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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

☐ 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

1441 F.D. Roosevelt Avenue, San Juan, PR 00920

(787) 749-4949

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

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.         

☐ Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   

☐ Yes ☑ No

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 definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 Act).

☐ Yes ☑ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2020 was $438,985,592 for the Class B common stock (the only stock of the registrant that trades in a public market).

As of February 18, 2021, the registrant had 23,680,932 of its Class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 30, 2021 are incorporated by reference into Parts II and III of this Annual Report on Form 10-K.

Triple-S Management Corporation

FORM 10-K

For the Fiscal Year Ended December 31, 2020

Table of Contents

Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K and the documents we incorporated by reference in this report contains forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are statements that include information about possible or assumed future sales, results of operations, developments, regulatory approvals or other circumstances and may be found in the Items of this Annual Report on Form 10-K entitled Item 1.   Business, Item 1A.   Risk Factors, Item 7   Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K.  Statements that use the terms ‘‘believe,’’ ‘‘expect,’’ ‘‘plan,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘anticipate,’’ ‘‘project,’’ ‘‘may,’’ ‘‘will,’’ ‘‘shall,’’ ‘‘should’’ and similar expressions, whether in the positive or negative, are intended to identify forward-looking statements.

All forward-looking statements in this Annual Report on Form 10-K reflect our current views about future events and are based on assumptions and subject to risks and uncertainties.  Consequently, actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in Item 1A.   Risk Factors and elsewhere in this Annual Report on Form 10-K.

In addition, we operate in a highly competitive, constantly changing environment that is significantly influenced by very large organizations that have resulted from business combinations, aggressive marketing and pricing practices of competitors and regulatory oversight.  The following list is a summary of factors, the results of which, either individually or in combination, if markedly different from our planning assumptions, could cause our business results of operations, financial condition, cash flow, or prospect, to be materially adversely affected from those expressed in any forward-looking statements contained in this Annual Report on Form 10-K:

The foregoing list should not be construed to be exhaustive.  We believe the forward-looking statements in this Annual Report on Form 10-K are reasonable; however, there is no assurance that the actions, events or results anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition.  In view of these uncertainties, you should not place undue reliance on any forward-looking statements, which are based on our current expectations at the time the statements are made.  Further, forward-looking statements speak only as of the date they are made, and, other than as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any of them in light of new information or future events.

Set forth below is a summary of the principal risk factors we face during the normal course of business. You should review and carefully consider Item 1A. Risk Factors in this Annual Report on Form 10-K for a detailed description of these and other risk factors we face. The risks and uncertainties summarized below are not the only ones we face and the order in which these factors were summarized does not necessarily reflect their relative importance. Additional risks and uncertainties not summarized below or not presently known to us or that are currently deemed insignificant may also impair our business operations. The occurrence of any of the following risks could materially affect our business, financial condition, operating results, and cash flows.

Risks Related to Our Business

Risks Relating to the Regulation of Our Industry

Part I

General Description of Business and Recent Developments

Triple-S Management Corporation (Triple-S, TSM, the Company, the Corporation, we, us or our) is a health services company and one of the top players in the Puerto Rico health care industry. With more than 60 years of experience, we are the premier health care brand and serve more people through the most attractive provider networks on the island. We have the exclusive right to use the Blue Cross and 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 or the Government health plan).

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 health care 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 health care 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.

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. As of December 31, 2020, we served approximately 979,000 managed care members across all regions of Puerto Rico.

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). Effective June 1, 2020, TSV acquired a life insurance portfolio from a local insurance company. The portfolio represents approximately $5.0 million in annualized premiums.

Substantially all of our premiums are from customers within Puerto Rico.  In addition, most of all of our long-lived assets, other than financial instruments, including deferred policy acquisition costs and value of business acquired, goodwill and other intangibles, and the deferred tax assets are related to Puerto Rico.

Operating revenues, with intersegment premiums and service revenue shown separately, operating income and total assets attributable to the reportable segments are set forth in Note 28, Segment Information of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

In 2018, our subsidiary TSP experienced a spillover of losses over its catastrophe reinsurance program for the first time since its incorporation 30 years ago.  This spillover was related to the losses caused by Hurricane Maria, a strong Category 4 hurricane that struck Puerto Rico in September 2017.  Following the impact of Hurricane Maria, TSP strengthened its reinsurance program by increasing its catastrophe protection and decreasing its insured values.  See Note 14, Reinsurance Activity of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.  Please refer also to Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – III. Results of Operations – Property and Casualty Segment Operating Results.

Our subsidiary TSS was granted Utilization Review Accreditation Commission (URAC) effective March 1, 2017.  We went through a reaccreditation process in January 2020 successfully maintaining our accreditation.  The URAC accreditation is a requirement for the Federal Employees Program representing over $170.0 million in premiums. The accreditation is extensive to the Commercial and Medicaid lines of business since they are managed in the same operational platforms as the Federal Employees Program.  Our Star Rating and URAC accreditation evidence the commitment to quality in health services for our members and affiliates.

In August 2017, the Board of Directors authorized the immediate commencement of a Class B $30.0 million share repurchase program.  In February 2018 the Company’s Board of Directors authorized a $25.0 million expansion to the existing $30.0 million Class B repurchase program. In October 2019 the Company’s Board of Directors authorized an additional expansion to this repurchase program increasing its remaining balance up to a total of $25.0 million, effective November 2019.  This share repurchase program was completed in May 2020 and was conducted in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. See Note 19, Stock Repurchase Programs of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

On July 16, 2019, the Company announced that its Board of Directors authorized the conversion (Conversion) of the Company’s remaining issued and outstanding Class A common shares into Class B common shares, effective August 7, 2019.  Preceding the Conversion, as the result of a recent litigation settlement, the Company issued 48,602 Class A shares to the heirs of a former shareholder.  The issuance of these new Class A shares entitled all Class B shareholders to certain anti-dilution rights; therefore, all holders of Class B shares at the close of business on July 26, 2019 (Record Date) received a share dividend of 0.051107 Class B shares for every Class B share they owned as of that time, as determined by the anti-dilution formula in the Company’s Articles of incorporation.  The Class B share dividend was paid on August 6, 2019; cash was paid in lieu of fractional shares.  Effective upon the Company’s public announcement on August 7, 2019, all Class A holders of record received one Class B share for each Class A share held.  Upon the Conversion, all remaining outstanding Class A shares were automatically cancelled and extinguished, and the Company now maintains a single class of common shares.  See Note 18, Stockholders’ Equity of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

In this Annual Report on Form 10-K, references to “shares” or “common stock” refer collectively to our Class A and Class B common stock, unless the context indicates otherwise.

Industry Overview

Managed Care

In response to increasing focus on health care costs by employers, the government and consumers, alternatives to traditional indemnity health insurance have increased; Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) are two prominent examples.  Through the introduction of these alternatives, the managed care industry has attempted to contain the cost of health care by negotiating contracts with hospitals, physicians and other providers to deliver health care services to plan members at favorable rates.  These products usually feature medical management and other quality and cost-optimization measures such as pre-admission review and approval for certain non-emergency services, pre-authorization of certain outpatient surgical procedures, network credentialing to determine that network doctors and hospitals have the required certifications and expertise, and various levels of care management programs to help members better understand and navigate the medical system.  In addition, providers may have incentives to achieve certain quality measures or may share medical cost risk.  Members generally pay co-payments, coinsurance and deductibles when they receive services.  While the distinctions between the various types of plans have lessened over recent years, PPO products generally provide reduced benefits for out-of-network services, while traditional HMO products generally provide little to no reimbursement for non-emergency out-of-network utilization.  An HMO plan may also require members to select one of the network primary care physicians (PCPs) to coordinate care and approve certain specialist or other services.

The U.S. government provides hospital and medical insurance benefits to eligible people aged 65 and over as well as certain other qualified persons through the Medicare program, including the Medicare Advantage program.  The federal government also offers prescription drug benefits to Medicare eligible, both as part of the Medicare Advantage program and on a stand-alone basis, pursuant to Medicare Part D (also referred to as PDP stand-alone product or PDP).  In addition, the Government of Puerto Rico provides managed care coverage to the medically indigent population of Puerto Rico.

Economic factors and greater consumer awareness have resulted in (a) the increasing popularity of products that offer larger, more extensive networks; more member choice related to coverage, physicians and hospitals; greater access to preventive care and wellness programs, and a desire for greater flexibility for customers to assume larger deductibles and co-payments in return for lower premiums and (b) products with lower benefits and a narrower network in exchange for lower premiums.  We believe we are well positioned to respond to these market preferences due to the breadth and flexibility of our product offering and size of our provider networks.

Life Insurance

Total annual premiums in Puerto Rico for the year ended December 31, 2019 for the life insurance market approximated $1.8 billion.  The main products in this market are ordinary life, cancer and other dreaded diseases, term life, disability and annuities. The main distribution channels are independent agents and an internal salaried sales force.  Banks have established general agencies to cross sell life insurance products, such as term life and credit life.

Property and Casualty Insurance

The total property and casualty market in Puerto Rico in terms of gross premiums written was approximately $2.4 billion in 2019, an increase of $255.0 million over 2018. The nine months ended September 30, 2020 was approximately $1.8 billion, an increase of just $9.0 million over the same period in 2019. Property and casualty insurance companies compete for accounts based on pricing, policy terms, and quality of services. The main lines of business in Puerto Rico are personal and commercial auto, commercial multi-peril, fire and allied lines, and other general liabilities.  Approximately 64% of the market is written by the top six insurance groups or companies in terms of market share, and approximately 87% of the market is written by companies that are incorporated under the laws of and which operate principally in Puerto Rico.

The Puerto Rican property and casualty insurance market is highly dependent on reinsurance.  In September 2017 Puerto Rico was hit by two major hurricanes causing severe damages and losses to the insurance market.  As a result, premium rates and reinsurance costs increased significantly in 2018 and 2019.  Moreover, in January 2020, the southwest part of Puerto Rico was struck by an earthquake causing losses to the insurance industry and affecting catastrophe reinsurance costs. In March 2020 the World Health Organization (WHO) declared the coronavirus (COVID-19) outbreak to be a pandemic which also affected Puerto Rico. The government of Puerto Rico put in place measures to control the effects of the pandemic; these measures included, among others, lockdowns and curfews.  In a general sense, the Property and Casualty Insurance markets were not affected for insurance losses as exclusions were in effect for losses caused by the pandemic.  The insurers were able to operate using technology and communication tools and with less staff at its offices.  The measures to control the pandemic is causing a favorable loss experience in several lines of business.  On the other side, the pandemic and measures to control it has affected several economic sectors and businesses and accordingly the level of premiums is affected as new business opportunities are limited.  The pandemic has several impacts in the reinsurance worldwide market which are considered in establishing reinsurance costs for the local market.

Puerto Rico’s Economy

The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services.  The manufacturing sector now places increased emphasis on higher wages, high technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors and certain high technology machinery and equipment with almost 90% of manufacturing generated by chemical and electronic products.  The services sector, which includes finance, insurance, real estate, wholesale and retail trade, transportation, communications and public utilities, and other services, plays a major role in the economy.  It ranks second to manufacturing in contribution to the gross domestic product and leads all sectors in providing employment.

The economy of Puerto Rico is affected by external factors determined by the U.S. economy and the policies and results of the U.S. government.  These external factors include exports, direct investment, the amount of federal transfer payments, the level of interest rates and the rate of inflation.  Historically, the economy of Puerto Rico has followed the economic trends of the U.S. economy.  However, for more than a decade, economic growth in Puerto Rico has not been consistent with the performance of the U.S. economy.  The Government of Puerto Rico has also faced a number of fiscal challenges, which eventually resulted in it defaulting and having to restructure the majority of debt.

The Puerto Rico economy entered a recession in the fourth quarter of fiscal year 2006. Puerto Rico’s  gross national product (GNP) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. GNP increased by 1.5% (in real terms) in fiscal year 2019, largely due to federal disaster recovery spending related to Hurricane María. The 2020 Fiscal Plan (discussed below) projected that the economy of Puerto Rico would 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.

