and accrued liabilities
   
387,465
     
325,761
 
Deferred tax liability
   
12,254
     
10,257
 
Short-term borrowings
   
82,500
     
54,000
 
Long-term borrowings
   
53,836
     
25,694
 
Liability for pension benefits
   
23,364
     
34,465
 
Total liabilities
   
2,110,600
     
1,875,654
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders' equity
               
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,430,222 and 23,799,633 shares at September 30, 2020 and December 31, 2019, respectively
   
23,430
     
23,800
 
Additional paid-in capital
   
53,964
     
60,504
 
Retained earnings
   
871,067
     
830,198
 
Accumulated other comprehensive income
   
61,939
     
29,363
 
Total Triple-S Management Corporation stockholders' equity
   
1,010,400
     
943,865
 
Non-controlling interest in consolidated subsidiary
   
(713
)
   
(693
)
Total stockholders' equity
   
1,009,687
     
943,172
 
Total liabilities and stockholders' equity
 
$
3,120,287
   
$
2,818,826
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

3

Table of Contents

Triple-S Management Corporation
Condensed Consolidated Interim Statements of Earnings (Unaudited)
(dollar amounts in thousands, except per share data)


 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Revenues:
                       
Premiums earned, net
 
$
922,934
   
$
815,021
   
$
2,657,366
   
$
2,442,516
 
Administrative service fees
   
3,752
     
2,607
     
8,755
     
7,695
 
Net investment income
   
14,168
     
15,176
     
42,294
     
45,614
 
Other operating revenues
   
2,052
     
3,167
     
6,394
     
6,335
 
Total operating revenues
   
942,906
     
835,971
     
2,714,809
     
2,502,160
 
Net realized investment gains (losses)
   
507
     
1,087
     
(180
)
   
4,766
 
Net unrealized investment gains (losses) on equity investments
   
11,040
     
1,267
     
(17,428
)
   
24,259
 
Other income, net
   
1,811
     
485
     
6,217
     
3,359
 
Total revenues
   
956,264
     
838,810
     
2,703,418
     
2,534,544
 
Benefits and expenses:
                               
Claims incurred
   
761,792
     
680,010
     
2,129,401
     
2,009,504
 
Operating expenses
   
158,809
     
136,882
     
499,669
     
403,629
 
Total operating costs
   
920,601
     
816,892
     
2,629,070
     
2,413,133
 
Interest expense
   
2,096
     
2,062
     
5,813
     
5,681
 
Total benefits and expenses
   
922,697
     
818,954
     
2,634,883
     
2,418,814
 
Income before taxes
   
33,567
     
19,856
     
68,535
     
115,730
 
Income tax expense
   
9,989
     
5,910
     
27,520
     
36,075
 
Net income
   
23,578
     
13,946
     
41,015
     
79,655
 
Net loss attributable to non-controlling interest
   
(3
)
   
(2
)
   
(20
)
   
(10
)
Net income attributable to Triple-S Management Corporation
 
$
23,581
   
$
13,948
   
$
41,035
   
$
79,665
 
Earnings per share attributable to Triple-S Management Corporation
                               
Basic net income per share
 
$
1.02
   
$
0.59
   
$
1.77
   
$
3.44
 
Diluted net income per share
 
$
1.02
   
$
0.58
   
$
1.76
   
$
3.43
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

4

Table of Contents

Triple-S Management Corporation
Condensed Consolidated Interim Statements of Comprehensive Income (Loss) (Unaudited)
(dollar amounts in thousands)


 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Net income
 
$
23,578
   
$
13,946
   
$
41,015
   
$
79,655
 
Other comprehensive income, net of tax:
                               
Net unrealized change in fair value of available for sale securities, net of taxes
   
4,743
     
9,290
     
32,023
     
37,660
 
Defined benefit pension plan:
                               
Actuarial loss, net
   
247
     
61
     
553
     
173
 
Total other comprehensive income, net of tax
   
4,990
     
9,351
     
32,576
     
37,833
 
Comprehensive income
   
28,568
     
23,297
     
73,591
     
117,488
 
Comprehensive loss attributable to non-controlling interest
   
(3
)
   
(2
)
   
(20
)
   
(10
)
Comprehensive income attributable to Triple-S Management Corporation
 
$
28,571
   
$
23,299
   
$
73,611
   
$
117,498
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

5

Table of Contents

Triple-S Management Corporation
Condensed Consolidated Interim Statements of Stockholders’ Equity (Unaudited)
(dollar amounts in thousands)


 
 
Class A
Common
Stock
   
Class B
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Triple-S
Management
Corporation
Stockholders’
Equity
   
Non-controlling
Interest in
Consolidated
Subsidiary
   
Total
Stockholders’
Equity
 
Balance, December 31, 2019
 
$
-
   
$
23,800
   
$
60,504
   
$
830,198
   
$
29,363
   
$
943,865
   
$
(693
)
 
$
943,172
 
Share-based compensation
   
-
     
590
     
1,769
     
-
     
-
     
2,359
     
-
     
2,359
 
Repurchase and retirement of common stock
   
-
     
(584
)
   
(8,511
)
   
-
     
-
     
(9,095
)
   
-
     
(9,095
)
Comprehensive (loss) income
   
-
     
-
     
-
     
(26,145
)
   
16,032
     
(10,113
)
   
(7
)
   
(10,120
)
Cummulative effect adjustment due to implementation of ASU 2016-13
   
-
     
-
     
-
     
(166
)
   
-
     
(166
)
   
-
     
(166
)
Balance, March 31, 2020
 
$
-
   
$
23,806
   
$
53,762
   
$
803,887
   
$
45,395
   
$
926,850
   
$
(700
)
 
$
926,150
 
Share-based compensation
   
-
     
7
     
4,228
     
-
     
-
     
4,235
     
-
     
4,235
 
Repurchase and retirement of common stock
   
-
     
(375
)
   
(5,618
)
   
-
     
-
     
(5,993
)
   
-
     
(5,993
)
Comprehensive income (loss)
   
-
     
-
     
-
     
43,599
     
11,554
     
55,153
     
(10
)
   
55,143
 
Balance, June 30, 2020
 
$
-
   
$
23,438
   
$
52,372
   
$
847,486
   
$
56,949
   
$
980,245
   
$
(710
)
 
$
979,535
 
Share-based compensation
   
-
     
7
     
1,842
     
-
     
-
     
1,849
     
-
     
1,849
 
Repurchase and retirement of common stock
   
-
     
(15
)
   
(250
)
   
-
     
-
     
(265
)
   
-
     
(265
)
Comprehensive income (loss)
   
-
     
-
     
-
     
23,581
     
4,990
     
28,571
     
(3
)
   
28,568
 
Balance, September 30, 2020
 
$
-
   
$
23,430
   
$
53,964
   
$
871,067
   
$
61,939
   
$
1,010,400
   
$
(713
)
 
$
1,009,687
 
                                                                 
Balance, December 31, 2018
 
$
951
   
$
21,980
   
$
34,021
   
$
761,970
   
$
3,062
   
$
821,984
   
$
(676
)
 
$
821,308
 
Share-based compensation
   
-
     
177
     
1,409
     
-
     
-
     
1,586
     
-
     
1,586
 
Repurchase and retirement of common stock
   
-
     
(1
)
   
(15
)
   
-
     
-
     
(16
)
   
-
     
(16
)
Comprehensive income (loss)
   
-
     
-
     
-
     
34,786
     
13,497
     
48,283
     
(3
)
   
48,280
 
Balance, March 31, 2019
 
$
951
   
$
22,156
   
$
35,415
   
$
796,756
   
$
16,559
   
$
871,837
   
$
(679
)
 
$
871,158
 
Share-based compensation
   
-
     
44
     
4,276
     
-
     
-
     
4,320
     
-
     
4,320
 
Comprehensive income (loss)
   
-
     
-
     
-
     
30,931
     
14,985
     
45,916
     
(5
)
   
45,911
 
Balance, June 30, 2019
 
$
951
   
$
22,200
   
$
39,691
   
$
827,687
   
$
31,544
   
$
922,073
   
$
(684
)
 
$
921,389
 
Share-based compensation
   
-
     
1
     
2,816
     
-
     
-
     
2,817
     
-
     
2,817
 
Issuance of Common Stock
   
48
     
-
     
1,151
     
-
     
-
     
1,199
     
-
     
1,199
 
Stock dividend
   
-
     
1,133
     
23,522
     
(24,655
)
   
-
     
-
     
-
     
-
 
Dividend
   
-
     
-
     
-
     
(11
)
   
-
     
(11
)
   
-
     
(11
)
Common Stock Class A conversion to Class B
   
(999
)
   
999
     
-
     
-
     
-
     
-
     
-
     
-
 
Comprehensive income (loss)
   
-
     
-
     
-
     
13,948
     
9,351
     
23,299
     
(2
)
   
23,297
 
Balance, September 30, 2019
 
$
-
   
$
24,333
   
$
67,180
   
$
816,969
   
$
40,895
   
$
949,377
   
$
(686
)
 
$
948,691
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

6

Table of Contents
Triple-S Management Corporation
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)


 
 
Nine months ended
September 30,
 
 
 
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
41,015
   
$
79,655
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
10,855
     
10,729
 
Net amortization of investments
   
2,151
     
1,484
 
Provision for doubtful receivables
   
2,229
     
2,476
 
Deferred tax expense
   
2,277
     
14,570
 
Net realized investment losses (gains) on sale of securities
   
180
     
(4,766
)
Net unrealized losses (gains) on equity investments
   
17,428
     
(24,259
)
Interest credited to policyholder deposits
   
4,788
     
4,414
 
Share-based compensation
   
8,443
     
8,723
 
Gain on sale of property and equipment
   
154
     
-
 
Decrease (increase) in assets:
               
Premium and other receivables, net
   
26,038
     
17,663
 
Deferred policy acquisition costs and value of business acquired
   
(10,827
)
   
(20,004
)
Deferred taxes
   
(109
)
   
114
 
Other assets
   
(29,831
)
   
(12,428
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
77,662
     
(134,798
)
Liability for future policy benefits
   
22,099
     
19,769
 
Unearned premiums
   
2,307
     
5,291
 
Liability to Federal Employees' Health Benefits and Federal Employees' Programs
   
10,093
     
21
 
Accounts payable and accrued liabilities
   
36,729
     
27,891
 
Net cash provided by (used in) operating activities
   
223,681
     
(3,455
)

(Continued)

7

Table of Contents
Triple-S Management Corporation
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)


 
 
Nine months ended
September 30,
 
 
 
2020
   
2019
 
 
           
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
94,557
   
$
365,383
 
Fixed maturities matured/called
   
37,450
     
19,017
 
Securities held to maturity:
               
Fixed maturities matured/called
   
1,079
     
1,378
 
Equity investments sold
   
80,152
     
126,134
 
Other invested assets sold
   
13,231
     
3,379
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(206,387
)
   
(397,956
)
Securities held to maturity:
               
Fixed maturities
   
(1,087
)
   
(748
)
Equity investments
   
(201,324
)
   
(88,945
)
Other invested assets
   
(25,442
)
   
(24,233
)
Increase in other investments
   
(3,924
)
   
(2,710
)
Net change in policy loans
   
240
     
(1,097
)
Net capital expenditures
   
(52,549
)
   
(14,746
)
Capital contribution on equity method investees
   
(7,083
)
   
-
 
Net cash used in investing activities
   
(271,087
)
   
(15,144
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
16,814
     
3,808
 
Net change in short-term borrowings
   
28,500
     
-
 
Proceeds from long-term borrowings
   
30,841
     
-
 
Repayments of long-term borrowings
   
(2,760
)
   
(2,425
)
Repurchase and retirement of common stock
   
(14,980
)
   
(1
)
Proceeds from policyholder deposits
   
21,586
     
15,060
 
Surrenders of policyholder deposits
   
(12,829
)
   
(16,455
)
Net cash provided by (used in) financing activities
   
67,172
     
(13
)
Net increase (decrease) in cash and cash equivalents
   
19,766
     
(18,612
)
Cash and cash equivalents:
               
Beginning of period
   
109,837
     
117,544
 
End of period
 
$
129,603
   
$
98,932
 

See accompanying notes to unaudited condensed consolidated interim financial statements.


8

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

(1)
Basis of Presentation


The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited.  In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries.  The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America (GAAP or U.S. GAAP) for complete financial statement presentation pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Accordingly, these condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.


In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included.  The results of operations for the three months and nine months ended September 30, 2020 are not necessarily indicative of the results for the full year ending December 31, 2020.

(2)
Significant Accounting Policies

Investments
 

Fixed maturities

 

Investment in debt securities at September 30, 2020 and December 31, 2019 consists mainly of obligations of government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, municipal securities, corporate bonds, residential mortgage-backed securities, and collateralized mortgage obligations.  The Company classifies its debt securities in one of two categories: available-for-sale or held-to-maturity.  Securities classified as held-to-maturity are those securities in which the Company has the ability and intent to hold until maturity.  All other securities not included in held-to-maturity are classified as available-for-sale.

 

Available-for-sale securities are recorded at fair value.  The fair values of debt securities (both available-for-sale and held-to-maturity investments) are based on quoted market prices for those or similar investments at the reporting date.  Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts, respectively.  Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized.  Realized gains and losses from the sale of available-for-sale securities are included in earnings and are determined on a specific identification basis.

 

Transfers of securities between categories are recorded at fair value at the date of transfer.  Unrealized holding gains or losses associated with transfers of securities from held-to-maturity to available-for-sale are recorded as a separate component of other comprehensive income.  The unrealized holding gains or losses included in the separate component of other comprehensive income for securities transferred from available-for-sale to held-to-maturity, are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.

