UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016March 31, 2017
orOr
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER: 001-33865
Triple-S Management Corporation
Puerto Rico | | 66-0555678 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
1441 F.D. Roosevelt Avenue | | |
San Juan, Puerto Rico | | 00920 |
(Address of principal executive offices) | | (Zip code) |
(787) 749-4949
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☑ |
| Non-accelerated filer ☐ | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☑ No
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date.
Title of each class | | Outstanding at June 30, 2016March 31, 2017 |
Common Stock Class A, $1.00 par value | | 950,968 |
Common Stock Class B, $1.00 par value | | 23,622,79523,491,670 |
Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended June 30, 2016March 31, 2017
Table of Contents
Part I – Financial Information
Triple-S Management Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)
| | June 30, | | | December 31, | | |
| | 2016 | | | 2015 | | | March 31, 2017 | | | December 31, 2016 | |
Assets | | | | | | | | | | | | |
Investments and cash: | | | | | | | | | | | | |
Securities available for sale, at fair value: | | | | | | | | | | | | |
Fixed maturities | | $ | 1,144,588 | | | $ | 1,133,645 | | | $ | 1,153,545 | | | $ | 1,151,643 | |
Equity securities | | | 310,103 | | | | 197,071 | | | | 277,149 | | | | 270,349 | |
Securities held to maturity, at amortized cost: | | | | | | | | | | | | | | | | |
Fixed maturities | | | 2,838 | | | | 2,929 | | | | 2,514 | | | | 2,836 | |
Policy loans | | | 8,301 | | | | 7,901 | | | | 8,546 | | | | 8,564 | |
Cash and cash equivalents | | | 96,140 | | | | 197,818 | | | | 218,884 | | | | 103,428 | |
Total investments and cash | | | 1,561,970 | | | | 1,539,364 | | | | 1,660,638 | | | | 1,536,820 | |
Premiums and other receivables, net | | | 348,204 | | | | 282,646 | | | | 292,837 | | | | 286,365 | |
Deferred policy acquisition costs and value of business acquired | | | 188,976 | | | | 190,648 | | | | 195,513 | | | | 194,787 | |
Property and equipment, net | | | 70,356 | | | | 73,953 | | | | 66,756 | | | | 66,369 | |
Deferred tax asset | | | 46,716 | | | | 52,361 | | | | 64,128 | | | | 57,768 | |
Goodwill | | | 25,397 | | | | 25,397 | | | | 25,397 | | | | 25,397 | |
Other assets | | | 73,675 | | | | 41,776 | | | | 53,186 | | | | 51,493 | |
Total assets | | $ | 2,315,294 | | | $ | 2,206,145 | | | $ | 2,358,455 | | | $ | 2,218,999 | |
Liabilities and Equity | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | |
Claim liabilities | | $ | 481,864 | | | $ | 491,765 | | | $ | 530,304 | | | $ | 487,943 | |
Liability for future policy benefits | | | 309,491 | | | | 289,530 | | | | 326,162 | | | | 321,232 | |
Unearned premiums | | | 82,051 | | | | 80,260 | | | | 163,780 | | | | 79,310 | |
Policyholder deposits | | | 182,730 | | | | 179,287 | | | | 179,599 | | | | 179,382 | |
Liability to Federal Employees' Health Benefits Program (FEHBP) | | | 24,554 | | | | 26,695 | | |
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs | | | | 37,206 | | | | 34,370 | |
Accounts payable and accrued liabilities | | | 229,860 | | | | 176,910 | | | | 171,643 | | | | 169,449 | |
Deferred tax liability | | | 24,745 | | | | 15,070 | | | | 19,599 | | | | 18,850 | |
Long-term borrowings | | | 36,007 | | | | 36,827 | | | | 34,465 | | | | 35,085 | |
Liability for pension benefits | | | 65,229 | | | | 62,945 | | | | 30,472 | | | | 30,892 | |
Total liabilities | | | 1,436,531 | | | | 1,359,289 | | | | 1,493,230 | | | | 1,356,513 | |
Stockholders’ equity: | | | | | | | | | | | | | | | | |
Triple-S Management Corporation stockholders' equity | | | | | | | | | |
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 950,968 at June 30, 2016 and December 31, 2015, respectively | | | 951 | | | | 951 | | |
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,622,795 and 24,047,755 shares at June 30, 2016 and December 31, 2015, respectively | | | 23,623 | | | | 24,048 | | |
Triple-S Management Corporation stockholders’ equity | | | | | | | | | |