Puerto Rico’s population has also been in decline over the past decade. Estimates by the U.S. Census Bureau indicate the population has decreased by 14.3%, or approximately 530,000 people, from April 1, 2010 to July 1, 2019. The 2020 Fiscal Plan projects that population will continue to decline through fiscal year 2025. The weakness of Puerto Rico’s economy has also adversely affected employment. Total average annual employment, as measured by the Puerto Rico Department of Labor and Human Resources (the DLHR) has decreased approximately 20% since 2007. The reduction in total employment began in the fourth quarter of fiscal year 2007, when total employment was 1,244,425, and continued consistently until the first half of fiscal year 2015, after which it mostly stabilized.  According to the most recent data from DLHR, Puerto Rico’s average total employment as of November 2020 was 949,000, a decrease of 26,000 from total employment of 975,000 as of November 2019.  The DLHR also reports an average unemployment rate of approximately 8.5% as of November 2020, the same unemployment rate reported by the DLHR as of November 2019.

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 have been in the process of restructuring their debts through the mechanisms provided by PROMESA for some time.

In August 2016, President Barrack Obama appointed the seven voting members of the Oversight Board through the process established in PROMESA, which authorizes the President to select the members from several lists required to be submitted by congressional leaders and which process was recently upheld by the U.S. Supreme Court.  During 2020, President Donald Trump reappointed three of the original members and appointed four new members to the Oversight Board.

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).  In January 2020, however, the Oversight Board established a schedule for a proposed revision to the 2020 Fiscal Plan to incorporate new information regarding Puerto Rico’s macroeconomic environment and government revenues and expenditures, to better inform the fiscal year 2022 budget development, and to incorporate the impact of expenses related to the potential certification of a plan of adjustment for the Commonwealth under Title III of PROMESA. Pursuant to the schedule, the Governor is required to submit a proposed updated fiscal plan to the Oversight Board by February 20, 2021, and the Oversight Board expects to certify a revised updated fiscal plan by April 23, 2021.

The 2020 Fiscal Plan estimated that the economy of Puerto Rico would 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. The Oversight Board projected that this economic contraction would exacerbate the Commonwealth government’s fiscal challenges. As a result of this, the 2020 Fiscal Plan projected that the Commonwealth would have a pre-contractual debt service deficit each year through 2025 if the measures and structural reforms contemplated by the plan were not successfully implemented. It estimated that the proposed fiscal measures and structural reforms would 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 reflected an annual deficit starting in fiscal year 2032.

On February 28, 2020, the Oversight Board filed a 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.   In light of the COVID-19 pandemic, however, the Oversight Board requested that the court adjourn proceedings related to the proposed plan of adjustment so as to allow the Government and the Oversight Board to prioritize the health and safety of the people of Puerto Rico and gain a better understanding of the economic and fiscal impact of the pandemic. The Oversight Board, the Government and certain creditors of the Commonwealth recently resumed negotiations on the economic terms of a proposed plan of adjustment under a court-ordered mediation and, on February 10, 2021, the Oversight Board announced that it had reached an agreement in principle on the economic terms of a proposed plan with the principal parties to the previous plan support agreement. The Title III court set March 8, 2021 as the deadline for the filing of a new proposed plan of adjustment by the Oversight Board.

COVID-19

COVID-19 Situation in Puerto Rico

As of February 18, 2021, the Puerto Rico Department of Health reported 91,047 and 7,459 confirmed (RT-PCR+) and probable (antigen) COVID-19 cases, respectively, and a total of 1,940 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.  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 March 14, 2021.

Health care is considered an essential service under the Order; therefore, all functions of our Managed Care business, other than sales, were excluded from closure.  Our Life Insurance 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.

Puerto Rico began its COVID-19 vaccination program in December 2020 and is currently implementing the second phase of such program, which includes persons 65 years and older.

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

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 above) projected that the economy of Puerto Rico would 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 affected and may continue to adversely affect us. included in this Annual Report on Form 10-K.

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

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.  The Coronavirus Aid, Relief, and Economic Security or CARES Act, enacted on March 27, 2020, and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, enacted on December 27, 2020 include 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

2020 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.

Products and Services

Managed Care

Through our subsidiaries TSS and TSA, we offer a broad range of managed care products, including HMO plans, PPO plans, Medicare Supplement, Medicare Advantage and Medicaid plans.  Managed care products represented approximately 92% of our consolidated premiums earned, net before elimination for each of the years ended December 31, 2020, 2019, and 2018.  We design our products to meet the needs and objectives of a wide range of customers, including employers, individuals and government entities.  Our customers either contract with us to assume underwriting risk or they self-fund underwriting risk and rely on us for provider network access, medical cost management, claim processing, stop-loss insurance and other administrative services.  Our products vary with respect to the level of benefits provided; the costs paid by employers and members, including deductibles and co-payments; and the extent to which our members’ access to providers is subject to referral or preauthorization requirements.

Managed care generally refers to a method of integrating the financing and delivery of health care within a system that manages the cost, accessibility and quality of care.  Managed care products can be further differentiated by the types of provider networks offered, the ability to use providers outside such networks, and the scope of the medical management and quality assurance programs.  Our members receive medical care from our networks of providers in exchange for premiums paid by the individuals or their employers, including governmental entities, and, in some instances, a cost-sharing payment between the employer and the member.  We reimburse network providers according to pre-established fee arrangements and other contractual agreements.

We currently offer the following managed care plans.

Health Maintenance Organization.    We offer HMO plans that provide members with health care coverage for a fixed monthly premium in addition to applicable member co-payments.  Health care services can include emergency care; inpatient hospital and physician care; outpatient medical services; and supplemental services such as dental, vision, behavioral and prescription drugs, among others.  Members must select a primary care physician within the network to provide and assist in managing care, including referrals to specialists.

Preferred Provider Organization.    We offer PPO managed care plans that provide our members and their dependent family members with health care coverage in exchange for a fixed monthly premium.  In addition, we provide our PPO members with access to a larger network of providers than our HMO.  In contrast to our HMO product, we do not require our PPO members to select a primary care physician or to obtain a referral to utilize in-network specialists.  We also provide coverage for PPO members who access providers outside of the network.  Out-of-network benefits are generally subject to a higher deductible and coinsurance.  We also offer national in-network coverage to our PPO members through the BlueCard program.

BlueCard.    For our members who purchase our PPO and selected members under self-funded or Administrative Services Only (ASO) arrangements through our subsidiary TSS, we offer the BlueCard program.  The BlueCard program offers these members in-network benefits through the networks of the other BCBS plans in the United States and certain U.S. territories.  In addition, the BlueCard worldwide program provides our PPO members with coverage for medical assistance worldwide.

Medicare Supplement.    We offer Medicare Supplement products, which provide supplemental coverage for many of the medical expenses that the Medicare Parts A and B programs do not cover, such as deductibles, coinsurance and specified losses that exceed these programs’ maximum benefits.

ASO.    In addition to our fully insured plans, we also offer our PPO products on a self-funded or ASO basis, under which we provide claims processing and other administrative services to employers.  Employers choosing to purchase our products on an ASO basis fund their own claims, but their employees are able to access our provider network at our negotiated discounted rates.  We administer the payment of claims to the providers, but we do not bear any insurance risk in connection with claims costs because we are reimbursed in full by the employer. We are thus subject only to credit risk in this business.  For certain self-funded plans, we provide stop-loss insurance pursuant to which we assume some of the medical risk for a premium.  The administrative fee charged to self-funded groups is generally based on the size of the group and the scope of services provided.

Life Insurance

We offer a wide variety of life, accident, disability and health and annuity products in Puerto Rico through our subsidiary TSV.  TSV markets in-home service life and supplemental health products through a network of company-employed agents.  Ordinary life, cancer and dreaded diseases (Cancer line of business), and pre-need life products are marketed through independent agents.  TSV is the leading distributor of life products in Puerto Rico.  We are the only home service company in Puerto Rico and offer guaranteed issue, funeral and cancer policies to the lower and middle income market segments directly to people in their homes.  We also market our group life and disability coverage through our independent producers and brokers.

Property and Casualty Insurance

We offer a wide range of property and casualty insurance products through our subsidiary TSP.  Our predominant insurance products are commercial multi-peril package, personal package, commercial auto, hospital malpractice, commercial liability, and commercial property.  This segment’s commercial products targeted mainly small-to medium-size accounts.

Because of our geographical location, property and casualty insurance operations in Puerto Rico are subject to natural catastrophic activity, in particular hurricanes, tropical storms and earthquakes.  As a result, local insurers, including ourselves, rely on the international reinsurance market.  The property and casualty insurance market is affected by the cost of reinsurance, which varies with the catastrophic experience.

We maintain a comprehensive reinsurance program as a means of protecting our surplus in the event of a catastrophe.  We also carry reinsurance to protect us from the impact of large unforeseen losses and prevent sudden and unpredictable changes in results of operations and equity.  Our policy is to enter into reinsurance agreements with reinsurers considered to be financially sound.  Practically all our reinsurers have an A.M. Best rating of ‘A-’ or better, or an equivalent rating from other rating agencies.  During the year ended December 31, 2020, 38.7% of the premiums written in the Property and Casualty segment were ceded to reinsurers.  Although these reinsurance arrangements do not relieve us of our direct obligations to our insured, we believe that the risk of our reinsurers not paying balances due to us is low.

Marketing and Distribution

Our marketing activities are focused on promoting our strong brands, quality care, customer service efforts, size and quality of provider networks, flexibility of plan designs, financial strength and breadth of product offerings.  We distribute and market our products through several channels, including our salaried and commission-based internal sales force, direct mail, independent brokers and agents, telemarketing staff, traditional media (including local and cable TV, national and regional press, billboards, radio and cinema) and digital media (social, search engine optimization and search engine marketing).

Branding and Marketing

Our branding and marketing efforts include brand advertising, which focuses on the Triple-S name and the BCBS brand for our managed care products and services, acquisition marketing, which focuses on attracting new customers; and institutional advertising, which focuses on our overall corporate image. We believe that the strongest element of our brand identity is the Triple-S name. We also believe that the BCBS name and marks are valuable brands of our products and services in the marketplace.  We seek to leverage what we believe to be the strong name recognition and comfort level that many existing and potential customers associate with this brand.

Acquisition marketing consists of business-to-business marketing efforts to generate leads for brokers and our sales force, as well as direct-to-consumer marketing efforts used to add new customers to our direct pay businesses.  Institutional advertising promotes key corporate interests and overall company image and communicates our company purpose.  We believe these efforts support and further our competitive brand advantage.  We will continue to utilize the Triple-S name and the BCBS brand for all managed care products and services in Puerto Rico, the USVI, Costa Rica, the BVI and Anguilla.

Sales and Marketing

We employ a wide variety of sales and marketing activities.  Such activities are closely regulated by CMS, the Office of Personnel Management (OPM), the U.S. Department of Health and Human Services (HHS), Commissioner of Insurance, Superintendencia General de Seguros de Costa Rica (Costa Rica Insurance Superintendency) and other government of Puerto Rico agencies.  For example, some of our sales and marketing materials must be approved in advance by the applicable regulatory authorities, and they often impose other regulatory restrictions on our marketing activities.

Distribution

Managed Care Segment.   We rely principally on our internal sales force and a network of independent brokers and agents to market our products.  Individual Commercial policies are sold entirely through independent agents who exclusively sell our individual products, and Medicare Advantage and group products are sold through our 415-person internal sales force (promoters and sales representatives), as well through over 239 independent brokers and agents.  We believe that each of these marketing methods is optimally suited to address the specific needs of the customer base to which it is assigned.