 

If a fixed maturity security is in an unrealized loss position and the Company does not have the intent to sell the fixed maturity security, or it is more likely than not that the Company will not have to sell the fixed maturity security before recovery of its amortized cost basis, the credit component of the impairment, if any, is recorded as an allowance for credit losses with an offsetting entry in the Company’s consolidated statements of earnings. The non-credit component of the impairment is recognized in other comprehensive income.  Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.

9

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the Company will write off any previously recognized allowance for credit losses and will decrease the amortized cost basis of the security. If the allowance has been fully written off and the fair value is less than its amortized cost basis, the amortized cost basis is written down and an impairment loss is recognized in the Company’s consolidated statements of earnings. As of September 30, 2020, no allowance for credit losses was recorded in the condensed consolidated interim financial statements.

 

The credit component of the impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition. If there is an increase in the projected future cash flows of the fixed maturity security in subsequent periods, all or part of the allowance for credit losses may be reversed.

 

In addition, the Company considers the following factors when evaluating whether a credit loss exist: the reasons for the impairment, the severity of the impairment, market conditions, changes in the security’s rating, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

 

Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

 

The Company regularly invests in mortgaged-backed securities and other securities subject to prepayment and call risk.  Significant changes in prevailing interest rates may adversely affect the timing and amount of cash flows on such securities.  In addition, the amortization of market premium and accretion of market discount for mortgaged-backed securities is based on historical experience and estimates of future payment speeds on the underlying mortgage loans.  Actual prepayment speeds may differ from original estimates and may result in material adjustments to amortization or accretion recorded in future periods.

 

Equity investments

 

Investment in equity securities at September 30, 2020 and December 31, 2019 consists of mutual funds whose underlying assets are comprised of domestic equity securities, international equity securities and higher risk fixed income instruments. Equity investments are recorded at fair value.  The fair values of equity investments are mainly based on quoted market prices for those or similar investments at the reporting date.  For a specific equity investment, the fair value is estimated using the net asset value (NAV) of the Company’s ownership interest in the partnership.  Unrealized holding gains and losses on equity investments are included in earnings.  Realized gains and losses from the sale of equity investments are included in earnings and are determined on a specific identification basis.

 

Other invested assets

 

Other invested assets at September 30, 2020 and December 31, 2019 consist mainly of alternative investments in partnerships that invest in several private debt and private equity funds.  Portfolios are diversified by vintage year, stage, geography, business sectors and number of investments. These investments are not redeemable with the funds. Distributions from each fund are received as the underlying investments of the funds are liquidated. It is estimated that the underlying assets of the funds will be liquidated in the next 5 to 12 years. The fair value of the investments in this class have been estimated using the net asset value (NAV) of the Company’s ownership interest in the partnerships. Total unfunded capital commitments for these positions as of September 30, 2020 amounted to $57,762.  The remaining average commitments period is approximately three years

10

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

Health Insurance Providers Fee
 

The Patient Protection and Affordable Care Act (ACA) as amended by the Health Care and Education Reconciliation Act mandates an annual Health Insurance Providers Fee (HIP Fee).  The annual HIP Fee becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk each applicable calendar year. The initial estimated annual fee is accrued as of January 1, with a corresponding deferred cost that is amortized over 12 months on a straight-line basis. The fee payment is due on September 30 of each year.  The deferred cost is included within the other asset line item and the accrued fee is included within the accounts payable and accrued liabilities line item in the accompanying condensed consolidated balance sheets. The fee is presented within operating expenses in the accompanying condensed consolidated statements of earnings. The HIP Fee was waived for all health insurance providers during the year ended December 31, 2019. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Further Consolidated Appropriations Act of 2020, signed into law on December 20, 2019, repealed the HIP Fee effective calendar years beginning after December 31, 2020. As of September 30, 2020, the HIP Fee deferred cost amounted to $12,139. During the quarter ended September 30, 2020, the Company made the corresponding payment amounting to $55,514. As of December 31, 2019, no balance was deferred or accrued for the HIP Fee.

Recently Adopted Accounting Standards
 

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  In addition, on April 25, 2019, the FASB issued Accounting Standard Update (ASU) 2019-04: Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update represent changes to clarify, correct errors in or improve the codification. Such amendments should make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Within the clarifications was the FASB’s intent to include all reinsurance recoverables within the scope of ASU 2016-13 (Topic 326). For public companies, the improvements related to ASU 2016-13 (Topic 326) and ASU 2016-01 (Topic 825) are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020 and recognized $166, net of deferred tax asset, as a cumulative effect adjustment to the opening balance of retained earnings on the adoption date.


On January 26, 2017, the FASB issued guidance to simplify the manner in which an entity is required to evaluate goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Instead, under the amendments in this guidance, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, this guidance removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.  For public companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. Upon adoption of this standard, if the carrying amount of any of the reporting units exceeds its fair value, the Company will be required to record an impairment charge for the difference up to the amount of the goodwill.

11

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


On August 27, 2018, the FASB issued guidance for Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirement for Fair Value Measurement.  This update focuses on improving the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. Specifically, certain disclosure requirements are removed (the amount of, and reasons for, transfer between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements) while certain other disclosures are modified and added (changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements). The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent period in the initial fiscal year of adoption.  All other amendments should be applied retrospectively to all periods presented upon their effective date. For public companies, these amendments will be applied for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. The adoption of this guidance did not have a material impact on the presentation and disclosures of the Company’s condensed consolidated interim financial statements.

 

On August 29, 2018, the FASB issued guidance for Intangibles – Goodwill and Other – Internal-Use Software. Guidance addresses customers’ accounting for implemented costs incurred in a cloud computing arrangement that is a service contract and aims to reduce complexity in the accounting for costs of implementing a cloud computing service arrangement.  The amendments require a customer in a hosting arrangement that is a service contract to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Additionally, it requires the customer to expense the capitalized implementation costs over the term of the hosting arrangement.  For public companies, these amendments will be applied on a prospective basis, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. The adoption of this guidance did not have a material impact on the results of the Company’s condensed consolidated interim financial statements.
 
Future Adoption of Accounting Standards
 

On March 12, 2020, the FASB issued ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU was issued to provide optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments, which are elective and apply to all entities, provide expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate that is expected to be discontinued due to reference rate reform. Because the guidance is intended to assist stakeholders during the global market-wide reference rate transition period, it is in effect for a limited time, from March 12, 2020 through December 31, 2022. The Company is currently in the process of identifying its LIBOR-based contracts that will be impacted by the phase-out of LIBOR and expects to utilize the optional expedients provided in this ASU.

12

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


Other than the accounting pronouncements disclosed above, there were no other new accounting pronouncements issued during the three months and nine months ended September 30, 2020 that could have a material impact on the Company’s financial position, operating results or financials statement disclosures.

(3)
Investment in Securities


The amortized cost for debt securities and cost for alternative investments, gross unrealized gains, gross unrealized losses, and estimated fair value for the Company’s investments in securities by major security type and class of security at September 30, 2020 and December 31, 2019, were as follows:

 
 
September 30, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
                         
 Fixed maturities available for sale
                       
Obligations of government- sponsored enterprises
 
$
36,762
   
$
784
   
$
(29
)
 
$
37,517
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
103,483
     
8,747
     
-
     
112,230
 
Municipal securities
   
628,689
     
56,009
     
(126
)
   
684,572
 
Corporate bonds
   
195,293
     
31,863
     
-
     
227,156
 
Residential mortgage-backed securities
   
263,715
     
17,230
     
(376
)
   
280,569
 
Collateralized mortgage obligations
   
19,275
     
726
     
(45
)
   
19,956
 
Total fixed maturities available for sale
 
$
1,247,217
   
$
115,359
   
$
(576
)
 
$
1,362,000
 

 
December 31, 2019
 
 
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
                         
Fixed maturities available for sale
                       
Obligations of government- sponsored enterprises
 
$
17,209
   
$
477
   
$
-
   
$
17,686
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
102,230
     
4,779
     
-
     
107,009
 
Municipal securities
   
595,051
     
34,735
     
(22
)
   
629,764
 
Corporate bonds
   
187,096
     
21,721
     
(74
)
   
208,743
 
Residential mortgage-backed securities
   
262,783
     
8,073
     
(320
)
   
270,536
 
Collateralized mortgage obligations
   
8,674
     
471
     
-
     
9,145
 
Total fixed maturities available for sale
 
$
1,173,043
   
$
70,256
   
$
(416
)
 
$
1,242,883
 

13

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


 
 
September 30, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
                         
Fixed maturities held to maturity
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
614
   
$
217
   
$
-
   
$
831
 
Residential mortgage-backed securities
   
165
     
6
     
-
     
171
 
Certificates of deposit
   
1,088
     
-
     
-
     
1,088
 
Total
 
$
1,867
   
$
223
   
$
-
   
$
2,090
 

 
 
December 31, 2019
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
615
   
$
158
   
$
-
   
$
773
 
Residential mortgage-backed securities
   
165
     
1
     
-
     
166
 
Certificates of deposit
   
1,080
     
-
     
-
     
1,080
 
Total
 
$
1,860
   
$
159
   
$
-
   
$
2,019
 

 
September 30, 2020
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Other invested assets - Alternative investments
 
$
110,532
   
$
3,795
   
$
(3,562
)
 
$
110,765
 

 
December 31, 2019
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Other invested assets - Alternative investments
 
$
97,575
   
$
3,721
   
$
(788
)
 
$
100,508
 

14

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2020 and December 31, 2019 were as follows:

 
September 30, 2020
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Fixed maturities available for sale
                                                     
Obligations of government-sponsored enterprises
 
$
9,511
   
$
(29
)
   
1
   
$
-
   
$
-
     
-
   
$
9,511
   
$
(29
)
   
1
 
Municipal securities
   
21,832
     
(126
)
   
4
     
-
     
-
     
-
     
21,832
     
(126
)
   
4
 
Residential mortgage-backed securities
   
22,551
     
(376
)
   
8
     
-
     
-
     
-
     
22,551
     
(376
)
   
8
 
Collateralized mortgage  obligations
   
8,847
     
(45
)
   
2
     
-
     
-
     
-
     
8,847
     
(45
)
   
2
 
Total fixed maturities
 
$
62,741
   
$
(576
)
   
15
   
$
-
   
$
-
     
-
   
$
62,741
   
$
(576
)
   
15
 
Other invested assets - Alternative investments
 
$
12,873
   
$
(1,933
)
   
4
   
$
16,308
   
$
(1,629
)
   
6
   
$
29,181
   
$
(3,562
)
   
10
 

 
December 31, 2019
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Fixed maturities available for sale
                                                     
Municipal securities
 
$
10,656
   
$
(22
)
   
3
   
$
-
   
$
-
     
-
   
$
10,656
   
$
(22
)
   
3
 
Corporate bonds
   
5,047
     
(74
)
   
1
     
-
     
-
     
-
     
5,047
     
(74
)
   
1
 
Residential mortgage-backed securities
   
79,902
     
(320
)
   
16
     
-
     
-
     
-
     
79,902
     
(320
)
   
16
 
Total fixed maturities
 
$
95,605
   
$
(416
)
   
20
   
$
-
   
$
-
     
-
   
$
95,605
   
$
(416
)
   
20
 
Other invested assets - Alternative investments
 
$
24,437
   
$
(605
)
   
8
   
$
10,580
   
$
(183
)
   
1
   
$
35,017
   
$
(788
)
   
9
 


The Company reviews the available for sale and other invested assets portfolios under the Company’s impairment review policy. Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material impairments and allowances may be recorded in future periods. The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.

 

Obligations of Government-Sponsored Enterprises and Municipal Securities:  The unrealized losses of these securities were mainly caused by fluctuations in interest rates and general market conditions.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.  In addition, these investments have investment grade ratings. The Company does not consider these investments to be credit impaired because the decline in fair value is attributable to changes in interest rates and not credit quality; the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company expects to collect all contractual cash flows.

15

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


Residential mortgage-backed securities and Collateral mortgage obligations: The unrealized losses on these investments were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities are guaranteed by a U.S. government-sponsored enterprise. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Company owns. The Company does not consider these investments to be credit impaired because the decline in fair value is attributable to changes in interest rates; the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company expects to collect all contractual cash flows.

 

Alternative investments: As of September 30, 2020, alternative investments with unrealized losses are not considered credit impaired based on market conditions.


Maturities of investment securities classified as available for sale and held to maturity were as follows:

 
September 30, 2020
 
 
 
Amortized
cost
   
Estimated
fair value
 
Fixed maturities available for sale
           
Due in one year or less
 
$
33,764
   
$
34,244
 
Due after one year through five years
   
564,825
     
610,357
 
Due after five years through ten years
   
204,234
     
220,251
 
Due after ten years
   
161,404
     
196,623
 
Residential mortgage-backed securities
   
263,715
     
280,569
 
Collateralized mortgage obligations
   
19,275
     
19,956
 
 
 
$
1,247,217
   
$
1,362,000
 
Fixed maturities held to maturity
               
Due in one year or less
 
$
1,088
   
$
1,088
 
Due after ten years
   
614
     
831
 
Residential mortgage-backed securities
   
165
     
171
 
 
 
$
1,867
   
$
2,090
 


Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.


Investments with an amortized cost of $232,818 and $145,981 and a fair value of $252,601 and $152,916 at September 30, 2020 and December 31, 2019, respectively, were pledged with the Federal Home Loan Bank of New York (FHLBNY) to secure short-term borrowings.