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 950,968 at March 31, 2017 and December 31, 2016, respectively | | | | 951 | | | | 951 | |
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,491,670 and 23,321,163 shares at March 31, 2017 and December 31, 2016, respectively | | | | 23,492 | | | | 23,321 | |
Additional paid-in capital | | | 71,951 | | | | 83,438 | | | | 63,978 | | | | 65,592 | |
Retained earnings | | | 720,802 | | | | 713,466 | | | | 726,562 | | | | 730,904 | |
Accumulated other comprehensive income | | | 62,109 | | | | 25,623 | | | | 50,920 | | | | 42,395 | |
Total Triple-S Management Corporation stockholders' equity | | | 879,436 | | | | 847,526 | | |
Total Triple-S Management Corporation stockholders’ equity | | | | 865,903 | | | | 863,163 | |
Non-controlling interest in consolidated subsidiary | | | (673 | ) | | | (670 | ) | | | (678 | ) | | | (677 | ) |
Total stockholders' equity | | | 878,763 | | | | 846,856 | | |
Total liabilities and equity | | $ | 2,315,294 | | | $ | 2,206,145 | | |
Total stockholders’ equity | | | | 865,225 | | | | 862,486 | |
Total liabilities and stockholders’ equity | | | $ | 2,358,455 | | | $ | 2,218,999 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Triple-S Management Corporation
Condensed Consolidated Statements of Earnings (Unaudited)
(dollar amounts in thousands, except per share data)
| | Three months ended June 30, | | | | | | Three months ended March 31, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Revenues: | | | | | | | | | | | | | | | | | | |
Premiums earned, net | | $ | 729,049 | | | $ | 754,107 | | | $ | 1,467,583 | | | $ | 1,286,665 | | | $ | 702,273 | | | $ | 738,534 | |
Administrative service fees | | | 4,520 | | | | 4,549 | | | | 9,603 | | | | 33,672 | | | | 4,379 | | | | 5,083 | |
Net investment income | | | 12,875 | | | | 10,998 | | | | 24,233 | | | | 21,916 | | | | 12,016 | | | | 11,358 | |
Other operating revenues | | | 915 | | | | 641 | | | | 1,727 | | | | 1,794 | | | | 965 | | | | 812 | |
Total operating revenues | | | 747,359 | | | | 770,295 | | | | 1,503,146 | | | | 1,344,047 | | | | 719,633 | | | | 755,787 | |
Net realized investment gains (losses): | | | | | | | | | | | | | | | | | |
Total other-than-temporary impairment losses on securities | | | (1,434 | ) | | | (1,660 | ) | | | (1,434 | ) | | | (2,862 | ) | |
Net realized gains, excluding other-than-temporary impairment losses on securities | | | 2,954 | | | | 12,267 | | | | 3,012 | | | | 19,682 | | |
Total net realized investment gains on sale of securities | | | 1,520 | | | | 10,607 | | | | 1,578 | | | | 16,820 | | |
Net realized investment gains on sale of securities | | | | 336 | | | | 58 | |
Other income, net | | | 3,859 | | | | 1,083 | | | | 4,734 | | | | 2,842 | | | | 2,525 | | | | 875 | |
Total revenues | | | 752,738 | | | | 781,985 | | | | 1,509,458 | | | | 1,363,709 | | | | 722,494 | | | | 756,720 | |
Benefits and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Claims incurred | | | 622,087 | | | | 637,898 | | | | 1,248,781 | | | | 1,070,328 | | | | 620,863 | | | | 626,694 | |
Operating expenses | | | 121,112 | | | | 126,824 | | | | 244,092 | | | | 254,199 | | | | 110,946 | | | | 122,980 | |
Total operating costs | | | 743,199 | | | | 764,722 | | | | 1,492,873 | | | | 1,324,527 | | | | 731,809 | | | | 749,674 | |
Interest expense | | | 1,954 | | | | 2,074 | | | | 3,836 | | | | 4,256 | | | | 1,686 | | | | 1,882 | |
Total benefits and expenses | | | 745,153 | | | | 766,796 | | | | 1,496,709 | | | | 1,328,783 | | | | 733,495 | | | | 751,556 | |
Income before taxes | | | 7,585 | | | | 15,189 | | | | 12,749 | | | | 34,926 | | |
Income tax expense (benefit) | | | 3,707 | | | | (3,712 | ) | | | 5,416 | | | | 1,219 | | |
Net income | | | 3,878 | | | | 18,901 | | | | 7,333 | | | | 33,707 | | |
(Loss) income before taxes | | | | (11,001 | ) | | | 5,164 | |
Income taxes | | | | (6,658 | ) | | | 1,709 | |
Net (loss) income | | | | (4,343 | ) | | | 3,455 | |
Less: Net loss attributable to non-controlling interest | | | 2 | | | | 25 | | | | 3 | | | | 55 | | | | 1 | | | | 1 | |