Strong competition exists among managed care companies for brokers and agents with proven ability to secure new business and maintain existing accounts.  The basis of competition for the services of such brokers and agents are commission structure, support services, reputation and prior relationships, the ability to retain clients and the quality of products.  We pay monthly commissions based on premiums collections.  We believe that we have good relationships with our brokers and agents, and that our products, support services and commission structure are highly competitive in the marketplace.

Life Insurance Segment.    In our Life Insurance segment, we offer our insurance products through our network of company-employed home-service agency force, and approximately 300 independent agents and brokers.  Most of our premiums (63% in 2020, 63% in 2019 and 61% in 2018) were placed through our home-service distribution channel selling directly to customers in their homes.  TSV employs approximately 700 full-time active agents and managers who, operate from 25 district offices around the island.

Property and Casualty Segment.   In our Property and Casualty segment, business is primarily subscribed through approximately 13 general agencies, including our insurance agency, Triple-S Insurance Agency, Inc. (TSIA), where business is placed by independent insurance agents and brokers.  During the years ended December 31, 2020, 2019, and 2018 TSIA placed approximately 80%, 78%, and 76% of TSP’s total premium volume, respectively. General agencies contracted by TSP remit premiums net of their respective commission.

Customers

Managed Care

We offer our products in the Managed Care segment to three distinct market sectors in Puerto Rico.  The following table sets forth enrollment information with respect to each sector:

Commercial Sector

The commercial accounts sector includes corporate accounts, federal government employees, individual accounts, local government employees, and Medicare Supplement.

Corporate Accounts.    Corporate accounts consist of small (2 to 50 employees) and large employers (over 50 employees).  Employer groups may choose various funding options ranging from fully insured to self-funded financial arrangements or a combination of both.  While self-funded clients participate in our managed care networks, the clients bear the insurance risk, except to the extent they maintain stop loss coverage.

Federal Government Employees.    For over 50 years, we have maintained our leadership in providing managed care services to federal government employees in Puerto Rico.  We provide our services to these employees under the Federal Employees Health Benefits Program pursuant to a direct contract with OPM and through the Federal Employee Program of the BCBSA.  We are one of two companies in Puerto Rico that has such a contract with OPM.  Every year, OPM allows other insurance companies to compete for this business, provided such companies comply with the applicable requirements for service providers.  This contract is subject to termination in the event of a noncompliance that is not corrected to the satisfaction of OPM.

Individual Accounts.    We provide managed care services to individuals and their dependent family members who contract these services directly with us through our network of independent brokers.  We provide individual and family contracts.

Local Government Employees.    We provide full risk managed care services to the local government of Puerto Rico employees through a government-sponsored program.  Annually, the government qualifies the managed care companies that participate in this program and sets the coverage, including benefits, co-payments and amount to be contributed by the government.  Employees then select from one of the authorized companies and pays for the difference between the premium of the selected carrier and the amount contributed by the government.

Medicare Supplement.    We offer Medicare Supplement products, which provide supplemental coverage for many of the medical expenses that the Medicare Parts A and B programs do not cover, such as deductibles, coinsurance and specified losses that exceed the federal program’s maximum benefits.

Medicare Advantage Sector

Medicare is a federal program administered by CMS that provides a variety of hospital and medical insurance benefits to eligible persons aged 65 and over as well as to certain other qualified persons.  With the approval of the Medicare Modernization Act, Medicare began communicating that managed care organizations (MCO) sponsored Medicare products that offers benefits similar to or better than the traditional Medicare product, but where the risk is assumed by the MCOs.  This program is called Medicare Advantage.  We have contracts with CMS to provide extended Medicare coverage to Medicare beneficiaries under our Dual and Non-Dual products.  Under these annual contracts, CMS pays us a set premium rate based on membership that is risk adjusted for health status.  Depending on the total benefits offered, for certain of our Medicare Advantage products the member will also be required to pay a premium.

Our Dual products target the sector of the population eligible for both Medicare and Medicaid, or dual-eligible beneficiaries.  The government of Puerto Rico has implemented a plan to allow dual-eligibles enrolled in Medicaid to move to a Medicare Advantage plan under which the government, rather than the insured, will assume all of the premiums for additional benefits not included in the Medicare Advantage programs, such as deductibles and co-payments of prescription drug benefits.

Medicaid

The government of Puerto Rico has privatized the delivery of services to the Medicaid and Child Health Insurance subscribers in Puerto Rico, as defined by the government, by contracting with private managed care companies instead of providing health services directly to such population.  This program is based on the Medicaid program, a joint federal and state health insurance program for medically indigent residents of the state.  The Medicaid program is structured to provide states the flexibility to establish eligibility requirements, benefits provided, payment rates, and program administration rules, subject to general federal guidelines.  As of December 31, 2020, this program provided health care coverage to over a million people.

Under the current agreement with the Health Department of Puerto Rico and ASES, TSS is responsible for the provision of medical, mental, pharmacy, and dental health care services on an at-risk basis to subscribers who enroll with TSS.  With this agreement, TSS is now able to serve subscribers who enroll in our plan on an island-wide basis, rather than participating in the specific service regions assigned by ASES.  ASES pays TSS a per member per month (PMPM) rate that varies depending on the clinical condition or category of the subscriber.

Before November 1, 2018, the government divided Puerto Rico into eight geographical areas, where we provided health care services on at-risk basis to subscribers in the Metro-North and West regions.  Each of these geographical areas was awarded through a competitive bid process, to a managed care company doing business in Puerto Rico.

Our agreement with the government of Puerto Rico is subject to termination in the event of a noncompliance event that is not corrected or cured to the satisfaction of the government entity overseeing Medicaid, or in the event that the government determines that there is an insufficiency of funds to finance the program.  See Item 1A – Risks Factors – Risks Related to our Business – We are dependent on a small number of government contracts to generate a significant amount of the revenues of our Managed Care segment. included in this Annual Report on Form 10-K.

Life Insurance

Our Life Insurance segment mainly markets individual life and cancer and other dreaded diseases insurance products. Our policyholders consist primarily of individuals, who hold approximately 672,000 policies.  We also insure approximately 1,700 groups.

Property and Casualty Insurance

Our Property and Casualty segment targets mainly small- to medium-size accounts with low to average exposures to catastrophic losses.  The auto physical damage and auto liability customer bases are primarily of commercial accounts.  Personal business is primarily generated with sales of our personal package product, ProPack, which includes coverage for residences, personal property, and automobile.  In addition, a professional liability coverage is offered with hospital and medical malpractice products.

Underwriting and Pricing

Managed Care

We strive to maintain our market leadership by trying to provide all of our managed care members with the best health care coverage at a reasonable cost.  We believe that disciplined underwriting and appropriate pricing are core strengths of our business and important competitive advantages. We continually review our underwriting and pricing guidelines on a product-by-product and customer group-by-group basis to maintain competitive rates in terms of both price and scope of benefits.  Pricing is based on the overall risk level and the estimated administrative expenses attributable to each particular segment.

Our claims database enables us to establish rates based on each renewing group’s claims experience, which provides us with important insights about the risks in our service areas.  We tightly manage the overall rating process and have processes in place to ensure that underwriting decisions are made by properly qualified personnel.  In addition, we have developed and implemented a utilization review and fraud and abuse prevention program.

We have been able to maintain relatively high retention rates, which is the percentage of existing clients retained in the renewal process, in the corporate accounts sector of our Managed Care segment.  For 2020, 2019 and 2018 our corporate accounts retention factor was 92%, 93% and 96%, respectively.

Our managed care rates are set prospectively, meaning that a fixed premium rate is determined at the beginning of each contract year and revised at renewal.  We renegotiate the premiums of different groups in the corporate accounts as their existing annual contracts become due.  We set rates for individual contracts based on the most recent semi-annual claims data.  We consider the actual claims trend of each group when determining the premium rates for the following contract year.  Rates in the Medicare and Medicaid sectors and for federal and local government employees are generally set on an annual basis through negotiations with the U.S. Federal and Puerto Rico Governments, as applicable.

Life Insurance

The individual life insurance business has been priced using mortality, morbidity, lapses and expense assumptions which approximate actual experience for each line of business.  We review pricing assumptions on an annual basis.  Individual insurance applications are reviewed by utilizing common underwriting standards used in the United States and by our reinsurers, and only those applications that meet these commonly used underwriting requirements are approved for policy issuance.  Our group life insurance business is written on a group-by-group basis.  We develop the pricing for our group life business based on mortality and morbidity experience and estimated expenses attributable to each particular group.

Property and Casualty Insurance

Prior to 2017, the property and casualty insurance market in Puerto Rico was soft, principally as a result of economic conditions and reinsurance capacity. After the losses generated by the hurricanes that made landfall in the Island during 2017, market conditions hardened.  Our Property and Casualty segment has maintained its strong position in the property insurance sector by following prudent underwriting and pricing practices.

Our core business mainly comprises of small- and medium-sized accounts.  The volume of business is subject to attentive risk assessment and strict adherence to underwriting guidelines, combined with maintenance of competitive rates on above-par risks designed to maintain a relatively high retention ratio.  Underwriting strategies and practices are closely monitored by senior management and constantly updated based on market trends, risk assessment results and loss experience.  Commercial risks in particular are fully reviewed by our underwriters.

Quality Initiatives and Medical Management

We utilize a broad range of focused traditional cost-containment and advanced care management processes across various product lines.  We continue to enhance our management strategies, which seek to control claims costs while fulfilling the needs of highly informed and demanding managed care consumers.  One of these strategies is the reinforcement of population and case management programs, which empower consumers by educating them and engaging them in actively maintaining or improving their own health.  Early identification of patients and inter-program referrals are the focus of these programs, which allow us to provide services to our customers based on their specific conditions.  Population management programs include programs that target asthma, congestive heart failure, hypertension, diabetes, and a prenatal program that focuses on preventing prenatal complications and promoting adequate nutrition.  We developed a medication therapy management program aimed at plan members who are identified as having high drug utilization and unrelated diagnostics.  In addition, TSS, through a third-party supplier, provides our members a 24-hour telephone-based triage program and health-information services.    We intend to maximize utilization of population and case management programs among our insured populations.  Other strategies include innovative partnerships and business alliances with other entities to provide new products and services such as an employee assistance program and the promotion of evidence-based protocols and patient safety programs among our providers.  We also employ registered nurses and social workers to manage individual cases and coordinate health care services.  We have enhanced our hospital concurrent-review program, the goal of which is to monitor the appropriateness of high admission rate diagnoses and unnecessary stays.  To expand the scope of the revision, we established a phone-based review for low admissions hospitals, which freed resources to cover the biggest hospitals and allowed the onsite nurses to participate in patient discharge planning; referral to programs; quality of services, including the occurrence of never events (which are adverse events that are clearly identifiable and measurable, serious and usually preventable).  As part of the cost-containment measures, we have preauthorization services for certain procedures and the mandatory validation of member eligibility prior to accessing services.  In addition, we provide a variety of services and programs for acute, chronic and complex populations.  These services and programs seek to enhance quality at physicians’ premises, thus reducing emergency care and hospitalizations.  We promote the use of a formulary for accessing medications, encouraging the use of generic drugs in the three-tier formulary, which offers three co-payment levels.

We have also established an exclusive pharmacy network with higher discounted rates than our broader network.  In addition, through arrangements with our pharmacy benefits manager, we are able to obtain discounts and rebates on certain medications based on formulary listing and market share.

We have designed a comprehensive Quality Improvement Program (QIP).  This program is designed with a strong emphasis on continuous improvement of clinical and service indicators, such as Health Effectiveness Data and Information Set (HEDIS) and Consumer Assessment of Healthcare Providers and Systems (CAHPS) measures.  Our QIP also includes a Physician Incentive Program (PIP) and a Hospital Quality Incentive Program (HQIP), which are directed to support corporate quality initiatives, utilizing clinical and benchmark criteria developed by governmental agencies and nationally recognized professional organizations.  The PIP encourages the participation of members in chronic care improvement programs and the achievement of specific clinical outcomes.  The HQIP encourages participating hospitals to achieve the national benchmarks related to the five core measures established by CMS and the Joint Commission.