16

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

(4)
Realized and Unrealized Gains (Losses)


Information regarding realized and unrealized gains and losses from investments is as follows:

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Realized gains (losses)
                       
Fixed maturity securities:
                       
Securities available for sale:
                       
Gross gains
 
$
402
   
$
950
   
$
1,953
   
$
3,597
 
Gross losses
   
(1
)
   
-
     
(7
)
   
(319
)
Total fixed securities
   
401
     
950
     
1,946
     
3,278
 
Equity investments:
                               
Gross gains
   
67
     
401
     
1,057
     
2,532
 
Gross losses
   
(479
)
   
(443
)
   
(3,249
)
   
(1,488
)
Gross losses from impaired securities
   
-
     
-
     
(678
)
   
-
 
Total equity investments
   
(412
)
   
(42
)
   
(2,870
)
   
1,044
 
Other invested assets:
                               
Gross gains
   
518
     
179
     
744
     
500
 
Gross losses
   
-
     
-
     
-
     
(56
)
Total other invested assets
   
518
     
179
     
744
     
444
 
Net realized investment gains (losses)
 
$
507
   
$
1,087
   
$
(180
)
 
$
4,766
 


The gross losses from impaired securities during the nine months ended September 30, 2020 is related to an equity method investment held by the Company.
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Changes in net unrealized gains (losses):
                       
Recognized in accumulated other comprehensive income (loss):
                       
Fixed maturities – available for sale
 
$
4,705
   
$
11,544
   
$
44,943
   
$
48,095
 
Other invested assets
   
1,498
     
686
     
(2,700
)
   
1,358
 
 
 
$
6,203
   
$
12,230
   
$
42,243
   
$
49,453
 
Not recognized in the consolidated financial statements:
                               
Fixed maturities – held to maturity
 
$
(6
)
 
$
14
   
$
64
   
$
50
 


The change in deferred tax liability on unrealized gains recognized in accumulated other comprehensive income during the nine months ended September 30, 2020 and 2019 was $8,446 and $9,892, respectively.


As of September 30, 2020, and December 31, 2019, no individual investment in securities exceeded 10% of stockholders’ equity.

17

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


(5)
Premiums and Other Receivables, Net


Premiums and other receivables, net were as follows:

 
 
September 30,
2020
   
December 31,
2019
 
Premium
 
$
135,133
   
$
188,861
 
Self-funded group receivables
   
26,310
     
28,672
 
FEHBP
   
14,499
     
13,894
 
Agent balances
   
34,224
     
30,784
 
Accrued interest
   
9,753
     
11,307
 
Reinsurance recoverable
   
222,966
     
239,767
 
Other
   
153,839
     
110,952
 
 
   
596,724
     
624,237
 
Less allowance for doubtful receivables:
               
Premium
   
37,489
     
36,622
 
Other
   
12,276
     
19,923
 
 
   
49,765
     
56,545
 
Total premium and other receivables, net
 
$
546,959
   
$
567,692
 


As of  September 30, 2020, and December 31, 2019, the Company had premiums and other receivables of $71,322 and $49,176, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of September 30, 2020 and December 31, 2019 were $24,268 and $22,091, respectively.

(6)
Property and Equipment, Net


Property and equipment, net are composed of the following:
 
 
 
September 30,
   
December 31,
 
 
 
2020
   
2019
 
 
           
Land
 
$
15,867
   
$
10,976
 
Buildings and leasehold improvements
   
125,239
     
92,752
 
Office furniture and equipment
   
32,062
     
27,878
 
Computer equipment and software
   
135,456
     
133,922
 
Automobiles
   
671
     
761
 
 
   
309,295
     
266,289
 
Less accumulated depreciation and amortization
   
179,075
     
177,701
 
Property and equipment, net
 
$
130,220
   
$
88,588
 


On June 19, 2020, the Company acquired a nine-story office building (the Building), located at 1451 F.D. Roosevelt Avenue, in San Juan, Puerto Rico, as well as the adjoining multi-level parking structure and a parking lot. See Note 9 for further information on the credit agreement obtained to partially finance the acquisition of the Building.
 
18

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


(7)
Fair Value Measurements


Our condensed consolidated balance sheets include the following financial instruments: securities available for sale, equity investments, policy loans, policyholder deposits, short-term borrowings and long-term borrowings.  We consider the carrying amounts of policy loans, policyholder deposits, short-term borrowings and long-term borrowings to approximate their fair value and are considered Level 2 financial instruments.  Certain assets are measured at fair value on a recurring basis and are disclosed below. These assets are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2019 Annual Report on Form 10-K.


The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:

 
 
September 30, 2020
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed maturity securities available for sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
37,517
   
$
-
   
$
37,517
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
112,230
     
-
     
-
     
112,230
 
Municipal securities
   
-
     
684,572
     
-
     
684,572
 
Corporate bonds
   
-
     
227,156
     
-
     
227,156
 
Residential agency mortgage-backed securities
   
-
     
280,569
     
-
     
280,569
 
Collateralized mortgage obligations
   
-
     
19,956
     
-
     
19,956
 
Total fixed maturities
 
$
112,230
   
$
1,249,770
   
$
-
   
$
1,362,000
 
Equity investments
 
$
197,864
   
$
186,048
   
$
5,166
   
$
389,078
 

 
 
December 31, 2019
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed maturity securities available for sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
17,686
   
$
-
   
$
17,686
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
107,009
     
-
     
-
     
107,009
 
Municipal securities
   
-
     
629,764
     
-
     
629,764
 
Corporate bonds
   
-
     
208,743
     
-
     
208,743
 
Residential agency mortgage-backed securities
   
-
     
270,536
     
-
     
270,536
 
Collateralized mortgage obligations
   
-
     
9,145
     
-
     
9,145
 
Total fixed maturities
 
$
107,009
   
$
1,135,874
   
$
-
   
$
1,242,883
 
Equity investments
 
$
177,136
   
$
105,180
   
$
5,209
   
$
287,525
 


There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2020 and the year ended December 31, 2019.

19

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and nine months ended September 30 is as follows:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
           
 
 
Three months ended
   
Nine months ended
 
   
September 30, 2020
   
September 30, 2020
 
Beginning Balance
 
$
5,237
   
$
5,209
 
Unrealized in other accumulated comprehensive income
   
(71
)
   
(43
)
Ending Balance
 
$
5,166
   
$
5,166
 


The fair value of investment securities is estimated based on quoted market prices for those or similar investments.  Additional information pertinent to the estimated fair value of investment in securities is included in Note 3.

(8)
Claim Liabilities


A reconciliation of the beginning and ending balances of claim liabilities is as follows:

 
 
Nine months ended
September 30, 2020
 
 
 
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
 
                 
 
                 
Claim liabilities at beginning of period
 
$
341,277
   
$
367,981
   
$
709,258
 
Reinsurance recoverable on claim liabilities
   
-
     
(137,017
)
   
(137,017
)
Net claim liabilities at beginning of period
   
341,277
     
230,964
     
572,241
 
Claims incurred
                       
Current period insured events
   
2,000,825
     
84,358
     
2,085,183
 
Prior period insured events
   
24,297
     
(7,885
)
   
16,412
 
Total
   
2,025,122
     
76,473
     
2,101,595
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
1,678,400
     
45,815
     
1,724,215
 
Prior period insured events
   
267,427
     
41,081
     
308,508
 
Total
   
1,945,827
     
86,896
     
2,032,723
 
Net claim liabilities at end of period
   
420,572
     
220,541
     
641,113
 
Reinsurance recoverable on claim liabilities
   
-
     
145,807
     
145,807
 
Claim liabilities at end of period
 
$
420,572
   
$
366,348
   
$
786,920
 


* Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations.

20

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


 
Nine months ended
September 30, 2019
 
 
 
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
 
                 
 
                 
Claim liabilities at beginning of period
 
$
394,226
   
$
542,563
   
$
936,789
 
Reinsurance recoverable on claim liabilities
   
-
     
(315,543
)
   
(315,543
)
Net claim liabilities at beginning of period
   
394,226
     
227,020
     
621,246
 
Claims incurred
                       
Current period insured events
   
1,934,859
     
85,726
     
2,020,585
 
Prior period insured events
   
(29,038
)
   
(8,254
)
   
(37,292
)
Total
   
1,905,821
     
77,472
     
1,983,293
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
1,606,458
     
41,849
     
1,648,307
 
Prior period insured events
   
303,289
     
32,145
     
335,434
 
Total
   
1,909,747
     
73,994
     
1,983,741
 
Net claim liabilities at end of period
   
390,300
     
230,498
     
620,798
 
Reinsurance recoverable on claim liabilities
   
-
     
181,193
     
181,193
 
Claim liabilities at end of period
 
$
390,300
   
$
411,691
   
$
801,991
 


* Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations.


The actual amounts of claims incurred in connection with insured events occurring in a prior period typically differ from estimates of such claims made in the prior period.  Amounts included as incurred claims for prior period insured events reflect the aggregate net amount of these differences.


The unfavorable prior period development in the claims incurred and loss-adjustment expenses for prior period insured events for the nine months ended September 30, 2020 are due primarily to higher than expected utilization trends in the Managed Care segment.  The favorable development in the claims incurred and loss-adjustment expenses for prior period insured events for the nine months ended September 30, 2019 are due primarily to better than expected utilization trends. Reinsurance recoverable on unpaid claims is reported as premiums and other receivables, net in the accompanying condensed consolidated interim financial statements.


The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $27,806 and $26,211 during the nine months ended September 30, 2020 and 2019, respectively.

21

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


The following is information about total incurred but not reported (IBNR) liabilities plus expected development on reported claims included in the liability for unpaid claims adjustment expenses for the Managed Care segment as of September 30, 2020.
 
Incurred Year
 
Total of IBNR Liabilities Plus Expected
Development on Reported Claims
 
2019
 
$
29,283
 
2020
   
322,425
 

(9)
Borrowings

Long-Term Borrowings


A summary of the borrowings entered by the Company are as follows:

 
 
September 30, 2020
   
December 31, 2019
 
 
           
Secured loan payable of $11,187, payable in monthly installments of $137 through October 1, 2023, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.16% at September 30, 2020).
 
$
5,037
   
$
6,267
 
Secured loan payable of $20,150, payable in monthly installments of $84 through January 1, 2024, plus interest at a rate reset periodically of 275 basis points over selected LIBOR maturity (which was 3.05% at September 30, 2020).
   
16,456
     
17,211
 
Secured loan payable of $4,116, payable in monthly installments of $49 through January 1, 2024, plus interest at a rate reset periodically of 325 basis points over selected LIBOR maturity (which was 3.55% at September 30, 2020).
   
1,960
     
2,401
 
Secured loan payable of $31,350, payable in monthly installments of $105 through May 1, 2025, plus interest at prime rate (which was 3.22% at September 30, 2020). Last payment of $25,185 due on June 19, 2025.
   
31,036
     
-
 
Total borrowings
   
54,489
     
25,879
 
 
               
Less: unamortized debt issuance costs
   
653
     
185
 
 
 
$
53,836
   
$
25,694
 

22

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

Aggregate maturities of the Company’s borrowings as of September 30, 2020 are summarized as follows:

Remaining of 2020
 
$
1,122
 
2021
   
4,490
 
2022
   
4,490
 
2023
   
4,196
 
2024
   
14,484
 
Thereafter
   
25,707
 
 
 
$
54,489
 


On June 19, 2020, TSM entered into a $31,350 Credit Agreement (the Loan) with a commercial bank in Puerto Rico. The proceeds of the Loan were used by the Company to partially finance the acquisition of the Building (see Note 6).


The Loan is guaranteed by a mortgage over the Building, a pledge of all collateral related to the Building and an assignment of the rents collected for the lease of office space in the Building. Pursuant to the credit agreement, interest is payable on the outstanding principal balance of the Loan at an annual rate equal to the Prime Rate. Interest shall be paid on a monthly basis commencing on July 1, 2020 until the principal of the Loan has been paid in full.


The Company may, at its option and at any time, upon written notice as specified in the credit agreement, prepay prior to maturity, all or any part of the Loan upon the payment of a penalty fee of the outstanding principal amount at the time of the prepayment of 3% during the first year, 2% during the second year and 1% during the third year, and thereafter at par.


The four term loans under credit agreements with commercial banks in Puerto Rico include certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business. The Company was in compliance with all these covenants as of September 30, 2020.

Short-term Borrowings


The Company has several short-term facilities available to address timing differences between cash receipts and disbursements, consisting of collateralized advances from FHLBNY and a revolving credit facility.

In August 2019, Triple-S Salud, Inc. (TSS) and Triple-S Vida, Inc. (TSV) became members of the FHLBNY, which provides access to collateralized advances.  The borrowing capacity of TSS and TSV is up to 30% of their admitted assets as disclosed in the most recent filing with the Commissioner of Insurance but is constrained by the amount of collateral held at the FHLBNY (see Note 3). As of September 30, 2020, the borrowing capacity was approximately $119,329 for TSS and $87,940 for TSV.  As of December 31, 2019, the borrowing capacity was approximately $82,200 for TSS and $48,900 for TSV. The outstanding balance as of September 30, 2020 for TSS is $62,500 and TSV is $20,000. The outstanding balance as of December 31, 2019 for TSS and TSV was $25,000 and $29,000, respectively. The average interest rate of the outstanding balance is 0.34% and 1.79% as of September 30, 2020 and December 31, 2019, respectively.