Net income attributable to Triple-S Management Corporation | | $ | 3,880 | | | $ | 18,926 | | | $ | 7,336 | | | $ | 33,762 | | |
Net (loss) income attributable to Triple-S Management Corporation | | | $ | (4,342 | ) | | $ | 3,456 | |
Earnings per share attributable to Triple-S Management Corporation | | | | | | | | | | | | | | | | | | | | | | | | |
Basic net income per share | | $ | 0.16 | | | $ | 0.73 | | | $ | 0.30 | | | $ | 1.29 | | |
Diluted net income per share | | $ | 0.16 | | | $ | 0.73 | | | $ | 0.30 | | | $ | 1.28 | | |
Basic net (loss) income per share | | | $ | (0.18 | ) | | $ | 0.14 | |
Diluted net (loss) income per share | | | $ | (0.18 | ) | | $ | 0.14 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Triple-S Management Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(dollar amounts in thousands)
| | Three months ended March 31, | |
| | 2017 | | | 2016 | |
Net (loss) income | | $ | (4,343 | ) | | $ | 3,455 | |
Other comprehensive (loss) income, net of tax: | | | | | | | | |
Net unrealized change in fair value of available for sale securities, net of taxes | | | 8,472 | | | | 19,577 | |
Defined benefit pension plan: | | | | | | | | |
Actuarial loss, net | | | 53 | | | | 722 | |
Prior service credit, net | | | - | | | | (88 | ) |
Total other comprehensive income, net of tax | | | 8,525 | | | | 20,211 | |
Comprehensive income | | | 4,182 | | | | 23,666 | |
Comprehensive income attributable to non-controlling interest | | | 1 | | | | 1 | |
Comprehensive income attributable to Triple-S Management Corporation | | $ | 4,183 | | | $ | 23,667 | |
| | Three months ended June 30, | | | | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Net income | | $ | 3,878 | | | $ | 18,901 | | | $ | 7,333 | | | $ | 33,707 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | |
Net unrealized change in fair value of available for sale securities, net of taxes | | | 15,830 | | | | (29,044 | ) | | | 35,407 | | | | (27,250 | ) |
Defined benefit pension plan: | | | | | | | | | | | | | | | | |
Actuarial loss, net | | | 507 | | | | 1,016 | | | | 1,229 | | | | 1,903 | |
Prior service credit, net | | | (62 | ) | | | (77 | ) | | | (150 | ) | | | (138 | ) |
Total other comprehensive income (loss), net of tax | | | 16,275 | | | | (28,105 | ) | | | 36,486 | | | | (25,485 | ) |
Comprehensive income (loss) | | | 20,153 | | | | (9,204 | ) | | | 43,819 | | | | 8,222 | |
Comprehensive loss attributable to non-controlling interest | | | 2 | | | | 25 | | | | 3 | | | | 55 | |
Comprehensive income (loss) attributable to Triple-S Management Corporation | | $ | 20,155 | | | $ | (9,179 | ) | | $ | 43,822 | | | $ | 8,277 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Triple-S Management Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollar amounts in thousands)
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Balance at January 1 | | $ | 847,526 | | | $ | 858,558 | | | $ | 863,163 | | | $ | 847,526 | |
Share-based compensation | | | 2,649 | | | | 3,199 | | | | (1,443 | ) | | | 1,421 | |
Stock issued upon the exercise of stock options | | | 55 | | | | 179 | | |
Repurchase and retirement of common stock | | | (14,616 | ) | | | (26,170 | ) | | | - | | | | (8,027 | ) |
Comprehensive income | | | 43,822 | | | | 8,277 | | | | 4,183 | | | | 23,667 | |
Total Triple-S Management Corporation stockholders' equity | | | 879,436 | | | | 844,043 | | |
Total Triple-S Management Corporation stockholders’ equity | | | | 865,903 | | | | 864,587 | |
Non-controlling interest in consolidated subsidiary | | | (673 | ) | | | (587 | ) | | | (678 | ) | | | (671 | ) |
Balance at June 30 | | $ | 878,763 | | | $ | 843,456 | | |
Balance at March 31 | | | $ | 865,225 | | | $ | 863,916 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollarDollar amounts in thousands)
| | | | | Three months ended March 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 7,333 | | | $ | 33,707 | | |
Net (loss) income | | | $ | (4,343 | ) | | $ | 3,455 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 7,300 | | | | 8,138 | | | | 2,990 | | | | 3,700 | |