Provider Arrangements

Approximately 99% of member services are provided through one of our contracted provider networks; the remainder is provided by out-of-network providers.  Our relationships with managed care providers, physicians, hospitals, other facilities and ancillary managed care providers are guided by standards established by applicable regulatory authorities for network development, reimbursement and contract methodologies.

We contract with our managed care providers in different forms, including capitation-based reimbursement.  For certain ancillary services, such as behavioral health services and certain products of primary care services, we generally enter into capitation arrangements with entities that offer broad-based services through their own contracts with providers.  We attempt to provide market-based reimbursement along industry standards.  We seek to ensure that providers in our networks are paid in a timely manner, and we provide means and procedures for claims adjustments and dispute resolution.  We also provide a dedicated service center for our providers.  We seek to maintain broad provider networks to ensure member choice while implementing effective management programs designed to improve the quality of care received by our members.

We promote the use of electronic claims billing by our providers.  Approximately 84% of claims are submitted electronically through our fully automated claims processing system, and our provider-claim first-pass rate, or rate at which a claim is approved for payment when first processed by our system without human intervention, has averaged 84% in 2020.

We believe that physicians and other providers primarily consider member volume, reimbursement rates, timeliness of reimbursement and administrative service capabilities along with the “non-hassle” factor, or reduction of non-value adding administrative tasks, when deciding whether to contract with a managed care plan.  As a result of our established position in the Puerto Rican market, the strength of the Triple-S name and our association with the BCBSA, we believe we have strong relationships with hospital and provider networks leading to a strong competitive position in terms of hospital count, number of providers and number of in-network specialists.

Hospitals  

We generally contract for hospital services to be paid on an all-inclusive per diem basis, which includes all services necessary during a hospital stay.  We also contract some hospital services to be paid on diagnosis-related groups (DRG), an all-inclusive rate per admission.  Negotiated rates vary among hospitals based on the complexity of services provided.  We annually evaluate these rates and revise them, as appropriate.

Physicians 

Fee-for-service is our predominant reimbursement methodology for physicians in our PPO products and for services referred by the independent practice associations (IPAs) under capitation agreements.  Our physician rate schedules applicable to services provided by in-network physicians are pegged to a resource-based relative value system fee schedule and then adjusted for competitive rates in the market.  This structure is similar to reimbursement agreement methodologies developed and used by the Medicare program and other major payers.  Payments to physicians under the Medicare Advantage program are based on Medicare fees.  For certain of our Medicare products we contract with IPAs in the form of capitation-based reimbursement for certain risks.  We have a network of IPAs that provide managed care services to our members in exchange for a capitation fee.  The IPAs assume the costs of certain primary care services provided and referred by their PCPs, including procedures and in-patient services not related to risks assumed by us.

Services are provided to our members through our network providers with whom we contract directly.  Members seeking medical treatment outside of Puerto Rico are served by providers in these areas through the BlueCard program, which offers access to the provider networks of other BCBS plans.

Subcontracting

We subcontract our triage call center, certain utilization management, mental and substance abuse health services, and pharmacy benefits management services through contracts with third parties.  We also have a Master Services Agreement with OptumInsight, Inc. to provide health care technology and operations services, including information technology, claims processing, and application development, to TSS and its affiliates.

In addition, we contract with a number of other ancillary service providers, including laboratory service providers, home health agency providers and intermediate and long-term care providers, to provide access to a wide range of services.  These providers are normally paid on either a fee schedule or fixed per day or per case basis.

Competition

The insurance industry in Puerto Rico is highly competitive and comprises both local and national entities.  The approval of the Gramm-Leach-Bliley Act of 1999 has opened the insurance market to new competition by allowing financial institutions such as banks to enter into the insurance business.  Several banks in Puerto Rico have established subsidiaries that operate as insurance agencies, brokers and reinsurers.

Managed Care

The managed care industry is highly competitive, both nationally and in Puerto Rico.  Competition continues to be intense due to aggressive marketing, business consolidations, a proliferation of new products and increased quality awareness and price sensitivity among customers.  Industry participants compete for customers based on the ability to provide a total value proposition which we believe includes quality of service and flexibility in benefit design, access to and quality of provider networks, brand recognition and reputation, price and financial stability.

Competitors in the managed care industry include national and local managed care plans. Our market share in terms of premiums written in Puerto Rico was estimated at approximately 28% for the nine-month period ended September 30, 2020.

We believe that our competitive strengths, including our leading presence in Puerto Rico, our BCBS license, the size and quality of our provider network, the broad range of our product offerings, our strong complementary businesses, and our experienced management team position us well to satisfy these competitive requirements.

Life Insurance

We are one of the leading providers of life insurance products in Puerto Rico.  In 2019, we were the second largest life insurance company in Puerto Rico, as measured by direct premiums, with a market share of approximately 11.5%.  We are the only life insurance company that distributes our products through a home service agency force. However, we face competition in each of our product lines.  Excluding annuities, we are the largest company in the life insurance and cancer lines of business, with market shares of approximately 20.9% and 26.2% respectively.

Property & Casualty Insurance

Property and casualty insurance companies tend to compete for the same accounts through price, policy terms and quality of services.  We compete by reasonably pricing our products and providing efficient services to producers, agents and clients.

In the nine-month period ended September 30, 2020, we were the fifth largest property and casualty insurance company in Puerto Rico, as measured by direct premiums, with a market share approximating 6.4%.

Blue Cross and Blue Shield License

We have license agreements with (BCBSA) that permit us the exclusive use of the BCBS name and marks for the sale, marketing and administration of managed care plans and related services in Puerto Rico, the USVI, Costa Rica, the BVI and Anguilla.  We believe that the BCBS name and marks are valuable brands of our products and services in the marketplace.  The license agreements, which have a perpetual term (but are subject to termination under circumstances described below), contain certain requirements and restrictions regarding our operations and our use of the BCBS name and marks.

Upon the occurrence of any event causing the termination of our license agreements, we would cease to have the right to use the BCBS name and marks.  We also would no longer have access to the networks of providers of the different plans that are members of the Association nor the BlueCard Program.  We would expect to lose some portion of our membership if we were to lose these licenses.  Loss of these licenses could impact our ability to compete in our markets and could require payment of a significant fee to the BCBSA.  Furthermore, if our licenses were terminated, the BCBSA would be free to issue a new license to use the BCBS name and marks to another entity, which could have a material adverse effect on our business, financial condition and results of operations.  See Item 1A   Risk Factors – Risks Related to Our Business – The termination or modification of our license agreements to use the BCBS name and mark could have a material adverse effect on our business, financial condition and results of operations. included in this Annual Report on Form 10-K.

Events which could result in termination of our license agreements include, but are not limited to:

The BCBSA license agreements and membership standards specifically permit a licensee to operate as a for-profit, publicly-traded stock company, subject to certain governance and ownership requirements.

Pursuant to our license agreements with BCBSA, at least 80% of the revenue that we earn from health care plans and related services in Puerto Rico, and at least 66.7% of the revenue that we earn from (or at least 66.7% of the enrollment for) health care plans and related services both in the United States and in Puerto Rico together, must be sold, marketed, administered, or underwritten through use of the BCBS name and marks.  However, although subject to final court approval, as part of the settlement agreement reached between Triple-S and other BCBS plans with subscribers in connection with an antitrust suit, the BCBSA will no longer restrict member plans’ unbranded business outside of their territories.

As required by our BCBS license agreements, our Articles of incorporation prohibit any institutional investor from owning 10% or more of our voting power, any person that is not an institutional investor from owning 5% or more of our voting power, and any person from beneficially owning shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest in us.  To the extent that a person, including an institutional investor, acquires shares in excess of these limits, our Articles provide that we will have the power to take certain actions, including refusing to give effect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the Articles.

Pursuant to the rules and license standards of the BCBSA, TSM guarantees TSS and TSB contractual and financial obligations to their respective customers.  Also, TSS guarantees TSA’s contractual and financial obligations to their respective customers.  In addition, pursuant to the rules and license standards of the BCBSA, we have agreed to indemnify the BCBSA against any claims asserted against it resulting from our contractual and financial obligations.

Each license requires an annual fee to be paid to the BCBSA.  The fee is determined based on a per-contract charge from products using the BCBS name and marks.  The annual BCBSA fee for the year 2021 is $1,508,502.  During the years ended December 31, 2020 and 2019, we paid fees to the BCBSA in the amount of $1,299,208 and $1,367,352, respectively.  The BCBSA is a national trade association of 36 independent Primary Licensees (Plans), including TSM, the primary function of which is to promote and preserve the integrity of the BCBS name and marks, as well as to provide certain centralized services to entities licensed by the BCBSA (the Member Plans).  Each Member Plan is an independent legal organization and is not responsible for obligations of other BCBSA Member Plans.  With a few limited exceptions, we have no right to market products and services using the BCBS name and marks outside our BCBS licensed territory.

Under the rules and license standards of the BCBSA, other Member Plans must make available their provider networks to members of the BlueCard Program in a manner and scope as consistent as possible to what such member would be entitled to in his or her home region.  Specifically, a plan located where a member receives the service (each, a Host Plan) must pass on discounts to BlueCard members from other Member Plans that are at least as great as the discounts that the providers give to the Host Plan’s local members.  The BCBSA requires us to pay fees to any Host Plan whose providers submit claims for health care services rendered to our members who receive care in their service area.  Similarly, we are paid fees for submitting claims and providing other services to members of other Member Plans who receive care in our service area.

Trademarks

We consider our trademarks Triple-S and SSS to be very important and material to all segments in which we are engaged.  These trademarks have been duly registered with the Department of State of Puerto Rico and the United States Patent and Trademark Office.  It is our policy to register all our important and material trademarks to protect our rights under applicable corporate and intellectual property laws.  In addition, we have the exclusive right to use the BCBS name and marks in Puerto Rico, Costa Rica, USVI, British Virgin Islands, and Anguilla.  See section – Blue Cross and Blue Shield License.

Regulation

Our business operations are subject to comprehensive and detailed regulation in all the jurisdictions in which we conduct business.  Regulatory agencies include the Commissioner of Insurance, ASES, which administers Medicaid, including the Medicare dual-eligible beneficiaries program; the Division of Banking and Insurance of the Office of the Lieutenant Governor of the U.S. Virgin Islands;  Costa Rica Insurance Superintendency; the Insurance Division of the Financial Service Commission of British Virgin Islands; and the Financial Services Commission of Anguilla.  Federal regulatory agencies that oversee our operations include HHS—directly and through the Office of the Inspector General (OIG), the Office of Civil Rights (OCR), CMS, the U.S. Department of Justice (DOJ), the U.S. Department of Labor (DOL), and OPM.  These government agencies have the right to:

Our operations and accounts are subject to examination and audits at regular intervals by a number of these agencies.  In addition, the U.S federal and local governments continue to consider and enact many legislative and regulatory proposals that have affected, or could materially affect, various aspects of the health care and insurance industries.  Some of the more significant current issues that may affect our business include:

The federal government and the government of Puerto Rico, including the Commissioner of Insurance, have adopted laws and regulations that govern our business activities in various ways.  These laws and regulations may restrict how we conduct our business and may result in additional burdens and costs to us.  Areas of governmental regulation include:

These laws and regulations are subject to amendments and changing interpretations in each jurisdiction.  Failure to comply with existing or future laws and regulations could materially and adversely affect our operations, financial condition and prospects.

Puerto Rico Insurance Laws

Our insurance subsidiaries are subject to the regulations and supervision of the Commissioner of Insurance.  The regulations and supervision of the Commissioner of Insurance consist primarily of the approval of certain policy forms, solvency standards, the nature of and limitations on investments, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations and the form and content of the financial reports, among others.  In general, such regulations are for the protection of policyholders rather than shareholders.