Triple-S Advantage, Inc. (TSA) has a $10,000 revolving loan agreement with a commercial bank in Puerto Rico. This line of credit has an interest rate of 30-day LIBOR plus 250 basis points and contains certain financial and non-financial covenants that are customary for this type of facility. This line of credit matures on June 30, 2021. As of September 30, 2020, there is no outstanding balance.
23

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


(10)
Pension Plan


The components of net periodic benefit cost were as follows:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Components of net periodic benefit cost (income):
                       
Interest cost
 
$
1,474
   
$
1,748
   
$
4,554
   
$
5,230
 
Expected return on assets
   
(2,211
)
   
(2,209
)
   
(6,629
)
   
(6,643
)
Amortization of actuarial loss
   
396
     
98
     
884
     
277
 
Settlement loss
   
356
     
555
     
1,068
     
1,305
 
Net periodic benefit cost (income)
 
$
15
   
$
192
   
$
(123
)
 
$
169
 

 

Employer Contributions:  The Company disclosed in its audited consolidated financial statements for the year ended December 31, 2019 that it expected to contribute $2,000 to the pension program in 2020.  As of September 30, 2020, the Company has contributed $10,000 to the pension program. 

(11)
Stock Repurchase Program


The Company repurchases shares through open market transactions, in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, under repurchase programs authorized by the Board of Directors. Shares purchased under share repurchase programs are retired and returned to authorized and unissued status.


In August 2017 the Company’s Board of Directors authorized a $30,000 repurchase program (2017 $30,000 program) of its Class B common stock.  In February 2018 the Company’s Board of Directors authorized a $25,000 expansion of this program. In October 2019 the Company’s Board of Directors authorized an expansion to this repurchase program increasing its remaining balance up to a total of $25,000, effective November 2019.


During the three months ended September 30, 2020, no stocks were repurchased under a repurchase program. During the nine months ended September 30, 2020, the Company repurchased and retired under this program 952,820 shares at an average per share price of $15.72, for an aggregate cost of $14,982. During the three months and nine months ended September 30, 2019 no stocks were repurchased under a repurchase program. This program was completed in May 2020.

(12)
 Reinsurance


Triple-S Propiedad, Inc. (TSP) uses facultative reinsurance, pro rata, and excess of loss reinsurance treaties to manage its exposure to losses, including those from catastrophe events. TSP has geographic exposure to catastrophe losses from hurricanes and earthquakes. The incidence and severity of catastrophes are inherently unpredictable.


Under these treaties, TSP ceded premiums written were $14,920 and $12,355 for the three months ended September 30, 2020 and 2019, respectively, and $45,637 and $36,028 for the nine months ended September 30, 2020, and 2019, respectively. Ceded incurred losses and loss adjustment expenses during the three months and nine months ended September 30, 2020 and 2019 were $5,419 and $1,089, respectively, and $45,802 and $6,531, respectively. The ceded incurred losses and loss adjustment expenses for the nine months ended September 30, 2020 include $40,000 related to earthquake losses ceded under catastrophe reinsurance.

24

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

Principal reinsurance agreements are as follows:
 
Casualty excess of loss treaty provides reinsurance for losses up to $20,000, subject to a retention of $225.
 
Medical malpractice excess of loss treaty provides reinsurance for losses up to $3,000, subject to a retention of $150.
 
Property reinsurance treaty includes proportional cessions and a per risk excess of loss contract limiting losses to $400 in $30,000 risks.
 
Catastrophe protection is purchased limiting losses to $5,000 per event with losses up to approximately $809,000 in a $814,000 event.
 

All principal reinsurance contracts are for a period of one year and are subject to modifications and negotiations in each renewal. TSP’s current property and catastrophe reinsurance program was renewed effective April 1, 2020 for a twelve months period ending March 31, 2021. Other contracts were renewed as expiring on January 1, 2020.

(13)
Leases


The Company’s subsidiaries lease their regional offices, certain equipment, and warehouse facilities under non-cancelable operating leases. These contracts generally do not include purchase options or residual value guarantees. The remaining lease terms ranges from 0.2 to 14.2 years. The Company identifies leases when it has both the right to obtain substantially all economic benefits from the use of the asset and the right to direct the use of the asset.


The Company recognizes the right-of -use of assets and lease liabilities related to operating leases in its balance sheet statement under the caption of other assets and accounts payables and accrued liabilities, respectively. As of September 30, 2020, the right -of -use asset and lease liabilities balance was $13,929 and $14,171, respectively. As of December 31, 2019, the right-of -use asset and lease liabilities balance was $10,438 and $10,586, respectively. The weighted -average remaining lease term is 5.9 years as of September 30, 2020.


The Company uses the incremental borrowing rate for purposes of discounting lease payments for our operating leases since our lease agreements do not provide a readily determinable implicit rate. We estimate our incremental borrowing rate by using an interest rate index and add a credit spread to this rate based on financing transactions with a similar credit risk profile. The weighted-average discount rate of our operating leases is 5.2% as of September 30, 2020.

25

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


Undiscounted cash flows of operating leases are summarized as follows:

Remaning of 2020
 
$
1,062
 
2021
   
3,998
 
2022
   
3,420
 
2023
   
2,329
 
2024
   
1,855
 
Thereafter
   
3,590
 
Total lease payments
   
16,254
 
Less: imputed interest
   
(2,083
)
Total
 
$
14,171
 


At December 31, 2019, operating lease commitments under lessee arrangements were $4,713, $3,790, $3,200, $2,171, $1,710 and $2,707 for 2020 through 2024 and thereafter, respectively. The following presents the lease cost recognized by the Company:

 
Nine months ended
 
   
September 30, 2020
 
Operating lease cost
 
$
3,570
 
Short-term lease cost
   
801
 
Total lease cost
 
$
4,371
 


Also, the Company leases certain floors of one of its buildings and generates rental income. Maturity analysis of lease payments to be received from its lessees as of September 30, 2020, is summarized as follows:

Remaining of 2020
 
$
473
 
2021
   
1,909
 
2022
   
1,947
 
2023
   
1,986
 
2024
   
2,026
 
Thereafter
   
2,624
 
Total
 
$
10,965
 

26

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


(14)
Comprehensive Income (Loss)


The accumulated balances for each classification of other comprehensive income (loss), net of tax, are as follows:
 
 
 
Three months ended
   
Nine months ended
 
 
 
September 30,
   
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Net Unrealized Gain on Securities
                       
Beginning Balance
 
$
85,110
   
$
55,678
   
$
57,830
   
$
27,308
 
Other comprehensive income before reclassifications
   
5,149
     
10,160
     
31,879
     
41,473
 
Amounts reclassified from accumulated other comprehensive (loss) income
   
(406
)
   
(870
)
   
144
     
(3,813
)
Net current period change
   
4,743
     
9,290
     
32,023
     
37,660
 
Ending Balance
   
89,853
     
64,968
     
89,853
     
64,968
 
Liability for Pension Benefits
                               
Beginning Balance
   
(28,161
)
   
(24,134
)
   
(28,467
)
   
(24,246
)
Amounts reclassified from accumulated other comprehensive income
   
247
     
61
     
553
     
173
 
Ending Balance
   
(27,914
)
   
(24,073
)
   
(27,914
)
   
(24,073
)
Accumulated Other Comprehensive Income (Loss)
                               
Beginning Balance
   
56,949
     
31,544
     
29,363
     
3,062
 
Other comprehensive income before reclassifications
   
5,149
     
10,160
     
31,879
     
41,473
 
Amounts reclassified from accumulated other comprehensive (loss) income
   
(159
)
   
(809
)
   
697
     
(3,640
)
Net current period change
   
4,990
     
9,351
     
32,576
     
37,833
 
Ending Balance
 
$
61,939
   
$
40,895
   
$
61,939
   
$
40,895
 

(15)
Share-Based Compensation


 Share-based compensation expense recorded during the three months ended September 30, 2020 and 2019 was $1,849 and $2,817, respectively. Share-based compensation expense recorded during the nine months ended September 30, 2020 and 2019 was $8,443 and $8,723, respectively. During the three months ended September 30, 2020, 14,040 shares were repurchased and retired as the result of non-cash tax withholdings upon vesting of shares. During the nine months ended September 30, 2020 and 2019, 20,922 and 602 shares, respectively, were repurchased and retired as the result of non-cash tax withholdings upon vesting of shares. There were no non-cash tax withholdings during the three months ended September 30, 2019.

(16)
Net Income Available to Stockholders and Net Income per Share
 

The following table sets forth the computation of basic and diluted earnings per share:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Numerator for earnings per share:
                       
Net income attributable to TSM available to stockholders
 
$
23,581
   
$
13,948
   
$
41,035
   
$
79,665
 
Denominator for basic earnings per share:
                               
Weighted average of common shares
   
23,073,511
     
23,830,106
     
23,215,840
     
23,143,361
 
Effect of dilutive securities
   
120,469
     
63,701
     
102,229
     
73,937
 
Denominator for diluted earnings per share
   
23,193,980
     
23,893,807
     
23,318,069
     
23,217,298
 
Basic net income per share attributable to TSM
 
$
1.02
   
$
0.59
   
$
1.77
   
$
3.44
 
Diluted net income per share attributable to TSM
 
$
1.02
   
$
0.58
   
$
1.76
   
$
3.43
 

27

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

(17) Contingencies
 

The following information supplements and amends, as applicable, the disclosures in Note 24 to the Consolidated Financial Statements of the Company’s 2019 Annual Report on Form 10-K.  The Company’s business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, U.S. Virgin Islands (USVI), Costa Rica, British Virgin Islands (BVI), and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company’s compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.

 

The Company is involved in various legal actions arising in the ordinary course of business. The Company is also defendant in various other litigations and proceedings, some of which are described below. Where the Company believes that a loss is both probable and estimable, such amounts have been recorded.  Although the Company believes the estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution. However, there are legal proceedings where a loss is reasonably possible, and for which it is possible to reasonably estimate the amount of the possible loss or range of losses. We currently believe that the range of possible losses for such proceedings in excess of established reserves is, in the aggregate, from $0 to approximately $10,000 at September 30, 2020. The outcome of legal proceedings is inherently uncertain; pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any. Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material effect on the consolidated financial condition, operating results and/or cash flows of the Company.

 

Additionally, we may face various potential litigation claims that have not been asserted to date.

Claims by Heirs of Former Shareholders


The Company and TSS are defending four individual lawsuits: Vera Sanchez, et al, v. Triple-S; Olivella Zalduondo, et al, v. Seguros de Servicios de Salud, et al; Cebollero Santamaria v. Triple-S Salud, Inc., et al; and Ruiz de Porras, et al, v. Triple-S Salud, Inc.  All claims were filed in the Puerto Rico Court of First Instance by persons who claim to have inherited a total of 41 shares of the Company or one of its predecessors or affiliates (before giving effect to a 3,000-for-one stock split).  While each case presents unique facts and allegations, the lawsuits generally allege that the redemption of the shares by the Company pursuant to transfer and ownership restrictions contained in the Company’s (or its predecessors’ or affiliates’) articles of incorporation and bylaws was improper.  Consequently, the remedy requested by the plaintiffs is to be recognized as shareholders of the Company in the corresponding proportion.


As a result of the Puerto Rico Supreme Court’s decision to deny the applicability of the statute of limitations contained in the local securities law, these claims are being litigated on their merits.


In Cebollero Santamaria v. Triple-S Salud, Inc., et. al. the Puerto Rico Court of First Instance entered partial summary judgment in favor of plaintiff on June 20, 2019. The Company filed a request for reconsideration that is pending adjudication and intends to continue defending this case vigorously in an appeal stage if necessary.

28

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


In Vera Sanchez, et. al. v. Triple-S, Inc., the Puerto Rico Court of First Instance entered summary judgment in favor of the Company. Plaintiffs appealed before the Puerto Rico Court of Appeals. The Company filed its opposition on October 31, 2019. On June 24, 2020, the Court of Appeals revoked the summary judgement and remanded the case back to the Court of First Instance on the grounds that summary judgement was inappropriate because there are disputes as to issues of material fact. We will continue to defend this case vigorously.


In Ruiz de Porras, et. al. v. Triple-S, Inc. the Company intends to file a motion for summary judgment to dismiss all claims once new discovery matters are completed.


In Olivella Zalduondo, et al, v. Seguros de Servicios de Salud, et al, the Court of First Instance entered summary judgment in favor of the Company in November 2019, dismissing the complaint with prejudice. Plaintiffs appealed the decision on January 16, 2020. The Company will continue to defend this case as needed.

In re Blue Cross Blue Shield Antitrust Litigation


TSS is a co-defendant with multiple Blue Plans and the Blue Cross Blue Shield Association in a multi-district class action litigation filed by a group of providers and subscribers on July 24, 2012 and October 1, 2012, respectively, that has since been consolidated by the United States District Court for the Northern District of Alabama, Southern Division, in the case captioned In re Blue Cross Blue Shield Association Antitrust Litigation. Essentially, provider plaintiffs allege that the exclusive service area requirements of the Primary License Agreements with the Blue Plans constitute an illegal horizontal market allocation under federal antitrust laws. As per provider plaintiffs, the quid pro quo for said “market allocation” is a horizontal price fixing and boycott conspiracy implemented through BCBSA and whose benefits are allegedly derived through the BCBSA’s BlueCard/National Accounts Program. Among the remedies sought, provider plaintiffs seek increased compensation rates and operational changes. In turn, subscriber plaintiffs allege that the alleged conspiracy to allocate markets have prevented subscribers from being offered competitive prices and resulted in higher premiums for Blue Plan subscribers. Subscribers seek damages for the amounts that the Blue Plan premiums allegedly have been artificially inflated as a result of the alleged antitrust violations. Both actions seek injunctive relief.