Puerto Rico insurance laws prohibit any person from offering to purchase or sell voting stock of an insurance company that constitutes 10% or more of the total issued and outstanding stock of such company or of the total issued and outstanding stock of a company that controls an insurance company, without the prior approval of the Commissioner of Insurance.

Puerto Rico insurance laws also require that stock insurers obtain the Commissioner of Insurance’s approval prior to any merger or consolidation.  The Commissioner of Insurance cannot approve any such transaction unless it determines that such transaction is fair, equitable, consistent with law, and that no reasonable objection exists.  The reinsurance of all or substantially all of the insurance of an insurance company by another insurance company is deemed to be a merger or consolidation.

Puerto Rico insurance laws further prohibit insurance companies and insurance holding companies, among other entities, from soliciting or receiving funds in exchange for any new issuance of its securities, other than through a stock dividend, unless the Commissioner of Insurance has granted a solicitation permit in respect of such transaction.  The Commissioner of Insurance will issue the permit unless it finds that the funds proposed to be secured are excessive for the purpose intended, the proposed securities and their distribution would be inequitable, or the issuance of the securities would jeopardize the interests of policyholders or security-holders.

In addition, Puerto Rico insurance laws limit insurance companies’ ability to reinsure risk.  Insurance companies can only accept reinsurance in respect of the types of insurance which they are authorized to transact directly.  Also, except for life and disability insurance, insurance companies cannot accept any reinsurance in respect of any risk resident, located, or to be performed in Puerto Rico, which was insured as direct insurance by an insurance company not then authorized to transact such insurance in Puerto Rico.  Insurance companies cannot reinsure 75% or more of their direct risk with respect to any type of insurance without first obtaining the approval of the Commissioner of Insurance.

Privacy of Financial and Health Information

Puerto Rico law requires that companies that manage individual financial, insurance and health information maintain the confidentiality of such information. The Commissioner of Insurance has promulgated regulations relating to the privacy of such information. As a result, our Managed Care subsidiaries must periodically inform our clients of our privacy policies, and in the case of our Life Insurance and Property and Casualty subsidiaries, allow our clients to opt-out if they do not want their financial information to be shared.  Also, Puerto Rico law requires that managed care providers give patients access to their health information within a specified time and that they not charge more than a predetermined amount for such access.  The law imposes various sanctions on managed care providers that fail to comply with these provisions.

Managed Care Provider Services

Participating managed care providers of the dual-eligible sector of the population, administered by ASES, are required to provide specific services to their subscribers.  Such services include access to a provider network that guarantees emergency and specialty services.  In addition, the Patient’s Solicitor Office (the Solicitor) is authorized to review and supervise the operations of entities contracted by the government of Puerto Rico to provide services to the dual-eligible sector of the population.  The Solicitor may investigate and adjudicate claims filed by Medicaid beneficiaries against the various service providers contracted by the government of Puerto Rico.  See Business – Customers – Medicare Supplement and Medicare Advantage Sector sections included in this Item for more information.

Capital and Reserve Requirements

Local insurers and health maintenance organizations are required by the Insurance Code to submit to the Puerto Rico Commissioner of Insurance, Risk Based Capital (RBC) reports following the National Association of Insurance Commissioners (NAIC) RBC Model Act, and accordingly are subject to certain regulatory actions if their capital levels do not meet minimum requirements.  Our minimum RBC requirement is currently 200%, subject to the compliance with certain regulatory ratios.  Noncompliance with required regulatory ratios would subject TSS, TSV, TSB and TSP to a minimum RBC requirement of 300%.  As a health maintenance organization TSA is not subject to compliance with regulatory ratios and is therefore always required to maintain a minimum RBC of 200%.

In addition, TSS, TSA, and TSB are subject to the capital and surplus licensure requirements of the BCBSA.  The capital and surplus requirements of the BCBSA are also based on the RBC Model Act and are intended to assess capital adequacy taking into account the risk characteristics of an insurer’s investments and products.  The RBC Model Act sets forth the formula for calculating the risk-based capital requirements, which are designed to take into account various risks, including insurance risks, interest rate risks and other relevant risks, with respect to an individual insurance company’s business.

The RBC Model Act requires increasing degrees of regulatory oversight and intervention as an insurance company’s risk-based capital declines.  The level of regulatory oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary insurance commissioner of a comprehensive financial plan for increasing its risk-based capital to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control, in rehabilitation or liquidation proceeding.  The RBC Model Act provides for four different levels of regulatory attention depending on the ratio of the company’s total adjusted capital (defined as the total of its statutory capital, surplus, assets valuation reserve and dividend liability) to its “authorized control level.”  At the “company action level,” occurring when a company’s total adjusted capital is less than 200% but greater than or equal to 150% of its “authorized control level,” a company must submit to the regulatory authority a comprehensive plan proposing corrective actions to improve its capital position.  When a company’s adjusted capital is between 200% and 300% and it has a combined ratio greater than 150%, a company action level is triggered pursuant to a health trend test.  The regulatory action level is triggered if a company’s total adjusted capital is less than 150% but greater than or equal to 100% of its authorized control level.  At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed.  The authorized control level is triggered if a company’s total adjusted capital is less than 100% but greater than or equal to 70% of its authorized control level, at which level the regulatory authority may take any action it deems necessary, including placing the company under regulatory control.  The ‘‘mandatory control level’’ is triggered if a company’s total adjusted capital is less than 70% of its authorized control level, at which level the regulatory authority must place the company under its control.

As of December 31, 2020, our insurance subsidiaries met and exceeded the minimum capital requirements established by the Commissioner of Insurance and the BCBSA, as applicable.

In addition to its catastrophic reinsurance coverage, TSP is required by local regulatory authorities to establish and maintain a reserve supported by a trust fund (the Trust) to protect policyholders against their dual exposure to hurricanes and earthquakes.  The funds in the Trust are solely to be used to pay catastrophic losses whenever qualifying catastrophic losses exceed 5% of catastrophe premiums or when authorized by the Commissioner of Insurance.  Contributions to the Trust, and accordingly additions to the reserve, are determined by a rate, imposed by the Commissioner of Insurance on the catastrophe premiums written in that year. As a result of the hurricanes affecting Puerto Rico in September 2017, TSP withdrew $10.0 million from the Trust in 2018.  TSP requested and obtained approval for a $5.0 million withdrawal from the Trust during the year ended December 31, 2020, to cover net earthquake-related losses. During January 2021, TSP withdrew the $5.0 million from the Trust.

At December 31, 2020 and 2019, the reserve for catastrophes is $35.9 and $39.4 million, respectively.  The supporting Trust has assets of $43.1 miliion and $41.0 million as of December 31, 2020 and 2019, respectively.  Assets consist primarily of investment in securities available-for-sale, securities held for maturity, accrued investment income, cash and cash equivalents.  The income generated by investment securities deposited in the Trust becomes part of the Trust fund balance and are therefore considered an addition to the reserve.  For additional details see Note 17, Catastrophe Loss Reserve and Trust Fund, of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Dividend Restrictions

We are subject to the provisions of the General Corporation Law of Puerto Rico (PRGCL), which contains certain restrictions on the declaration and payment of dividends by corporations organized pursuant to the laws of Puerto Rico.  These provisions specify that Puerto Rico corporations may only declare dividends charged to their surplus or, in the absence of such surplus, net profits of the fiscal year in which the dividend is declared and/or the preceding fiscal year.  The PRGCL also contains provisions regarding the declaration and payment of dividends and directors’ liability for illegal payments.

TSM’s ability to pay dividends is dependent on our receiving cash dividends from our subsidiaries.  Our insurance subsidiaries are subject to regulatory surplus requirements and additional regulatory requirements, which may restrict their ability to declare and pay dividends or distributions to TSM.  In addition, our secured term loan restricts our ability to pay dividends if a default thereunder has occurred and is continuing.  Please refer to Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Restrictions on Certain Payments by the Corporation’s Subsidiaries.

Guaranty Fund Assessments

We are required by Puerto Rico law and by the BCBSA guidelines to participate in certain guarantee associations.  See Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Contingencies—Guarantee Associations for additional information.

Federal Regulation

Our business is subject to extensive federal law and regulation.  New laws, regulations or guidance or changes to existing laws, regulations or guidance or their enforcement, may materially impact our business financial condition and results of operations.

Medicare Generally

Medicare is the federal health insurance program created in 1965 for all people aged 65 and older (regardless of income or medical history), qualifying disabled persons and persons suffering from end-stage renal disease.  Medicare is funded by the federal government and administered by CMS, with the day-to-day operations of the program (e.g., provider enrollment, claims payment) handled by private contractors under contract with CMS.  There are approximately 60 million Medicare beneficiaries.

Medicare is divided into four distinct parts:

Medicare Advantage.  Medicare Advantage plans are required to maintain a medical loss ratio (MLR) of at least 85%, meaning, very basically, that if Medicare Advantage plans do not spend at least 85% of their revenue on patient care costs, they may face various sanctions, including refunds, prohibition on enrolling new members, and contract termination. The Part C premium varies by plan.

Other Medicare Supplemental Plans.  “Medigap” is another type of private plan that fills in the patient out-of-pocket gaps in traditional fee-for-service Medicare Part A and B coverage.  These Medigap policies are standardized by CMS, but funded and administered by private organizations.

Historical Changes to the Medicare Program – Creation of Private Plans and the Part D Program

In the 1980s, as an alternative to the traditional fee-for-service Medicare program, Medicare began offering Medicare managed care benefits provided through contracted private health plans.  CMS initially reimbursed health plans participating in the Medicare program primarily on the basis of the demographic data of the plans’ members.  Beginning in 1997, CMS gradually phased in a risk-adjustment payment methodology that based its monthly premium payments to plans on various clinical and demographic factors.  This methodology uses two risk-adjustment models: a Hierarchical Condition Category based model and an End-Stage Renal Disease (ESRD) model, each applying to the corresponding population.  Beginning in 2003, Congress introduced a Medicare managed care approach, which itself has subsequently undergone several changes.

In 2006, Congress introduced the Medicare Part D program, which offered a voluntary outpatient prescription drug benefit to fee-for-service as well as Medicare Advantage beneficiaries.  An Rx Hierarchical Condition Category Model is used in the determination of the Part D premium, and a Low-Income Subsidy (LIS) is applied to Part D premiums for members that qualify.

Medicare Advantage Program Over Time

Under the Patient Protection and Affordable Care Act of 2010 (Pub. L No. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152), on March 30, 2010 (referred to herein as ACA), payments to Medicare Advantage plans were reduced over time, and bonus payments are available to certain plans based on quality ratings.

Among other things, the ACA mandated several changes, implemented by CMS, to the Medicare Advantage and Medicare Part D programs, including strengthening CMS’ ability to remove poor performers from the Medicare Advantage and Part D programs beginning in 2015.  Beginning with Medicare contract year 2015, CMS has the authority to terminate its contract with any Medicare Advantage or Part D plan for substantial contract noncompliance, or refuse to renew such plan, if the plan fails to achieve an overall Star Rating of 3.0 stars (out of 5.0) for any consecutive three year period.  Although CMS has issued annual Star Ratings for Part D plans since 2007 and for Medicare Advantage plans since 2008, CMS uses Star Ratings issued for Medicare contract years 2013 and beyond in implementing this provision. In April 2015, CMS announced that it would for the first time exercise its authority to terminate low performing Medicare Advantage and Part D plans beginning in 2016. CMS now issues Star Ratings on a prospective basis, typically in the fall preceding the contract year.  CMS also has the authority to use the lower Star Ratings as a means to invoke its existing authority under Section 1857(c)(2) of the Social Security Act to terminate a contract when CMS determines that the Medicare Advantage or Part D plan has failed to substantially carry out the contract or is carrying out the contract in a manner that is inconsistent with the efficient or effective administration of the Medicare Advantage or Part D program.

In addition, under the ACA, Medicare Advantage plan payment rates were subject to transitionally phased-in reductions intended to bring Medicare Advantage rates more in line with Medicare fee-for-service rates. The transition began in 2012 and was completed in 2017.

Payments to Medicare Advantage Participating Plans

Since 2006, Medicare Advantage has used a bidding system by which plans submit bids based on costs per enrollee for Part A and Part B covered services.  Medicare Advantage also pays plans for providing prescription drug benefits under Part D.  Bids are based on estimated costs per enrollee for the Medicare-covered services.  The bids are then analyzed against a benchmark established by federal statute, and which vary by county or region.  A Medicare Advantage plan’s actual payment rate is based on a complex statutory formula that takes into account a number of factors, including the relationship between the plan’s bid and the applicable benchmark. When a bid is higher than the benchmark, enrollees generally pay the difference (through an additional premium) between the benchmark and the bid, in addition to any other Medicare premiums.  If the bid is lower than the benchmark, the plan and Medicare generally share the difference, and the plan must use its share (known as a rebate) to provide additional benefits to enrollees.  For plans obtaining up to 3.0 Stars (explained below), the rebate share to the plan is 50%.  When the plan reaches 3.5 or 4.0 Stars, that rebate share rises to 65%, and when the plan reaches 4.5 or 5.0 Stars it rises to 70%.

Plans reaching 4.0 Stars or higher, also receive a 5% quality bonus payment (QBP), which could be doubled for certain qualifying counties.  The resulting benchmark plus QBP amount can be reduced to a cap determined for each county, so the effective bonus payment for such qualifying counties could be between 5% and 10%.  Rebates and QBPs only apply to Part C premium payments.

Star Ratings for plans are calculated based on the results achieved by the plan on a contract in terms of measures (46 in the contract year 2021 as established in the 2021 Rate Announcement published by CMS in April 2020) spanning four categories: HEDIS measures, CAHPS and Health Outcomes Survey (HOS) measures, Administrative measures and Part D measures.  CMS assigns from one to five stars for each numeric measure score by applying one of two methods: relative distribution with significance testing (CAHPS) or clustering (all other measures).  Case-mix adjustments are applied to the survey results as part of the scoring.  CMS has recognized that socio-economic factors create significant variations in results for some metrics.  CMS’ interim response to address the within-contract disparity in performance associated with a contract’s percentages of beneficiaries with low income subsidy and dual eligible (LIS/DE) and disability status revealed in our comprehensive research conducted over multiple years culminated in the creation of the Categorical Adjustment Index (CAI).  Each measure is also assigned a relative weight used in the calculation of the Part C, Part D and overall Star Rating.  CMS has also adopted policies to consider the impact of extreme natural disasters in the results, recognizing that the aftermath can present unanticipated barriers to achieving solid results.

Medicaid Generally

Medicaid is a public insurance program intended for low-income individuals and families.  To participate in Medicaid, states are required to cover certain groups, but may cover additional population groups at their discretion.  States may apply to CMS for waivers to provide coverage to populations beyond those normally covered under the program.  States are able to establish eligibility criteria within federal minimum standards, to set Medicaid provider payment rates and to reimburse providers through fee-for-service or managed care.  They also have the flexibility to determine the type, amount, duration, and scope of services of their respective Medicaid programs, as long as they remain within federal guidelines, although states are required to cover certain mandatory benefits.  In Puerto Rico, the Medicaid program is administered by ASES.

Medicaid is jointly funded by the federal government and state governments.  States receive a percentage of their Medicaid program expenditures from the federal government, through a formula known as the Federal Medical Assistance Percentage (FMAP).  The FMAP varies by state based on factors such as per capita income.  However, unlike states, the FMAP for Puerto Rico and other U.S. territories is fixed, and federal funding is capped per funding period.  Pursuant to the Further Consolidated Appropriations Act of 2020, the FMAP for Puerto Rico is 76% until September 30, 2021, and up to approximately $5.342 billion will be provided in Medicaid funding to Puerto Rico through such date.  This funding will bring temporary financial stability to Puerto Rico’s Medicaid program, and funding conditions related to compliance with program management standards will further promote stability and predictability.  However, a longer-term solution is necessary due to a shortfall that continues to be perpetuated by the FMAP established in the ACA in 2010.

Dual-Eligible Beneficiaries

A dual-eligible beneficiary is a person who is eligible for both Medicare, because of age or other qualifying status, and Medicaid, because of economic status.  Dual-eligibles are a high-cost population that account for a disproportionate share of government health care expenditures.  Given the disproportionately high cost of treating dual-eligibles, there has been a spate of initiatives designed to address the issue.  The government of Puerto Rico established a model that wraps-around benefits included in Medicaid that were not included in original Medicare benefits.  Dual-eligible beneficiaries in Puerto Rico have the option to participate in this model called Platino.  Health plans that offer Platino products receive premiums from CMS and the government of Puerto Rico.  In this plan the government, rather than the insured, will assume all of the premiums for additional benefits not included in traditional Medicare programs, such as prescription drug benefits.  By managing utilization and implementing disease management programs, many Medicare Advantage plans can profitably care for dual-eligible members.  The MMA established subsidies and reduced or eliminated deductibles for certain low-income beneficiaries, including dual-eligible individuals.  Pursuant to the MMA, dual-eligible individuals receive drug coverage from the Medicare program rather than the Medicaid program.  Companies offering Medicare Part D stand-alone prescription drug plans with bids at or below the regional weighted average bid resulting from the annual bidding process received a pro-rata allocation and auto-enrollment of the dual-eligible beneficiaries within the applicable region.

Additionally, ACA created the Medicare-Medicaid Coordination Office to better integrate Medicare and Medicaid benefits and improve coordination between federal and state governments, which has, among other things implemented initiatives such as demonstration projects and limited coordinated care contracts, intended to improve quality and lower costs with respect to dual eligible beneficiaries. Under authority of the ACA, a number of states (not including Puerto Rico) have been awarded contracts to support the design of demonstration projects that aim to improve the coordination of care for people with Medicare and Medicaid coverage.

Special Needs Plans

Special Needs Plans are intended to address Medicare beneficiaries with special care needs, particularly those with chronic conditions.  Essentially, Medicare Advantage Special Needs Plans (SNPs) are a type of Medicare Advantage Plan for people with certain chronic diseases and conditions or who have specialized needs (such as people who have both Medicare and Medicaid or people who live in certain institutions).  SNPs limit membership to people with specific diseases or characteristics, and tailor their benefits, provider choices, and drug formularies (list of covered drugs) to best meet the specific needs of the groups they serve.

Sales and Marketing.    Our sales and marketing activities are closely regulated by CMS, ASES, the Puerto Rico Office of the Commissioner of Insurance and the Solicitor General.  CMS regulations in this area preempt local law.

Fraud and Abuse Laws.    Insurance providers in Puerto Rico are subject to local and federal laws that prohibit fraud and abuse, and are required to have anti-fraud units in place.  In addition, entities, such as TSS and TSA, that receive federal funds from government health care programs, such as Medicare and Medicaid, are subject to a wide variety of federal fraud and abuse laws and enforcement activities.  Such laws include, among others, the federal anti-kickback laws and the False Claims Act.

Anti-kickback Laws.    Insurance providers in Puerto Rico are subject to local and federal anti-kickback laws.  These anti-kickback laws prohibit the payment, solicitation, offering or receipt of any form of remuneration (including kickbacks, bribes, and rebates) in exchange for business, and under federal law, in exchange for the referral of federal health care program patients or any item or service that is reimbursed by any federal health care program.  In addition, the federal regulations include certain safe harbors that describe relationships that have been determined by CMS not to violate the federal Anti-Kickback Statute.  Relationships that do not fall within one of the enumerated safe harbors are not a per se violation of the federal law, but will be subject to enhanced scrutiny by regulatory authorities.  The ACA amended the intent requirement of the federal Anti-Kickback Statute, and other health care criminal fraud statutes, so that a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute and other health care criminal fraud statutes, or the specific intent to violate them, to have committed a violation. The ACA also provided that a violation of the federal Anti-Kickback Statute is grounds for the government or a whistleblower to assert that a claim for payment of items or services resulting from such violation constitutes a false or fraudulent claim for purposes of the federal False Claims Act. Failure to comply with the anti-kickback provisions, and other health care criminal fraud statutes, may result in civil damages and penalties, criminal sanctions, and administrative remedies, such as exclusion from the applicable federal health care program, and additional reporting requirements and oversight if subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance.

Federal False Claims Act.    Federal regulations also strictly prohibit the presentation of false claims or the submission of false information to the federal government.  Under the federal False Claims Act, any person or entity that has knowingly presented or caused to be presented a false or fraudulent request for payment from the federal government or who has made a false statement or used a false record in the submission of a claim may be subject to treble damages and penalties of up to $23,331 thousand per claim.  The ACA codified the federal government’s prior position that claims presented in relationships that violate the federal Anti-Kickback Statute may also be considered to be violations of the federal False Claims Act.  Furthermore, the federal False Claims Act permits private citizen “whistleblowers” to bring actions on behalf of the federal government for violations of the False Claims Act and to share in the settlement or judgment that may result from the lawsuit.  Financial recoveries from civil health care matters brought under the False Claims Act are significant; according to the United States Department of Justice, it recovered over $3 billion from False Claims Act cases in fiscal year 2019.

HIPAA, HITECH, and Gramm-Leach-Bliley Act

Health care entities, such as TSS and TSA, are subject to laws, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their respective implementing regulations, and the Gramm-Leach-Bliley Act, that require the protection of certain health and other information.  HIPAA authorized HHS to issue standards for administrative simplification, as well as privacy and security of medical records and other individually identifiable health information.  The regulations pursuant to the HIPAA Administrative Simplification provisions and HITECH impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors.  These requirements apply to self-funded group plans, health insurers and HMOs, health care clearinghouses and health care providers who transmit health information electronically (collectively, covered entities) and their business associates that access, maintain, create, and/or receive individually identifiable health information (collectively business associates). These regulations also establish significant criminal penalties and civil sanctions for noncompliance.

HHS also sets standards relating to the privacy of individually identifiable health information.  In general, these regulations restrict how covered entities and business associates may use and disclose medical records and other individually identifiable health information in any form, whether communicated electronically, on paper or orally, subject only to limited exceptions.  In addition, the regulations provide patients’ rights to understand and control how their health information is used.  HHS has also published security regulations designed to protect member health information from unauthorized use or disclosure and require notification to members, the Secretary of HHS, and in certain cases the media, in the event of a breach of unsecured individually identifiable health information.

HHS has released rules mandating the use of standard formats in electronic health care transactions (for example, health care claims submission and payment, plan eligibility, precertification, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules mandating the use of standardized code sets and unique identifiers for employers and providers.  Our Managed Care subsidiaries believe that they are in material compliance with these requirements.

The Gramm-Leach-Bliley Act applies to financial institutions in the United States, including those domiciled in Puerto Rico, such as TSV and TSP.  The Gramm-Leach-Bliley Act generally places restrictions on the disclosure of non-public information to non-affiliated third parties, and requires financial institutions including insurers, to provide customers with notice regarding how their non-public personal information is used, including an opportunity to opt out of certain disclosures.  The Gramm-Leach-Bliley Act also gives banks and other financial institutions the ability to affiliate with insurance companies, which has led to new competitors in the insurance and health benefits fields in Puerto Rico.

Employee Retirement Income Security Act of 1974

The services we provide to certain employee welfare benefit plans maintained by private sector employers are subject to regulation under the Employee Retirement Income Security Act of 1974, as amended (ERISA), a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service, the U.S. Department of Labor, and federal courts.  ERISA regulates certain aspects of the relationships between us, private sector employers who maintain employee welfare benefit plans subject to ERISA, and the participants and beneficiaries in such plans.  Some of our administrative services and other activities may also be subject to regulation under ERISA.  In addition, certain states require licensure or registration of companies providing third-party claims administration services for benefit plans.  We provide a variety of products and services to employee welfare benefit plans that are covered by ERISA and its regulations.  Plans subject to ERISA can also be subject to state laws and the question of whether ERISA preempts a state law has been, and will continue to be, interpreted by federal and state courts.