Prior to consolidation, motions to dismiss were filed by several plans, including TSS - whose request was ultimately denied by the court without prejudice. On April 6, 2015, plaintiffs filed suit in the United States District Court of Puerto Rico against TSS. Said complaint, nonetheless, is believed not to preclude TSS’ jurisdictional arguments. Since inception, the Company has joined BCBSA and other Blue Plans in vigorously contesting these claims. On April 5, 2018, the United States District Court for the Northern District of Alabama, Southern Division, issued it’s ruling on the parties’ respective motions for partial summary judgment on the standard of review applicable to plaintiffs’ claims under Section 1 of the Sherman Act and subscriber plaintiffs’ motion for partial summary judgment on the Blue Plan’s single entity defense. After considering the “undisputed” facts (for summary judgment purposes only) and evidence currently on record in the light most favorable to defendants, the court essentially found that: (a) the combination of Exclusive Service Areas and the National Best Efforts Rule are subject to the Per Se standard of review; (b) there remain genuine issues of material fact as to whether defendants’ conduct can be shielded by the “single entity” defense; and (c) claims concerning the BlueCard Program and uncoupling rules are due to be analyzed under the Rule of Reason standard.


On April 16, 2018 Defendants moved the Federal District Court for the Northern District of Alabama to certify for immediate interlocutory appeal the court’s April 5, 2018 Standard of Review Ruling. On June 12, 2018 Hon. Judge Proctor agreed to grant Defendant’s motion for certification pursuant to 28 U.S.C. §1292(b). Defendants filed their Notice of Appeal on July 12, 2018. On December 12, 2018, the Court of Appeals for the Eleventh Circuit denied Defendants’ petition to appeal the District Court’s Standard of Review Ruling. The parties re-commenced mediation with subscribers in April 2019 and with providers in September 2019.  The Defendants have reached a tentative settlement agreement with subscribers. The agreement remains subject to approval from the Federal District Court for the Northern District of Alabama. However, based on this agreement, the Company has accrued $32,000 related to this legal proceeding during the nine months ended September 30, 2020.

29

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)

Claims Relating to the Provision of Health Care Services
 

TSS is a defendant in several claims for collection of monies in connection with the provision of health care services.

 

On January 12, 2015, American Clinical Solutions LLC, a limited liability company that provides clinical laboratory services filed a complaint in Florida state court alleging that TSM and TSS failed to pay certain clinical laboratory services provided to Blue Cross Blue Shield members. TSS and TSM have filed a motion to dismiss alleging lack of jurisdiction. TSM and TSS also requested a transfer of the case to Puerto Rico. Plaintiff has requested jurisdictional discovery, which is ongoing. The claim amounts to $5,000. TSS and TSM will continue to vigorously oppose this claim. 

(18)
Segment Information
 

The Company’s operations are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Company evaluates performance based primarily on the operating revenues and operating income of each segment.  Operating revenues include premiums earned, net, administrative service fees, net investment income, and revenues derived from other segments.  Operating costs include claims incurred and operating expenses.  The Corporation calculates operating income or loss as operating revenues less operating costs.

30

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


The following tables summarize the operations by reportable segment for the three months and nine months ended September 30, 2020 and 2019:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Managed Care:
                       
Premiums earned, net
 
$
849,529
   
$
746,043
   
$
2,447,588
   
$
2,244,448
 
Administrative service fees
   
3,013
     
2,607
     
8,755
     
7,695
 
Intersegment premiums/service fees
   
644
     
1,483
     
2,624
     
4,612
 
Net investment income
   
5,065
     
5,624
     
14,763
     
16,981
 
Total managed care
   
858,251
     
755,757
     
2,473,730
     
2,273,736
 
Life Insurance:
                               
Premiums earned, net
   
49,616
     
45,365
     
143,325
     
133,598
 
Intersegment premiums
   
516
     
471
     
1,552
     
1,457
 
Net investment income
   
6,900
     
6,709
     
20,625
     
20,091
 
Total life insurance
   
57,032
     
52,545
     
165,502
     
155,146
 
Property and Casualty Insurance:
                               
Premiums earned, net
   
23,789
     
23,613
     
66,453
     
64,470
 
Intersegment premiums
   
153
     
153
     
460
     
460
 
Net investment income
   
2,103
     
2,533
     
6,551
     
7,404
 
Total property and casualty insurance
   
26,045
     
26,299
     
73,464
     
72,334
 
Other segments: *
                               
Intersegment service revenues
   
2,595
     
2,076
     
7,637
     
6,049
 
Operating revenues from external sources
   
2,052
     
3,167
     
6,394
     
6,335
 
Total other segments
   
4,647
     
5,243
     
14,031
     
12,384
 
Total business segments
   
945,975
     
839,844
     
2,726,727
     
2,513,600
 
TSM operating revenues from external sources
   
100
     
310
     
355
     
1,138
 
Elimination of intersegment premiums/service fees
   
(574
)
   
(2,107
)
   
(4,636
)
   
(6,529
)
Elimination of intersegment service revenues
   
(2,595
)
   
(2,076
)
   
(7,637
)
   
(6,049
)
Consolidated operating revenues
 
$
942,906
   
$
835,971
   
$
2,714,809
   
$
2,502,160
 


* Includes segments that are not required to be reported separately, primarily the health clinics.

31

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Operating income (loss):
                       
Managed care
 
$
13,006
   
$
5,393
   
$
56,495
   
$
56,805
 
Life insurance
   
5,682
     
6,686
     
20,188
     
17,541
 
Property and casualty insurance
   
4,386
     
6,620
     
10,921
     
14,958
 
Other segments *
   
(1,639
)
   
(690
)
   
(4,552
)
   
(1,812
)
Total business segments
   
21,435
     
18,009
     
83,052
     
87,492
 
TSM operating revenues from external sources
   
100
     
310
     
355
     
1,138
 
TSM unallocated operating expenses
   
(1,633
)
   
(1,643
)
   
(4,877
)
   
(6,812
)
Elimination of TSM intersegment charges
   
2,403
     
2,403
     
7,209
     
7,209
 
Consolidated operating income
   
22,305
     
19,079
     
85,739
     
89,027
 
Consolidated net realized investment gains (losses)
   
507
     
1,087
     
(180
)
   
4,766
 
Consolidated net unrealized investment gains (losses) on equity investments
   
11,040
     
1,267
     
(17,428
)
   
24,259
 
Consolidated interest expense
   
(2,096
)
   
(2,062
)
   
(5,813
)
   
(5,681
)
Consolidated other income, net
   
1,811
     
485
     
6,217
     
3,359
 
Consolidated income before taxes
 
$
33,567
   
$
19,856
   
$
68,535
   
$
115,730
 
 
                               
Depreciation and amortization expense:
                               
Managed care
 
$
2,085
   
$
2,931
   
$
8,061
   
$
8,480
 
Life insurance
   
289
     
268
     
869
     
813
 
Property and casualty insurance
   
93
     
86
     
296
     
266
 
Other segments*
   
240
     
249
     
913
     
627
 
Total business segments
   
2,707
     
3,534
     
10,139
     
10,186
 
TSM depreciation expense
   
404
     
150
     
716
     
543
 
Consolidated depreciation and amortization expense
 
$
3,111
   
$
3,684
   
$
10,855
   
$
10,729
 


* Includes segments that are not required to be reported separately, primarily the health clinics.

 
 
September 30,
2020
   
December 31,
2019
 
Assets:
           
Managed care
 
$
1,406,356
   
$
1,190,538
 
Life insurance
   
1,039,765
     
981,370
 
Property and casualty insurance
   
603,728
     
592,758
 
Other segments *
   
30,408
     
28,346
 
Total business segments
   
3,080,257
     
2,793,012
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
19,881
     
28,167
 
Property and equipment, net
   
67,316
     
25,623
 
Other assets
   
45,927
     
37,176
 
 
   
133,124
     
90,966
 
Elimination entries-intersegment receivables and others
   
(93,094
)
   
(65,152
)
Consolidated total assets
 
$
3,120,287
   
$
2,818,826
 


* Includes segments that are not required to be reported separately, primarily the health clinics.

32

Table of Contents
 
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar amounts in thousands, except per share data)
(Unaudited)


(19)
Subsequent Events


The Company evaluated subsequent events through the date the unaudited condensed consolidated interim financial statements were issued. No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standard Codification.


33

Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries. The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and nine months ended September 30, 2020. Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2019 and the MD&A included therein, and our unaudited condensed consolidated interim financial statements and accompanying notes as of and for the three months and nine months ended September 30, 2020 included in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q and other of our publicly available documents may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations. These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control. These statements may address, among other things, future financial results, strategy for growth, and market position. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form. We are not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, the development of the COVID-19 outbreak, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.

Overview

Triple-S Management Corporation is a healthcare company and one of the top players in the Puerto Rico healthcare industry. With more than 60 years of experience, we are the premier healthcare brand and serve more people through the most attractive provider networks on the island. We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands (USVI), Costa Rica, the British Virgin Islands (BVI) and Anguilla, and we offer a broad portfolio of managed care and related products in the Commercial, Medicare Advantage and Medicaid markets. In the Commercial market, we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Insurance Plan (a government of Puerto Rico and U.S. federal government funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid).

Our commitment to our valued customers and provider partners, backed by our heritage of excellent care, access and service have positioned Triple-S for continued growth in the healthcare arena. Our progressive use of technology and clinical data, value-based partnerships with care providers and initial investments in ambulatory and primary care assets are a strong foundation for differentiation and growth through the development of an integrated delivery system over the next several years. We believe continued investment and focus on delivering an excellent healthcare experience and great service, coupled with health management programs that improve outcomes and quality of life while reducing the total cost of care, will separate Triple-S from our competition and strengthen the financial performance of our business well into the future.

As of September 30, 2020, we served approximately 951,000 managed care members across all regions of Puerto Rico. For the nine months ended September 30, 2020 and 2019, our managed care segment represented approximately 92% of our total consolidated premiums earned, respectively.

34

Table of Contents
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS); Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB). TSS, TSA and TSB are BCBS licensees.

Triple-S is also a well-known brand in the life insurance and property and casualty insurance markets, with a significant share in each. We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (TSV), and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP).

Intersegment revenue and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. Except as otherwise indicated, the numbers for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations. These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment but are eliminated in consolidation and do not change Net Income. See Note 18 to the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.

Our revenue primarily consists of premiums earned, net and investment income. Premiums are derived from the sale of managed care products and property and casualty and life insurance contracts.  Substantially all our earnings are generated in Puerto Rico.

Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and policyholders. Each segment’s results of operations depend to a significant extent on management’s ability to accurately predict and effectively manage claims. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period. Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses.

We use operating income as a measure of performance of the underwriting and investment functions of our segments. We also use the loss ratio and the operating expense ratio as measures of performance.  The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100. The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.

Recent Developments

COVID-19

COVID-19 Situation in Puerto Rico

As of November 4, 2020, the Puerto Rico Department of Health reported 35,807 and 33,213 confirmed and probable COVID-19 cases, respectively, and a total of 850 confirmed and probable COVID-19-related deaths in Puerto Rico.

Puerto Rico was under a stay-at-home order (as amended and extended, the “Order”) from March 15, 2020 until June 16, 2020.  The Order required the closure of non-essential businesses for the same period of time.  On May 1, 2020, the Governor issued a new order providing for the gradual re-opening of the economy beginning on May 4, 2020, provided that the risk of contagion does not increase significantly.  The Governor has issued several other executive orders establishing the rules to continue the gradual re-opening of the economy, the latest of which is effective until November 13, 2020.

Healthcare is considered an essential service under the Order; therefore, all functions of our Managed Care business, other than sales, have been excluded from closure.  Our Life and Property & Casualty businesses, which had been closed since March 16, 2020, re-opened on May 5, 2020, subject to compliance with certain safety and risk management measures.

We have implemented our business continuity and risk mitigation plans and are closely monitoring how the outbreak develops in order to ensure the health and safety of our employees and visitors.

35

Table of Contents

Economic Impact

It is still too early to fully assess the ultimate economic impact of the pandemic and lockdown.  However, the 2020 Fiscal Plan (as defined below) estimates that the economy of Puerto Rico will contract by 4% in real terms in fiscal year 2020 (which ended on June 30, 2020), largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021.  These projections incorporate the combined effect of the measures enacted by the federal and Puerto Rico governments (discussed below), which are expected to play an essential role in mitigating the economic damage from the sudden economic shock caused by the pandemic.

See Item 1A.  Risk Factors – Risks Related to our Business – “Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us.” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Legislative Measures and Initiatives

The federal and state governments have enacted a number of measures in response to the COVID-19 outbreak and the impact the outbreak has had on the economy, public health, government, individuals, and businesses. We include summaries of some of those measures below.

Funding and Economic Relief for Puerto Rico

Public Law 116-127, known as the Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, makes approximately $182.9 million available for Puerto Rico’s Medicaid Program and increases the percentage of federal government funding for its Medicaid program expenditures from 76% to approximately 82% during the emergency period.  Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security or CARES Act, enacted on March 27, 2020, includes a series of direct relief and financial assistance measures for Puerto Rico residents and businesses.  The CARES Act also assigns $2.2 billion to the Government of Puerto Rico to cover necessary expenditures related to COVID-19 and not included in the territory’s budget, among other measures. The Puerto Rico government has earmarked approximately $1 billion for its COVID-19 response.

Measures Impacting our Business

The FFCRA and CARES Act also require health plans and insurers to cover testing for COVID-19 without imposing cost-sharing or prior authorization requirements.  On April 16, 2020, the Puerto Rico Government enacted Act number 43, which requires health plans and insurers to cover COVID-19-related diagnostic and treatment services, including hospitalization, without cost-sharing.  Our regulators have also issued regulations and circular letters requiring waivers of pre-authorizations for certain services and drugs, requiring temporary coverage of certain out-of-network providers and services, and limiting cost-sharing for certain services.  See Item 1A. Risk Factors – “The COVID-19 pandemic and local, state and federal governments’ response to the pandemic may have a material adverse effect on our business, financial condition and results of operations” in this Quarterly Report on Form 10-Q.