Dodd-Frank Act

In 2010, Congress enacted the Dodd-Frank Wall-Street Reform and Consumer Protection Act (the Dodd-Frank Act) which provides for a number of reforms and regulations in the corporate governance, financial reporting and disclosure, investments, tax and enforcement areas that affect our subsidiaries.  Among other things, the Dodd-Frank Act creates a Federal Insurance Office (FIO) within the U.S. Department of the Treasury with powers that include information-gathering and subpoena authority.  Pursuant to the Dodd-Frank Act, the FIO issues annual reports on the insurance industry.  Although the FIO’s authority does not extend to health insurance, it extends to other parts of the business, primarily life and property and casualty insurance.  The FIO, however, does not have supervisory or regulatory authority over the insurance business.

In addition, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of financial services companies, including insurance companies, if they are designated by the Financial Stability Oversight Council as systemically important. In such a case, the Federal Reserve’s supervisory authority could include the ability to impose heightened financial regulation upon that insurance company and could impact its capital, liquidity and leverage requirements as well as its business and investment conduct. We have not been designated as systemically important by the Financial Stability Oversight Council.

Legislative and Regulatory Initiatives

Puerto Rico Initiatives

In recent years we have seen an increase in legislative activity related to  managed care organizations, and in the enactment of laws that are inconsistent with the managed care model. These laws may increase operational costs, limit our ability to review courses of treatment, and alter the way we negotiate and contract with providers, among other adverse effects.

For example, Act 26-2017 among other things, calls for a considerable reduction in public corporations’ health plan contributions to its employees, to the extent required to comply with the government’s Fiscal Plan.  Contributions to employees with pre-existing catastrophic, chronic or terminal conditions, however, shall remain the same.  It also authorizes the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) to negotiate health insurance coverage for such public employees.

Act 138-2019 requires health services organizations to contract any provider who requests to become a provider for the organization, when such provider meets the necessary requirements for practicing the medical profession and/or is authorized by the competent entities, among other things.  Act 138-2019 also forbids organizations from terminating a provider’s contract without cause, and provides for the Government of Puerto Rico’s automatic cancellation of all contracts with any organization that incurs in practices inconsistent with the purposes of the law or seeks to use subterfuges to circumvent its objectives.

Act 138-2020 purports to reduce applicable periods for insurers to process and pay claims, and to further regulate the utilization review process, and Act 142-2020 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.

Several of such laws have not yet been implemented, and a number have been challenged by health care insurers on federal preemption grounds, and by the Oversight  Board on grounds that they have not complied with the economic impact certification requirements of PROMESA, among others.  Recently, a federal court enjoined the Government from implementing and enforcing a number of legislative measures, including Act 138-2019, until such a time as the Government certifies the fiscal impact of the legislative measure.

See Item 1A.  Risk Factors—Risks Relating to the Regulation of Our Industry – Changes in public policy, enactment of new laws, changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations. included in this Annual Report on Form 10-K.

Federal Initiatives

When the ACA was enacted in 2010, it expanded Medicaid to an eligibility floor of 138% of the federal poverty level (FPL) beginning in 2014.  A 2012 U.S. Supreme Court decision regarding health care reform limited the federal government’s ability to enforce Medicaid expansion—meaning that the issue of Medicaid expansion is effectively left to each individual state as an option with enhanced federal match if they choose to do so.  Puerto Rico and the other U.S. territories were not included in the Medicaid expansion; instead Congress approved one billion in federal funding for Puerto Rico and the other U.S. territories to establish local affordable insurance exchanges or expand their Medicaid programs, at their option.  Puerto Rico elected to use the approximately $925 million made available by Congress for expanding its Medicaid program.

Most of the provisions of ACA with more significant effects on the health insurance marketplace went into effect on or before January 1, 2014, including a requirement that insurers guarantee the issuance of coverage to all individuals regardless of health status, strict rules on how health insurance is rated, and the assessment of new taxes and fees, including an annual Health Insurance Providers Fee (HIP Fee) on insurance plans.

On July 16, 2014, HHS notified the Commissioner of Insurance of Puerto Rico that the guarantee issue, community rating, single-risk pool, rate review, MLR, and essential health benefits provisions under the ACA do not apply to U.S. territories; however they continue to apply to Puerto Rico by virtue of an amendment to the Health Insurance Code of Puerto Rico passed on July 22, 2013 to enact similar provisions in Puerto Rico. ACA affects all aspects of the health care delivery and reimbursement system in the United States, including health insurers, managed care organizations, health care providers, employers, and U.S. states and territories.

The HIP Fee was allocated to health insurers based on the ratio of the amount of an insurer’s net premium revenues, and was assessed on plans in Puerto Rico even though Puerto Ricans did not receive subsidies or other ACA benefits.  In the years that followed, Congress waived the HIP Fee for 2017 and 2019, which – applied broadly – also provided relief to plans operating in Puerto Rico.  The total tax levied on the health insurance industry was $11.3 billion in 2016, $14.3 billion in 2018 and an estimated $16.0 billion in 2020.  We incurred $44.2 million, $50.1 million and $55.5 million in fees during 2016, 2018 and 2020, respectively.  In December 2019, the HIP Fee was permanently repealed for calendar years beginning after December 31, 2020 as part of the Further Consolidated Appropriations Act of 2020.

The Budget Control Act of 2011 was enacted to reduce the deficit and avoid default on the national debt.  When a joint committee of Congress established to develop debt reduction legislation failed to cut at least $1.5 trillion over the coming 10 years, an automatic process of across-the-board cuts (sequestration) split equally between defense and non-defense programs was triggered.  Under the sequestration, automatic spending cuts for the mandatory portion became effective beginning April 1, 2013, and these cuts have been extended through subsequent legislation through 2029 unless additional Congressional action is taken.  This resulted in a 2% cut to Medicare payments to providers.  Medicaid programs are not subject to automatic spending cuts.  Of note, the budget caps that were enacted to reduce the deficit are no longer in effect and were lifted for the final time in the Bipartisan Budget Act of 2019 for FY 2019 and FY 2020, which set the stage for the Further Consolidated Appropriations Act of 2020.

In December 2017 Congress passed tax reform, the 2017 Tax Cuts and Jobs Act (TCJA), that also zeroed out the individual mandate tax penalty for not complying with the requirement to purchase qualified health insurance coverage.  In light of zeroing out the tax penalty, in 2018 a group of 20 states, led by Texas, sued the federal government in February 2018, (Texas v. Azar) seeking to have the entire ACA declared unconstitutional. They argued that with the removal of the tax penalty, the individual mandate and the entire law was no longer constitutional. They based their claim on the Supreme Court of the United States’ (SCOTUS) previous ruling in 2012 that the individual mandate was upheld under Congress’ constitutional authority to tax.  SCOTUS heard the case in November 2020, and is expected to rule in 2021.

We no longer anticipate significant legislative action regarding the repeal and replacement of the ACA in Washington in the near future. However, the White House and various federal agencies, including, but not limited to, HHS, DOL, and the U.S. Department of the Treasury may issue Executive Orders and regulations related to the stabilization of the individual insurance market and ACA generally. Congress, now controlled by Democrats, may also seek to make improvements to the ACA at some point.

See Item 1A Risk Factors – Risk Relating to the Regulation of Our Industry – The health care reform law, changes in laws related to the health care system, and the implementation of such law could have a material effect on our business, financial condition, cash flows, or results of operations. included in this Annual Report on Form 10-K.

Human Capital

Workforce Demographics

As of December 31, 2020, our workforce consists of 3,911 full time employees serving a variety of business units, of which, 73% identify as female. 50% of our executive team identifies as female and 68% of all company management identifies as female. Seven percent (7%) of the overall workforce identifies having a disability or special need. Given our location, nearly 100% of our workforce is Hispanic/Latino. Our workforce includes a variety of generations, from Baby Boomers to Generation Z which provides for a rich work environment where diverse perspectives, ideas and views are considered valuable and a key factor to company long-term success.  Approximately 12% of employees are unionized. The current labor agreement expires in 2023. Overall, Management considers the relationship with the Union to be satisfactory.

Our Strategy

We believe that our workforce is our most valuable asset. We invest in leadership, engagement, organizational culture and volunteer initiatives. The investments we make in our workforce are implemented in the context of our business strategy and provide for continuous evolution of our standards and expectations on effectively executing plans and achieving business objectives that sustain long-term growth and diversification.

Governance

Our Chief Human Resources Officer is accountable for workforce productivity, effectiveness and holistic well-being. The Board oversees human capital management through quarterly reports and discussion by the Chief Human Resources Officer to the Talent & Compensation Committee, including on specific enterprise wide metrics, operational key performance indicators and key initiatives on topics relative to Succession Planning, Leadership, Engagement Index and Diversity, Equity & Inclusion.

As part of our governance structure, we have an executive-level Talent Management Council, led by the Chief Human Resources Officer and comprised of the Chief Executive Officer and the Chief Financial Officers and Presidents of each business line, whose main objective is to discuss and agree on strategies that attract, retain, develop and ensure adequate positioning of talent across the organization to meet evolving business needs.

In addition, human capital management is included in the Company Risk Management Program, which is subject to regular Board of Directors oversight.

Engagement

We believe that high employee engagement contributes to better service for our customers, lower turnover rates, and higher productivity.

We conduct an annual engagement survey of our employees, administered, and analyzed by a leading outside firm that specializes in employee engagement.  Our belief is that measuring engagement levels provides for perspective on how employees feel about the Company and the areas we should focus on to continually enhance employee experience. The results of this engagement survey are shared with all leaders and their teams, who are then tasked with designing an action plan based on their results, and employee’s feedback.  In 2019, we were recognized as Mejores Patronos de Puerto Rico, (Spanish for Best Employers of Puerto Rico) and we sustained adequate levels of engagement during 2020 in spite of the COVID-19 pandemic challenges.  Our results are in line with the average percentage for the insurance industry benchmark in Puerto Rico, and higher when compared with United States general engagement index.

Diversity, Equity and Inclusion

We value a diverse workforce and strive for an inclusive culture where the thoughts, ideas and styles of all our employees are valued and respected. Triple-S Management and subsidiaries values excellence and recognizes that by embracing the diverse backgrounds of its workforce, it will sustain a competitive advantage and continue to hold its position as an employer of choice on our island.

In 2020, we implemented a new microlearning training series titled Unconscious Bias for General Awareness about Diversity, Equity and Inclusion. Multiple other initiatives and activities aim at fostering inter-generational connections through common interests or characteristics, for example, we host an Annual Women Leadership Conference, and have running “Pets at Work,” “Bring Your Child to Work,” and “Play Soccer with Our CEO” initiatives, among others. We also encourage employee volunteering by offering four paid hours per month to volunteer at non-for-profit organizations. The total average annual volunteer hours is approximately 1,200.

In order to ensure continued diversity, equity and inclusion, we perform continued assessments on compensation internal equity by gender, organizational hierarchy, and work groups and constantly communicate policies on a safe environment against discrimination, retaliation or harassment.

Our compensation is internally equitable and externally competitive as a result of robust policies, continuous assessments and standard processes. We perform job evaluations, market data analysis, salary structures revision and have clear procedures for salary administration.

Talent Acquisition, Retention and Stability

We are committed to recruiting and retaining the best talent for our organization without regard to gender, ethnicity, religion, age, sexual orientation, gender identity, disability or protected veteran status or any other protected trait. We are an equal employment opportunity employer and we strongly believe in developing and promoting talent from within. We use internal and external resources to recruit skilled and talented people. As part of our efforts on employee retention, we measure employee engagement and reward employee innovation and productivity. The approach of our recognition program “Tu Brillas” (Spanish for “You Shine”) is to foster a culture that values those contributions and outcomes that are aligned with our organization’s goals and values. The program includes a variety of categories depending on the level of results achieved and behaviors we want to highlight.