Puerto Rico Economy

PROMESA and the Oversight Board

The Commonwealth has been enduring a fiscal and economic crisis for over a decade. Such crisis prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in June 2016. PROMESA, among other things, created a federal fiscal oversight board (the Oversight Board) with broad powers over the Commonwealth’s fiscal affairs and established two mechanisms for the restructuring of the obligations of the Commonwealth, its instrumentalities and municipalities, contained in Titles III and VI of PROMESA. The Commonwealth and several of its instrumentalities are in the process of restructuring their debts through the mechanisms provided by PROMESA.

36

Table of Contents
Commonwealth Fiscal Plan and Plan of Adjustment

The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated May 27, 2020 (the 2020 Fiscal Plan).  As mentioned above, the 2020 Fiscal Plan estimates that the economy of Puerto Rico will contract by 4% in real terms in fiscal year 2020, largely because of the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021. This new economic outlook exacerbates the Commonwealth government’s fiscal challenges. As a result of these changes, the 2020 Fiscal Plan projects that the Commonwealth will have a pre-contractual debt service deficit each year through 2025 if the measures and structural reforms contemplated by the plan are not successfully implemented. It estimates that the proposed fiscal measures and structural reforms will drive approximately $10 billion in savings and extra revenue through 2025 and a cumulative 0.88% increase in growth by fiscal year 2029. However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2020 Fiscal Plan’s projections reflect an annual deficit starting in fiscal year 2032.

On February 28, 2020, the Oversight Board filed an amended plan of adjustment for the Commonwealth, the Employees Retirement System of the Government of the Commonwealth and the Puerto Rico Public Buildings Authority in the pending debt restructuring proceedings under Title III of PROMESA (the Proposed Plan of Adjustment). In light of the COVID-19 pandemic, however, the Oversight Board requested that the court adjourn proceedings related to the Proposed Plan of Adjustment to allow the Government and the Oversight Board to prioritize the health and safety of the people of Puerto Rico and to gain a better understanding of the economic and fiscal impact of the pandemic.

Property & Casualty Litigation

As of September 30, 2020, our Property and Casualty subsidiary had been served in a total of 471 cases relating to Hurricane Maria. Of those, 329 remained open as of September 30, 2020. TSP closed 75 claims during the third quarter of 2020, increasing the number of claims closed to 97.5%. See Item 1A. Risk Factors – Risks Related to our Business – “Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations” and “We face risks related to litigation” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Property and Casualty Reinsurance Program

The Company’s Property and Casualty segment completed the renewal of its reinsurance property and catastrophe program effective April 1, 2020 for twelve-month term ending March 31, 2021.  The new reinsurance program considers a change in cessions in the Commercial Property quota share agreement from 25% to 20% and provides the segment with a catastrophe loss protection of $809 million in excess of $5 million. The cost of the new reinsurance program is estimated to be approximately $2.0 million more than the expiring program.

Recent Seismic Activity

On January 7, 2020, a magnitude 6.4 earthquake struck Puerto Rico, causing island-wide power outages and extensive damage to infrastructure and property in the southwest region of the island.  The 6.4 magnitude earthquake was preceded by foreshocks and followed by aftershocks. During the three months ended March 31, 2020, the Company recognized $5 million in incurred losses related to this event, which is its maximum exposure for a single event under its current reinsurance program.  We also incurred in $3.0 million in reinstatement reinsurance premiums related to the event.

See “Item 1A.  Risk Factors—Risks Related to Our Business – Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Puerto Rico Health Insurance Administration (ASES by its Spanish Acronym) Contract Amendment

On September 24, 2020, we entered into an amendment to our contract with ASES for the provision of health coverage to the medically indigent in Puerto Rico under the Puerto Rico Health Reform Program known as Vital (similar to Medicaid). The amendment, which is effective as of September 15, 2020, provides, among other things, for the revision of the premium rates payable by ASES. The new premium rates are effective retroactively from July 1, 2020 and will apply through the expiration of the contract on September 30, 2021.  In addition, the amendment clarifies certain aspects related to the payment and identification of high-cost high-need enrollees under the agreement.

37

Table of Contents
Legislative Initiatives

On July 20, 2020, the Governor of Puerto Rico announced she would call the Legislative Assembly to an extraordinary session for the consideration of legislation affecting the healthcare insurance industry, among other measures. Of note are House Bill 2583, now Act 138-2020, and Senate Bill 1658, now Act 142-2020, both of which apply to our Commercial and Medicaid lines of business. Act 138-2020, signed on September 1, 2020, purports to reduce applicable periods for insurers to process and pay claims, and to further regulate the utilization review process. The new law orders the Commissioner of Insurance and ASES to adopt related regulation. Act 142-2020, signed on October 9, 2020, limits insurers’ ability to review the course of treatment or medication prescribed by a physician and requires insurers to provide immediate, temporary coverage for prescribed medication to patients while their claims are resolved, among other matters.

Both measures would enter into force this year; however, adoption of related regulation and guidance from implementing agencies is still pending. Legal challenges are possible against these new laws. We are nonetheless assessing the operational and financial impact these laws may have on our business.

See “Item 1A.  Risk Factors—Risks Relating to the Regulation of Our Industry – Changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Acquisition of Life Insurance Portfolio

Effective June 1, 2020, our Life Insurance company acquired a life insurance portfolio from a local insurance company. The portfolio represents approximately $5 million in annualized premiums.

STARS Rating

On October 8, 2020, the Centers for Medicare and Medicaid Services (CMS) announced STARS Ratings for contract product offerings in year 2021. Our Medicare Advantage PPO plan achieved an overall rating of 3.5 stars, our HMO plan achieved an overall 4-star rating and our Part D (Pharmacy) offering received 4.5 stars. STARS Ratings for plans are calculated based on the results achieved by the plan on a contract in terms of measures spanning four categories: Healthcare Effectiveness Data and Information Set (HEDIS) measures, Consumer Assessment of Healthcare Providers and Systems (CAHPS) and Health Outcomes Survey (HOS) measures, Administrative measures, and Part D measures.

Recent Accounting Standards

For a description of recent accounting standards, see Note 2 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q.

Managed Care Membership
 
As of September 30,
 
   
2020
   
2019
 
Managed care enrollment:
           
Commercial 1
   
429,503
     
442,069
 
Medicare
   
136,135
     
128,660
 
Medicaid
   
385,344
     
354,230
 
Total
   
950,982
     
924,959
 
Managed care enrollment by funding arrangement:
               
Fully insured
   
843,152
     
805,882
 
Self-insured
   
107,830
     
119,077
 
Total
   
950,982
     
924,959
 

(1)
Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, Federal government employees and local government employees.

38

Table of Contents
Consolidated Operating Results

The following table sets forth the Corporation’s consolidated operating results.  Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Revenues:
                       
Premiums earned, net
 
$
923.0
   
$
815.0
   
$
2,657.4
   
$
2,442.5
 
Administrative service fees
   
3.7
     
2.6
     
8.7
     
7.7
 
Net investment income
   
14.2
     
15.2
     
42.3
     
45.6
 
Other operating revenues
   
2.0
     
3.1
     
6.4
     
6.3
 
Total operating revenues
   
942.9
     
835.9
     
2,714.8
     
2,502.1
 
Net realized investment gains (losses)
   
0.5
     
1.1
     
(0.2
)
   
4.8
 
Net unrealized investment gains (losses) on equity investments
   
11.1
     
1.3
     
(17.4
)
   
24.3
 
Other income, net
   
1.8
     
0.5
     
6.2
     
3.4
 
Total revenues
   
956.3
     
838.8
     
2,703.4
     
2,534.6
 
Benefits and expenses:
                               
Claims incurred
   
761.8
     
680.0
     
2,129.4
     
2,009.5
 
Operating expenses
   
158.8
     
136.9
     
499.7
     
403.6
 
Total operating expenses
   
920.6
     
816.9
     
2,629.1
     
2,413.1
 
Interest expense
   
2.1
     
2.1
     
5.8
     
5.7
 
Total benefits and expenses
   
922.7
     
819.0
     
2,634.9
     
2,418.8
 
Income before taxes
   
33.6
     
19.8
     
68.5
     
115.8
 
Income tax expense
   
10.0
     
5.9
     
27.5
     
36.1
 
Net income attributable to TSM
 
$
23.6
   
$
13.9
   
$
41.0
   
$
79.7
 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Operating Revenues

Consolidated premiums earned, net increased by $108.0 million, or 13.3%, to $923.0 million during the three months ended September 30, 2020.  This increase primarily reflects higher premiums in the Managed Care segment of $103.5 million. The growth in Managed Care premiums reflects higher average premium rates and fully insured member months across all Managed Care lines of business.

Net unrealized investment gains on equity investments

The $11.1 million in consolidated net unrealized investment gains on equity investments reflect the impact of changes in equity markets.

Claims Incurred

Consolidated claims incurred increased by $81.8 million, or 12.0%, to $761.8 million, and the consolidated loss ratio decreased 90 basis points, to 82.5%, when compared to the prior-year period. The increase in claims incurred  primarily reflects higher claims in the Managed Care segment resulting from an increase in fully insured members, unfavorable prior-period reserve development and other costs such as COVID-19 related treatment and testing, the waiver of medical and payment policies and the assistance we are providing to our elderly population and other vulnerable members. The decrease in the consolidated loss ratio reflects lower Managed Care utilization of services since mid-March as the result of the government-enforced lockdown during the COVID-19 pandemic, an increase in the average membership risk score, and the reinstatement of the HIP fee pass-through in 2020.

39

Table of Contents
Following the government-enforced lockdown related to the COVID-19 pandemic in mid-March, we have seen a decrease in utilization of Managed Care services as members and providers deferred non-emergent or elective health services.  While this trend has caused, and may continue to cause, a short-term decrease in our claim costs, during this third quarter we saw an increase in utilization closer to normal as demand for deferred non-emergent or elective health services resumed.  The access to and demand for care was most constrained from mid-March through April, and began to recover in late May, gradually increasing close to expected levels in the third quarter.

Operating Expenses

Consolidated operating expenses increased by $21.9 million, or 16.0%, to $158.8 million. The increase in operating expenses mostly resulted from the reinstatement in 2020 of the HIP fee of $12.1 million, and higher business promotion expenses, mainly related to COVID-19 relief efforts.  For the three months ended September 30, 2020, the consolidated operating expense ratio increased 40 basis points, to 17.1%.

Income Taxes

Consolidated income tax expense for the three months ended September 30, 2020 increased by $4.1 million, to $10.0 million, primarily reflecting higher taxable income in the Managed Care segment in 2020.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Operating Revenues

Consolidated premiums earned, net increased by $214.9 million, or 8.8%, to $2,657.4 million during the nine months ended September 30, 2020.  This increase primarily reflects higher premiums in the Managed Care segment by $203.3 million due to higher average premium rates in the Medicare and Medicaid lines of business and an increase in Medicare, Medicaid and Commercial fully insured member months.

Net unrealized investment gains (losses) on equity investments

The $17.4 million in consolidated net unrealized investment losses on equity investments reflect the impact of changes in equity markets.

Claims Incurred

Consolidated claims incurred increased by $119.9 million, or 6.0%, to $2,129.4 million, during the nine months ended September 30, 2020.  The consolidated loss ratio decreased 220 basis points, to 80.1%, from the prior-year period, mostly reflecting lower Managed Care utilization of services since mid-March as the result of the government-enforced lockdown during the COVID-19 pandemic and the effect in the MLR of the reinstatement of the HIP fee pass-through in 2020. These decreases were partially offset by the increased benefits in our 2020 Medicare product offering, unfavorable prior-period reserve development in the Managed Care segment and $5 million of earthquake losses recorded by the Property and Casualty segment.

Following the government-enforced lockdown related to the COVID-19 pandemic in mid-March, we have seen a decrease in utilization of Managed Care services as members and providers deferred non-emergent or elective health services.  While this trend has caused, and may continue to cause, a short-term decrease in our claim costs, we are experiencing an increase in these costs during the second half of the year, that affect our medical cost trends as the demand for deferred non-emergent or elective health services resumes.  The access to and demand for care was most constrained from mid-March through April, and began to recover in late May, gradually increasing close to expected levels in the third quarter.

Operating Expenses

Consolidated operating expenses increased by $96.1 million, or 23.8%, to $499.7 million. The increase in operating expenses mostly results from the reinstatement of the HIP fee in 2020 of $43.4 million, the recognition of a $32 million contingency reserve related to a legal proceeding in our Managed Care segment (see Note 17 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q), higher amortization of deferred acquisition costs and higher business promotion expenses, mainly related to COVID-19 relief efforts.  These increases were partially offset by lower professional fees and provision for doubtful accounts. The consolidated operating expense ratio increased 220 basis points, to 18.7%.

40

Table of Contents
Income Taxes

Consolidated income tax expense for the nine months ended September 30, 2020 decreased by $8.6 million to $27.5 million primarily reflecting a lower taxable income in all segments in 2020.

Managed Care Operating Results

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Medical premiums earned, net:
                       
Medicare
 
$
400.7
   
$
367.1
   
$
1,160.9
   
$
1,065.7
 
Medicaid
   
240.9
     
176.3
     
682.9
     
577.7
 
Commercial
   
208.4
     
203.1
     
605.3
     
602.4
 
Medical premiums earned, net
   
850.0
     
746.5
     
2,449.1
     
2,245.8
 
Administrative service fees
   
3.1
     
3.6
     
9.8
     
10.9
 
Net investment income
   
5.1
     
5.7
     
14.8
     
17.0
 
Total operating revenues
   
858.2
     
755.8
     
2,473.7
     
2,273.7
 
Medical operating costs:
                               
Medical claims incurred
   
720.3
     
645.2
     
2,025.1
     
1,905.9
 
Medical operating expenses
   
124.9
     
105.2
     
392.1
     
311.0
 
Total medical operating costs
   
845.2
     
750.4
     
2,417.2
     
2,216.9
 
Medical operating income
 
$
13.0
   
$
5.4
   
$
56.5
   
$
56.8
 
Additional data:
                               
Member months enrollment:
                               
Commercial:
                               
Fully insured
   
966,906
     
964,321
     
2,920,460
     
2,872,836
 
Self-funded
   
324,372
     
356,059
     
981,634
     
1,072,510
 
Total commercial
   
1,291,278
     
1,320,380
     
3,902,094
     
3,945,346
 
Medicare
   
407,170
     
386,995
     
1,220,280
     
1,156,438
 
Medicaid
   
1,132,626
     
1,065,885
     
3,278,098
     
3,187,753
 
Total member months
   
2,831,074
     
2,773,260
     
8,400,472
     
8,289,537
 
Medical loss ratio
   
84.7
%
   
86.4
%
   
82.7
%
   
84.9
%
Operating expense ratio
   
14.6
%
   
14.0
%
   
15.9
%
   
13.8
%

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Managed Care Operating Revenues

Managed Care premiums earned increased by $103.5 million, or 13.9%, to $850.0 million. This increase is principally the result of the following:

Premiums generated by the Medicare business increased by $33.6 million, or 9.2%, to $400.7 million, mostly due to an increase in enrollment by approximately 20,000 member months, primarily reflecting a more competitive product offering, and higher average premium rates due to an increase in the average membership risk score.  This quarter we also lowered the estimated MLR rebate accrual as utilization of services have continued to trend up to almost-normal levels following the reduction noted in the second quarter related to the lockdown as the result of the COVID-19 pandemic.

Premiums generated by the Medicaid business increased by $64.6 million, or 36.6%, to $240.9 million, primarily reflecting higher member months of approximately 67,000 and higher average premium rates following three separate premium rate increases that became effective on November 1, 2019, May 1, 2020 and July 1, 2020.

Premiums generated by the Commercial business increased by $5.3 million, or 2.6%, to $208.4 million, mainly reflecting higher average premium rates, an increase in fully insured member months during the quarter by approximately 3,000 and the reinstatement of the HIP fee pass-through in 2020.

41

Table of Contents
Managed Care Claims Incurred

Managed Care claims incurred increased by $75.1 million, or 11.6%, to $720.3 million when compared to the three months ended September 30, 2019. The medical loss ratio (MLR) of the segment decreased 170 basis points during the 2020 period, to 84.7%.  This fluctuation is primarily attributed to the net effect of the following:

Claims incurred in the Medicare business increased by $25.5 million, or 8.6%, during the 2020 period and its MLR decreased 50 basis points to 80.6%. The increase in claims incurred is the result of higher membership offset by lower MLR. The lower MLR mostly reflects the increase in the average membership risk score and lower utilization resulting from the government-enforced lockdown during the COVID-19 pandemic, partially offset by unfavorable prior-period reserve development and a more competitive product offering.

Claims incurred in the Medicaid business increased by $50.9 million, or 29.0%, during the 2020 period.  The MLR, at 94.0%, was 560 basis points lower than the same period last year. The increase in claims incurred is the result of higher membership offset by lower MLR.  The lower MLR mostly reflects the impact of the premium increases mentioned above, lower utilization resulting from the government-enforced lockdown during the COVID-19 pandemic, and the reinstatement of the HIP fee pass-through in 2020.  These effects were partially offset by unfavorable prior-period reserve development.

Claims incurred in the Commercial business decreased by $1.3 million, or 0.7%, during 2020 and its MLR decreased 280 basis points, to 81.9%.  The lower MLR mostly reflects the reinstatement of the HIP fee pass-through in 2020, offset in part by unfavorable prior-period reserve development.

Managed Care Operating Expenses

Managed Care operating expenses increased by $19.7 million, or 18.7%, to $124.9 million.  The operating expense ratio increased 60 basis points to 14.6% in 2020. The higher operating expenses and expense ratio are mostly driven by a $12.1 million increase in the HIP fee following the reinstatement of the fee in 2020 and expenses related to providing much-needed assistance to seniors to help them manage through the COVID-19 pandemic.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Managed Care Operating Revenues

Managed Care premiums earned increased by $203.3 million, or 9.1%, to $2,449.1 million. This increase is principally the result of the following:

Premiums generated by the Medicare business increased by $95.2 million, or 8.9%, to $1,160.9 million, mostly due to higher average premium rates, reflecting an increase in the average membership risk score revenue in 2020, and higher member months enrollment by approximately 64,000. These increases were partially offset by the recognition of an MLR rebate related to lower utilization following the government-enforced lock-down during the COVID-19 pandemic.

Premiums generated by the Medicaid business increased by $105.2 million, or 18.2%, to $682.9 million, primarily reflecting higher average premium rates following the premium rates increases in 2020 mentioned above, an increase in enrollment of approximately 90,000 member months, the reinstatement of the HIP fee pass-through in 2020, and a profit-sharing accrual recorded in 2019.

Premiums generated by the Commercial business increased by $2.9 million, or 0.5%, to $605.3 million.  This fluctuation primarily reflects higher fully insured enrollment during the year by approximately 48,000 member months and the reinstatement of the HIP fee pass-through in 2020.  These increases were partially offset by lower average premium rates and the recognition of an MLR rebate related to lower utilization following the government-enforced lockdown during the COVID-19 pandemic.

42

Table of Contents
Managed Care Claims Incurred

Managed Care claims incurred increased by $119.2 million, or 6.3%, to $2,025.1 million when compared to the nine months ended September 30, 2019.  The MLR of the segment decreased 220 basis points during 2020, to 82.7%. This fluctuation is primarily attributed to the net effect of the following:

Claims incurred in the Medicare business increased by $64.3 million, or 7.4%, during the 2020 period and its MLR decreased 120 basis points, to 80.2%.  The increase in claim cost is due to higher member months, improved benefits in product offerings, and unfavorable prior-period reserve development, partially offset by the lower MLR.  The lower MLR mostly reflects lower utilization of services as the result of the government-enforced lockdown during the COVID-19 pandemic, which was in force from mid-March to mid-June, when it was significantly reduced.

Claims incurred in the Medicaid business increased by $93.2 million, or 17.3%, during 2020 and its MLR decreased 70 basis points, to 92.7%. The increase in claim cost is due to higher claims trend and member months and an unfavorable prior-period reserve development in 2020, partially offset by the lower MLR. The lower MLR reflects the higher premium rates in the 2020 period as well as the reinstatement of the HIP fee pass-through in 2020. In addition, the 2020 MLR reflects lower utilization of services as the result of the government-enforced lockdown during the COVID-19 pandemic.

Claims incurred in the Commercial business decreased by $38.3 million, or 7.7%, during 2020 and its MLR decreased 670 basis points, to 76.1%. These decreases mostly result from lower utilization related to the COVID-19 lockdown and the impact in the MLR of the reinstatement of the HIP fee pass-through in 2020. These decreases were partially offset by the impact of the previously mentioned estimated premium rebates, higher fully insured enrollment and an unfavorable change in prior-period reserve developments when compared to the 2019 period.

Managed Care Operating Expenses

Managed Care operating expenses increased by $81.1 million, or 26.1%, to $392.1 million. The operating expense ratio increased 210 basis points to 15.9% in 2020. The higher operating expenses mostly result from the reinstatement in 2020 of the HIP fee of $43.4 million, the recognition of a contingency reserve related to a legal proceeding, and expenses related to providing much-needed assistance to seniors to help them manage through the COVID-19 pandemic, offset in part by a decrease in the provision for doubtful accounts and professional fees.

43

Table of Contents
Life Insurance Operating Results

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums earned
 
$
52.6
   
$
47.3
   
$
152.2
   
$
139.7
 
Assumed earned premiums
   
0.1
     
0.6
     
0.1
     
1.6
 
Ceded premiums earned
   
(2.6
)
   
(2.1
)
   
(7.4
)
   
(6.2
)
Premiums earned, net
   
50.1
     
45.8
     
144.9
     
135.1
 
Net investment income
   
6.9
     
6.7
     
20.6
     
20.0
 
Total operating revenues
   
57.0
     
52.5
     
165.5
     
155.1
 
Operating costs:
                               
Policy benefits and claims incurred
   
30.6
     
25.9
     
78.6
     
79.2
 
Underwriting and other expenses
   
20.7
     
20.0
     
66.7
     
58.4
 
Total operating costs
   
51.3
     
45.9
     
145.3
     
137.6
 
Operating income
 
$
5.7
   
$
6.6
   
$
20.2
   
$
17.5
 
Additional data:
                               
Loss ratio
   
61.1
%
   
56.6
%
   
54.2
%
   
58.6
%
Operating expense ratio
   
41.3
%
   
43.7
%
   
46.0
%
   
43.2
%

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Operating Revenues

Premiums earned, net increased by $4.3 million, or 9.4%, to $50.1 million, mainly as the result of higher sales across all lines of business, mainly in the Cancer, Individual Life, and Group lines of business, aided by the acquisition of an insurance portfolio during the second quarter of 2020.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred increased by $4.7 million, or 18.1%, to $30.6 million, mostly as the result of higher actuarial reserves following an increase in collections and policy retention efforts that resulted in the reinstatement of most policies that were cancelled during the second quarter of 2020 due to the COVID-19 lockdown.  As a result, the segment’s loss ratio increased 450 basis points to 61.1%.

Underwriting and Other Expenses

Underwriting and other expenses increased $0.7 million, or 3.5%, to $20.7 million while the segment’s operating expense ratio decreased 240 basis points to 41.3%.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Operating Revenues

Premiums earned, net increased by $9.8 million, or 7.3%, to $144.9 million, mainly as the result of higher sales across all lines of business, mainly in the Individual Life and Cancer lines of business aided by the acquisition of an insurance portfolio during the second quarter of 2020.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred decreased by $0.6 million, or 0.8%, to $78.6 million, mostly as the result of a slowdown in claim trends in the Cancer line of business due to the COVID-19 lockdown. As a result, the segment’s loss ratio decreased 440 basis points to 54.2%.

44

Table of Contents
Underwriting and Other Expenses

Underwriting and other expenses increased $8.3 million, or 14.2%, to $66.7 million, mostly reflecting higher amortization of deferred acquisition costs. The segment’s operating expense ratio increased 280 basis points to 46.0%.

Property and Casualty Insurance Operating Results

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums written
 
$
44.0
   
$
40.0
   
$
115.6
   
$
107.4
 
Premiums ceded
   
(14.9
)
   
(12.3
)
   
(45.6
)
   
(36.0
)
Change in unearned premiums
   
(5.2
)
   
(4.0
)
   
(3.1
)
   
(6.5
)
Premiums earned, net
   
23.9
     
23.7
     
66.9
     
64.9
 
Net investment income
   
2.2
     
2.5
     
6.6
     
7.4
 
Total operating revenues
   
26.1
     
26.2
     
73.5
     
72.3
 
Operating costs:
                               
Claims incurred
   
10.4
     
10.2
     
27.8
     
28.3
 
Underwriting and other expenses
   
11.3
     
9.4
     
34.8
     
29.1
 
Total operating costs
   
21.7
     
19.6
     
62.6
     
57.4
 
Operating income
 
$
4.4
   
$
6.6
   
$
10.9
   
$
14.9
 
Additional data:
                               
Loss ratio
   
43.5
%
   
43.0
%
   
41.6
%
   
43.6
%
Operating expense ratio
   
47.3
%
   
39.7
%
   
52.0
%
   
44.8
%

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Operating Revenues

Total premiums written increased by $4.0 million, or 10.0%, to $44.0 million, mainly driven by higher premiums in Commercial Auto, Personal Package and Commercial Property policies, partially offset by a decrease in Commercial Package policies.

The premiums ceded to reinsurers increased by $2.6 million, or 21.1%, as a result of the increase in premiums written and the impact of an unfavorable reinsurance premium adjustment in the current period when compared to the same period last year.

The change in unearned premiums is $1.2 million higher than the same period in the prior year mostly resulting from the higher volume of premiums, and the effect of changes in the current year’s reinsurance program.

Claims Incurred

Claims incurred increased by $0.2 million, or 2.0%, to $10.4 million, and as a result the loss ratio increased 50 basis points, from 43.0% to 43.5%.

Underwriting and Other Expenses

Underwriting and other operating expenses increased by $1.9 million, or 20.2%, to $11.3 million mostly due to higher net commission expense following the increase in net premiums earned. The net commission expense for the current period is impacted by a lower capitalization of deferred acquisition costs. The operating expense ratio was 47.3%, 760 basis points higher than the prior year.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Operating Revenues

Total premiums written increased by $8.2 million, or 7.6%, to $115.6 million, mostly driven by higher premiums particularly in Commercial Auto and Commercial Package products.

The premiums ceded to reinsurers increased by $9.6 million, or 26.7%, mostly due to approximately $3.0 million of reinsurance reinstatement premiums following losses recorded after the earthquakes in the southwest region of Puerto Rico in January 2020, as well as higher premiums written and the impact of an unfavorable reinsurance premium adjustment in the current period when compared to the same period last year.

45

Table of Contents
The lower change in unearned premiums had a favorable impact on premiums earned of $3.4 million when compared to prior year, mostly reflecting higher premiums written and the effect of changes in the current year’s reinsurance program.