Our focus on retention is evident in the length of service of our employees -- who have an average tenure of seven years.

Triple-S aims to attract qualified resources through an inclusive and accessible recruiting process that encourages employee referrals. Triple-S also has partnerships with local universities and alumni organizations to attract external talent. Last year, we trained 47% of our management on competency-based interviewing techniques.

Training and Development

As part of the performance evaluation cycle, we include a professional development plan where the employee and the supervisor discuss the opportunities for training, development and priorities to enable performance excellence and career growth. Over 94% of our workforce complete their performance reviews.

Our team of 13 training and organizational development professionals provides employees with learning programs and experiences to enhance their leadership and technical skills, including: (a) corporate onboarding training and activities (b) mandatory annual compliance trainings (c) leadership development programs (d) professional and personal productivity courses and (e) specialized business and technical training programs based on specific job nature.

All learning experiences are designed and implemented in alignment with company strategy and business needs to ensure company performance and leadership.

In 2020, all training programs were converted from in-person classroom to virtual mode to ensure all training and development activities were on track regardless of the remote work mode forced on by the COVID-19 pandemic.  In 2020, our employees completed over 2,900 hours of training and development.

Safety and Wellbeing

Employee health, safety and wellness is a high priority at all times.  In addition to traditional employee benefits, we offer an in-house clinic with medical staff, two onsite gyms, employee assistance program, telemedicine, weight loss and stop smoking programs, financial, physical and emotional health awareness and support resources, among others.  In response to the COVID-19 pandemic, the Company took early actions aligned with the Center for Disease Control and Prevention rules, implementing comprehensive protocols to protect our employees, insurers, providers and patients.  These protocols include complying with social distancing and other health and safety standards as required by federal and local government agencies and public health authorities. During the pandemic we have also:

In spite of a difficult year, our turnover decreased when compared to the previous year, and engagement levels were sustained as validated through our annual survey, with absenteeism at a minimum.

We are an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) and are required, pursuant to Item 101 of Regulation S-K, to provide certain information regarding our website and the availability of certain documents filed with or furnished to the Securities and Exchange Commission (SEC).  We make available free of charge, or through our website (https://investors.triplesmanagement.com/sec-filings/documents/default.aspx, under the Investors − SEC Filings caption), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC.  We also include on our website our Corporate Governance Guidelines, our Code of Business Conduct and Ethics, Code of Ethics for Financial Managers and Supervisors and the charter of each standing committee of our Board of Directors (https://investors.triplesmanagement.com/governance/documents/default.aspx, under the ‘‘Investors − Corporate Governance’’ caption).  In addition, we intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics and Code of Ethics for Financial Managers and Supervisors that are required to be publicly disclosed pursuant to rules of the SEC and the New York Stock Exchange (NYSE).  The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (https://www.sec.gov/edgar/searchedgar/companysearch.html).  The website addresses listed above are provided for the information of the reader and are not intended to be an active link.  We will provide free of charge copies of our filings to any shareholder that requests them at the following address: Triple-S Management Corporation; Office of the Secretary; PO Box 363628; San Juan, P.R. 00936-3628.

We must deal with several risk factors during the normal course of business.  You should carefully consider the following risks and all other information set forth in this Annual Report on Form 10-K. The risk and uncertainties described below are not the only ones we face. Additional risks and uncertainties not  presently known to us or that are currently deemed insignificant may also impair our business operations.  The occurrence of any of the following risks could materially affect our business, financial condition, operating results, and cash flows. See section Special Note Regarding Forward-Looking Statements in this Annual Report on Form 10-K for a summary of our Risk Factors.

Risks Related to Our Business

Our inability to contain managed care costs may adversely affect our business and profitability.

A substantial portion of our managed care revenue is generated by premiums consisting of monthly payments per member that are established by contracts with our commercial customers, ASES or CMS (for our Medicare Advantage plans), all of which are typically renewable on an annual basis.  If our medical expenses exceed our estimates, except in very limited circumstances or resulting from risk score adjustments for member acuity in case of the Medicare Advantage products, we will be unable to increase the premiums we receive for these contracts during the then-current terms.  As a result, our profitability in any year depends, to a significant degree, on our ability to adequately predict and effectively manage our medical expenses related to the provision of managed care services through underwriting criteria, medical management, product design and negotiation of favorable provider contracts with hospitals, physicians and other health care providers.  The aging of the population and other demographic characteristics and advances in medical technology continue to contribute to rising health care costs.  Also, we may continue to enter into new lines of business in the future, and it may be difficult to estimate the anticipated costs.  Numerous factors affecting the cost of managed care, including changes in health care practices, inflation, new technologies such as genetic laboratory screening for diseases including breast cancer, electronic recordkeeping, cost of prescription drugs, clusters of high cost cases, changes in the regulatory environment including the implementation of ACA, may adversely affect our ability to predict and manage managed care costs, as well as our business, financial condition and results of operations.

Introduction of new high-cost specialty drugs and sudden costs spikes for existing drugs increase the risk that the pharmacy cost assumptions used to develop our rates are not adequate enough to cover the actual pharmacy costs, which jeopardizes the overall actuarial soundness of our rates. Bearing the high costs of new specialty drugs or the high cost inflation of generic drugs without an appropriate rate adjustment or other reimbursement mechanism adversely affects our financial condition and operational results.  In addition, evolving state and federal regulation may affect the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. Although we will continue to work with state agencies in an effort to ensure that we receive appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceutical cost and utilization trends, there can be no assurance that we will always be successful.

Our profitability may be adversely affected if we are unable to maintain our current provider agreements and unable to enter into other appropriate agreements.

Our profitability is partially dependent upon our ability to contract on favorable terms with hospitals, physicians and other managed care providers. Puerto Rico legislation authorizes providers to collectively negotiate the services fees through cooperatives, on a voluntary basis, with health insurance companies and other health care related organizations. If collective negotiations with providers become mandatory or we are otherwise required to enter into collective negotiations with providers, it could become more difficult to maintain cost-effective managed care provider contracts, which could adversely affect our business.

We are dependent on a small number of government contracts to generate a significant amount of the revenues for our Managed Care segment.

Our managed care business participates in government contracts that generate a significant amount of our consolidated operating revenues, including:

Under the commercial business, we also provide health coverage to certain employees of the Government of Puerto Rico and its instrumentalities.  During each of the years ended December 31, 2020, 2019, and 2018, earned premium revenue related to such health plans represented 1.8%, 2.2%, and 3.0% of our consolidated premiums earned, net, respectively.

If any of these contracts is terminated for any reason, including noncompliance by us, or not renewed or replaced by a comparable contract, our consolidated premiums and profitability earned could be materially adversely affected.  See also Risks Relating to the Regulation of our Industry — As a Medicare Advantage program participant, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties. Our Medicare Advantage contracts may also be terminated or our operations may be required to change in a manner that has a material effect on our business. in this Annual Report on Form 10-K.

A change in our managed care commercial product mix may affect our profitability.

Our managed care products that involve greater potential risk, such as fully insured arrangements, generally tend to be more profitable than ASO products and those managed care products where employer groups retain the risk, such as self-funded financial arrangements.  As of December 31, 2020, 2019 and 2018, 76%, 73% and 69% of our managed care commercial customers, respectively, had fully insured arrangements and 24%, 27% and 31%, respectively, had ASO arrangements.  Unfavorable changes in the relative profitability or customer participation among our various products could have a material adverse effect on our business, financial condition, and results of operations.

Our failure to accurately estimate incurred but not reported claims would affect our reported financial results.

A portion of the claim liabilities recorded by our insurance segments represents an estimate of amounts needed to pay for insured events that have occurred, including events that have not yet been reported to us.  These amounts are based on estimates of the ultimate expected cost of claims and on actuarial estimation techniques.  Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under each segment’s current facts and circumstances.  Accordingly, the ultimate liability may be in excess of or less than the amount provided.  We regularly compare prior period liabilities to re-estimate claim liabilities based on subsequent claims development; any difference between these amounts is adjusted in the operations of the period determined.  Additional information on how each reportable segment determines its claim liabilities, and the variables considered in the development of this amount, is included elsewhere in this Annual Report on Form 10-K under Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations―Critical Accounting Estimates.  Actual experience will likely differ from assumed experience. And to the extent the actual claims experience is less favorable than estimated based on our underlying assumptions, our incurred losses would increase and future earnings could be adversely affected.

The termination or modification of our license agreements to use the BCBS name and mark could have a material adverse effect on our business, financial condition and results of operations.

We are a party to license agreements with the BCBSA that entitle us to the exclusive use of the BCBS name and mark in Puerto Rico, the USVI, Costa Rica, the BVI and Anguilla.  These license agreements contain certain standards, requirements and restrictions regarding our operations and our use of the BCBS name and mark, which may be modified in certain instances by the BCBSA. Changes to the terms of our license agreements may restrict various potential business activities.  Failure to comply with the standards, requirements and restrictions established could result in the termination of a license agreement.  Events that could cause the termination of a license agreement with the BCBSA: include failure to comply with minimum capital requirements imposed by the BCBSA, a change of control or violation of the BCBSA ownership limitations on our capital stock, impending financial insolvency and the appointment of a trustee or receiver or the commencement of any action against a licensee seeking its dissolution.  Upon termination of a license agreement, the BCBSA would impose a re-establishment fee upon us, which would allow the BCBSA to entitle another managed care company to use the BCBS name and marks in the service areas we currently serve.  This re-establishment fee is currently $98.33 per licensed enrollee.  If the re-establishment fee were applied to our total BCBS enrollees as of December 31, 2020, we would be assessed approximately $96.0 million by the BCBSA.

We believe that the BCBS name and mark are valuable identifiers of our products and services in the marketplace.  Termination of these license agreements, including modifications to the current term and conditions, could have a material adverse effect on our business, financial condition and results of operations. See Item 1.  Business ― Blue Cross and Blue Shield License for more information.

Our ability to manage our exposure to underwriting risks in our Life Insurance and Property and Casualty segments depends on the availability and cost of reinsurance coverage.

Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company.  We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity.  During 2020, 40.4%, or $62.5 million, of the premiums written in the Property and Casualty segment and 4.9%, or $10.0 million, of the premiums written in the Life Insurance segment were ceded to reinsurers.  Total premiums ceded, on a consolidated basis, represent 2.1%, or $76.8 million of our premiums.  The premiums ceded and the availability and cost of reinsurance is subject to changing market conditions and may vary significantly over time.  Any decrease in the amount of our reinsurance coverage will increase our risk of loss.  We may be unable to maintain our desired reinsurance coverage or obtain other reinsurance coverage in adequate amounts and at favorable rates.  If we are unable to renew our expiring coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.

It is also possible that the losses we experience on insured risks for which we have obtained reinsurance will exceed the coverage limits of the reinsurance.  See Risks Related to Our Business ― Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.

If our reinsurers do not pay our claims or do not pay them in a timely manner, we may incur losses.

We are subject to loss and credit risk with respect to the reinsurers with whom we deal.  In accordance with general industry practices, our Property and Casualty and Life Insurance subsidiaries annually purchase reinsurance to lessen the impact of large unforeseen losses and mitigate sudden and unpredictable changes in our net income and shareholders’ equity.  Reinsurance contracts do not relieve us from our obligations to policyholders.  In the event that all or any of the reinsurance companies are unable to meet their obligations under existing reinsurance agreements or pay on a timely basis, we will continue to be liable to our policyholders notwithstanding such defaults or delays.  If our reinsurers are not capable of fulfilling their financial obligations to us, our insurance losses would increase, which would negatively affect our financial condition and results of operations.

A downgrade in our A.M. Best rating could affect our ability to write new business or renew our existing business in our Property and Casualty segment.