Claims Incurred

Claims incurred decreased by $0.5 million, or 1.8%, to $27.8 million, mostly because of better loss experience in the segment’s on-going business from the effects of COVID-19 measures and lockdown, partially offset by the recognition of $5.0 million of earthquake losses after the January 2020 events. As a result, the loss ratio improved by 200 basis points, to 41.6% during this period.

Underwriting and Other Expenses

Underwriting and other operating expenses increased by $5.7 million, or 19.6%, to $34.8 million, mostly because of higher net commission expense following the increase in net premiums earned. Current year net commission expense is affected by a lower capitalization of deferred acquisition costs. The operating expense ratio was 52.0%, 720 basis points higher than the prior year.

Liquidity and Capital Resources

Cash Flows

A summary of our major sources and uses of cash for the periods indicated is presented in the following table:

 
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2020
   
2019
 
Sources (uses) of cash:
           
Cash provided by (used in) operating activities
 
$
223.7
   
$
(3.5
)
Net (purchases) proceeds of investment securities
   
(211.7
)
   
0.7
 
Net capital expenditures
   
(52.5
)
   
(14.7
)
Capital contribution on equity method investees
   
(7.1
)
   
-
 
Proceeds from long-term borrowings
   
30.9
     
-
 
Net change in short-term borrowings
   
28.5
     
-
 
Payments of long-term borrowings
   
(2.8
)
   
(2.4
)
Proceeds from policyholder deposits
   
21.6
     
15.1
 
Surrenders of policyholder deposits
   
(12.8
)
   
(16.5
)
Repurchase and retirement of common stock
   
(14.9
)
   
-
 
Other
   
16.9
     
2.7
 
Net increase (decrease) in cash and cash equivalents
 
$
19.8
   
$
(18.6
)

The increase of approximately $227.2 million in net cash provided by operating activities is mostly the result of higher premium collections, partially offset by higher cash paid to suppliers and employees and income taxes paid.

Net (purchases) proceeds from investment securities are part of our asset/liability management strategy.

On June 19, 2020, TSM entered into a $31.4 million Credit Agreement (the Loan) with a commercial bank in Puerto Rico. The proceeds of the Loan were used by the Company to partially finance the acquisition of a building, and the acquisition is included in the capital expenditures in the statement of cash flows.  For further details, see Note 9 to the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.

The increase in capital contribution reflects capital contributions in exchange for a participation in equity method investees.

46

Table of Contents
The net change in short-term borrowings represents the proceeds from short-term facilities available to address timing differences between cash receipts and disbursements.

In August 2017, the Company’s Board of Directors authorized a $30.0 million repurchase program of its Class B common stock and in February 2018 the Company’s Board of Directors authorized a $25.0 million expansion of this program. In October 2019, the Company’s Board of Directors authorized an additional expansion to this program increasing its remaining balance up to a total of $25.0 million, effective November 2019. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2020, the Company repurchased and retired under this program 952,820 shares at an average per share price of $15.72, for an aggregate cost of $15.0 million, completing the amount available for repurchases under this program.

The fluctuation in other sources of cash mostly reflects the $13.0 million change in outstanding checks in excess of bank balances.

Financing and Financing Capacity

Long-Term Borrowings

TSM has a $35.5 million credit agreement with a commercial bank in Puerto Rico. The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11.2 million, (ii) Term Loan B in the principal amount of $20.2 million, and (iii) Term Loan C in the principal amount of $4.1 million. Term Loan A matures in October 2023 while Term Loans B and C mature in January 2024. Term Loan A was used to refinance a previous $41.0 million secured loan payable with the same commercial bank.  Pursuant to the credit agreement, interest is payable on the outstanding balance of the loan at the following annual rate: (i) 100 basis points over LIBOR for Term Loan A, (ii) 275 basis points over LIBOR for Term Loan B, and, (iii) 325 basis points over LIBOR for Term Loan C. The loan includes certain financial and non-financial covenants, which are customary for this type of facility, including negative covenants imposing certain restrictions on the Company’s business. Failure to meet these covenants may trigger the accelerated payment of the outstanding balance. As of September 30, 2020, we are in compliance with these covenants.

As detailed above, the three term loans under our credit agreement with a commercial bank in Puerto Rico bear interest rates in relation to 1-month and 3-month LIBOR, a widely used interest rate benchmark.

In July 2017, the Financial Conduct Authority (FCA) in the United Kingdom, which regulates LIBOR, announced that it would phase out this benchmark by the end of 2021. In response, the U.S. Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a working group comprised of private market participants, to ensure a transition to a new reference rate.

The ARRC has recommended the use of the Secured Overnight Financing Rate (SOFR), which is an index based on the cost of borrowing overnight cash collateralized by U.S. Treasury securities. Currently, there is no definitive information regarding the future use of SOFR as a widely accepted benchmark or any other replacement rate.

If LIBOR rates are no longer available, we are subject to an alternative benchmark rate, as defined in the credit agreement of our long-term bank loan. At this time, we cannot assess the impact, if any, on the interest paid on this loan. Alternatively, the loan could be refinanced by us without prepayment penalties.

We will closely follow any new developments regarding the LIBOR phase-out.

On June 19, 2020, TSM entered into a $31.4 million Credit Agreement with a commercial bank in Puerto Rico. The proceeds were used by the Company to partially finance the acquisition of the Building. The Credit Agreement is guaranteed by a mortgage over the Building, a pledge of all collateral related to the Building and an assignment of the rents collected for the lease of office space in the Building. Approximately 64.25% of the acquired Building is currently leased to third parties. The Company expects to move within the next year some of its offices currently leased to third parties to the new Building and together with the leased space to fully occupy the new facilities.  Pursuant to the Credit Agreement, interest is payable on the outstanding principal balance of the Loan at an annual rate equal to the Prime Rate. Interest shall be paid on a monthly basis which commenced on July 1, 2020 until the principal of the Loan has been paid in full.

47

Table of Contents
The Company may, at its option and at any time, upon notice as specified in the Credit Agreement, prepay prior to maturity, all or any part of the Term Loan upon the payment of a penalty fee of the outstanding principal amount at the time of the prepayment of 3% during the first year, 2% during the second year and 1% during the third year, and thereafter at par.

The Credit Agreement includes certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business. The Company was in compliance with these covenants as of September 30, 2020.

See Note 9 to the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for a summary of long-term borrowings.

Short-Term Facilities

We have several short-term facilities available to address timing differences between cash receipts and disbursements, consisting of collateralized advances from the Federal Home Loan Bank of New York (FHLBNY) and a revolving credit facility. See Note 9 to the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for details of available short-term facilities.

We anticipate that we will have sufficient liquidity to support our currently expected needs.

For further details, see Note 13, Borrowings, of the Notes to the Consolidated Financial Statements, included in “Item 8, Financial Statements and Supplementary Data”, of our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business. We have exposure to market risk mostly in our investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in our exposure to financial market risks since December 31, 2019. A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistakes. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

48

Table of Contents
Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of September 30, 2020, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.

There were no significant changes in our disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed the evaluation referred to above.

Changes in Internal Controls Over Financial Reporting

No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended September 30, 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1.  Legal Proceedings

For a description of legal proceedings that have experienced significant developments during this quarter, see Note 17 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q.

Item 1A.  Risk Factors

For a description of our risk factors, see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.

The following risk factor was updated during the three months ended September 30, 2020.

The COVID-19 pandemic and local, state and federal governments’ response to the pandemic may have a material adverse effect on our business, financial condition and results of operations.

On March 11, 2020, the World Health Organization characterized the outbreak of a novel strain of coronavirus (COVID-19) as a global pandemic.  In response, the Puerto Rico Governor issued a stay at home order (as amended and extended, the “Order”) from March 15, 2020 until June 16, 2020.  The Order required the closure of non-essential businesses for the same period of time.  On May 1, 2020, the Governor issued a new order providing for the gradual re-opening of the economy beginning on May 4, 2020, provided that the risk of contagion does not increase significantly.  The Governor has issued several other executive orders establishing the rules to continue the gradual re-opening of the economy, the latest of which is effective until November 13, 2020.

At this point it is not possible to reliably estimate the length or severity of this outbreak, the length and effectiveness of government and private sector mitigation measures, and other variables that will determine the ultimate financial impact of the pandemic on the Company.  Additionally, the situation is rapidly developing and evolving.  We are therefore unable to reliably estimate the ultimate impact of the COVID-19 pandemic on the Company.  However, certain risks discussed in our 2019 Annual Report on Form 10-K may increase or materialize.  We are closely monitoring the development of the situation to assess its impact on our business.  New sales were affected in all our segments and lines of business during the lockdown given that sales functions of all our businesses were not considered essential under the Order and therefore had to be performed remotely. Even though the government-mandated lockdown has been relaxed and most of our sales force has returned to our offices, new sales continue to be affected as social distancing measures continue to restrict certain sales activities. We have experienced a temporary decrease in utilization caused by postponement or cancelation of elective services and medical appointments driven by the Order, which could cause our MLR to temporarily drop below the Affordable Care Act (ACA) and Medicare required ratios.  Conversely, the pandemic could result in a material increase in medical claims as COVID-19 cases increase and the return of deferred utilization.  In addition, the postponement or cancellation of medical appointments, treatments and evaluations in our High Cost High Needs (HCHN) Medicaid membership during the pandemic has and may continue to affect our ability to provide qualifying encounter or utilization data to certify them as such, which has and may continue to result in assignment of such members to a different rate cell with lower premium payments and retroactive premium adjustments by ASES. See Item 1A.  Risk Factors – Risks Relating to the Regulation of Our Industry– “ASES’s risk adjustment payment system and payment structure, and its dependence on scarce or unavailable data, make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.”

49

Table of Contents
Furthermore, COVID-19 related federal and state legislation and regulation may adversely impact our business, financial condition and results of operations. For example, the U.S. and Puerto Rico legislatures have enacted or are contemplating measures requiring health care insurers to cover and/or waive pre-authorization and cost-sharing for COVID-19 related testing, vaccines, treatment or services, which may adversely affect our profitability.  In addition, any legislation requiring insurance companies to make advance payments to providers not linked to services previously provided increases our credit risk and could have a material impact on our financial condition and results of operations.

See Item 1A.  Risk Factors – Risks Related to our Business – “Our inability to contain managed care costs may adversely affect our business and profitability” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Our Property & Casualty business interruption policies include an exclusion of coverage due to virus or bacteria.  However, there are federal and local legislative efforts to retroactively eliminate such exclusions or otherwise require property and casualty insurers to cover COVID-19 losses under their business interruption policies.  While we believe this type of legislative measure could be challenged on constitutional and other grounds, if successfully implemented, it would have a material adverse effect on our Property and Casualty Insurance segment.  With respect to our Life segment, there is a risk that the pandemic result in a higher number of deaths, and therefore a higher number of claims for death benefits than assumed in our actuarial models.

See Item 1A. Risk Factors – Risks Related to our Business – “Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Finally, while estimates vary, the COVID-19 pandemic is widely considered to have had and continue to have a significant effect on the Puerto Rico, U.S. and global economies. Financial market volatility caused by the pandemic may decrease the value of our investment portfolios, including our pension plan asset portfolio. Furthermore, as the financial capacity of our customers is adversely affected, we may experience delinquency in premium payments and ultimately a decrease in insured customers in our commercial line of business and premiums earned, net, or other adverse effects. See Item 1A. Risk Factors – Risks Related to our Business – “Our investment portfolios are subject to varying economic and market conditions.” See also “The securities and credit markets could experience extreme volatility and disruption.” and “Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us.” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

These and other risks, some of which we may be unable to identify at this time due to the evolving and highly uncertain nature of this event, could adversely impact our business, financial condition and results of operations.

50

Table of Contents
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table presents information related to our repurchases of common stock for the period indicated:

(Dollar amounts in millions, except per share data)
 
Total Number of Shares Purchased (1)
   
Average Price Paid per Share
   
Total Number of
Shares Purchased as Part of Publicly Announced Programs
   
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
 
                         
July 1, 2020 to July 31, 2020
   
-
   
$
-
     
-
   
$
-
 
August 1, 2020 to August 31, 2020
   
-
     
-
     
-
     
-
 
September 1, 2020 to September 30, 2020
   
14,040
     
18.85
     
-
     
-
 

(1) Represents shares repurchased and retired as the result of non-cash tax witholdings upon vesting of shares of participants under the Company’s equity compensation plans.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

51

Table of Contents
Item 6.  Exhibits

Exhibits
Description
   
10.1*
 
Amendment to the contract between Administración de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Government Health Plan dated as of August 28, 2020.
 
 
10.2*
 
Amendment to the contract between Administración de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Government Health Plan dated as of September 9, 2020.
 
 
10.3*
 
Amendment to the contract between Administración de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Government Health Plan dated as of September 24, 2020.
 
 
11
Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three and nine months ended September 30, 2020 and 2019 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.
 
 
31.1*
Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).
 
 
31.2*
Certification of the Executive Vice President and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).
 
 
32.1*
Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350.
 
 
32.2*
Certification of the Executive Vice President and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.

All other exhibits for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

* Filed herein.

52

Table of Contents
SIGNATURES

Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
   
Triple-S Management Corporation
 
   
Registrant
           
Date:
November 6, 2020
 
By:
/s/ Roberto García-Rodríguez
 
 
 
 
 
Roberto García-Rodríguez
 
 
 
 
 
President and Chief Executive Officer
 
           
Date:
November 6, 2020
 
By:
/s/ Juan J. Román-Jiménez
 
 
 
 
 
Juan J. Román-Jiménez
 
 
 
 
 
Executive Vice President and Chief Financial Officer
 


53