Net amortization of investments | | | 3,981 | | | | 3,187 | | | | 2,356 | | | | 1,936 | |
(Reduction) additions to the allowance for doubtful receivables | | | (313 | ) | | | 11,626 | | |
Deferred tax expense (benefit) | | | 4,301 | | | | (6,423 | ) | |
(Reductions) additions to the allowance for doubtful receivables | | | | (3,209 | ) | | | 1,531 | |
Deferred tax benefit | | | | (7,525 | ) | | | (2,435 | ) |
Net realized investment gain on sale of securities | | | (1,578 | ) | | | (16,820 | ) | | | (336 | ) | | | (58 | ) |
Interest credited to policyholder deposits | | | 2,436 | | | | 1,742 | | | | 991 | | | | 1,195 | |
Share-based compensation | | | 2,313 | | | | 3,199 | | | | (1,443 | ) | | | 1,085 | |
(Increase) decrease in assets: | | | | | | | | | | | | | | | | |
Premium and other receivables, net | | | (63,589 | ) | | | (56,003 | ) | | | (3,263 | ) | | | (35,687 | ) |
Deferred policy acquisition costs and value of business acquired | | | (3,562 | ) | | | (2,043 | ) | | | (822 | ) | | | (685 | ) |
Deferred taxes | | | 178 | | | | (4,876 | ) | | | (265 | ) | | | 162 | |
Other assets | | | (31,425 | ) | | | (16,596 | ) | | | (37 | ) | | | (26,485 | ) |
Increase (decrease) in liabilities: | | | | | | | | | | | | | | | | |
Claim liabilities | | | (9,901 | ) | | | 72,100 | | | | 42,361 | | | | 33,301 | |
Liability for future policy benefits | | | 19,961 | | | | 11,414 | | | | 4,930 | | | | 17,395 | |
Unearned premiums | | | 1,791 | | | | (2,464 | ) | | | 84,470 | | | | (4,387 | ) |
Liability to FEHBP | | | (2,141 | ) | | | 823 | | |
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs | | | | 2,836 | | | | 1,663 | |
Accounts payable and accrued liabilities | | | 52,350 | | | | 36,017 | | | | 11,274 | | | | 35,574 | |
Net cash (used in) provided by operating activities | | | (10,565 | ) | | | 76,728 | | |
Net cash provided by operating activities | | | | 130,965 | | | | 31,260 | |
(Continued) | | | | | | | | | |
(Continued)
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollarDollar amounts in thousands)
| | | | | Three months ended March 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Cash flows from investing activities: | | | | | | | | | | | | |
Proceeds from investments sold or matured: | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | |
Fixed maturities sold | | $ | 163,150 | | | $ | 241,476 | | | $ | 26,023 | | | $ | 90,328 | |
Fixed maturities matured/called | | | 14,301 | | | | 34,906 | | | | 5,001 | | | | 699 | |
Equity securities sold | | | 32,252 | | | | 65,621 | | | | 10,272 | | | | 11,257 | |
Securities held to maturity - fixed maturities matured/called | | | 700 | | | | 100 | | |
Securities held to maturity: | | | | | | | | | |
Fixed maturities matured/called | | | | 703 | | | | - | |
Acquisition of investments: | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | |
Fixed maturities | | | (150,005 | ) | | | (259,984 | ) | | | (33,738 | ) | | | (118,039 | ) |
Equity securities | | | (136,104 | ) | | | (12,165 | ) | | | (5,482 | ) | | | (92,956 | ) |
Securities held to maturity - fixed maturities | | | (609 | ) | | | (103 | ) | |
Securities held to maturity: | | | | | | | | | |
Fixed maturities | | | | (382 | ) | | | - | |
Increase in other investments | | | (1,383 | ) | | | (2,522 | ) | | | (2,044 | ) | | | (182 | ) |
Net disbursements for policy loans | | | (400 | ) | | | (74 | ) | |
Net change in policy loans | | | | 18 | | | | (231 | ) |
Net capital expenditures | | | (2,716 | ) | | | (3,003 | ) | | | (3,295 | ) | | | (1,465 | ) |
Net cash (used in) provided by investing activities | | | (80,814 | ) | | | 64,252 | | |
Net cash used in investing activities | | | | (2,924 | ) | | | (110,589 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Change in outstanding checks in excess of bank balances | | | 4,074 | | | | 1,028 | | | | (11,401 | ) | | | 1,916 | |
Repayments of long-term borrowings | | | (820 | ) | | | (11,820 | ) | | | (24,676 | ) | | | (410 | ) |
Proceeds from long-term borrowings | | | | 24,266 | | | | - | |
Repurchase and retirement of common stock | | | (14,560 | ) | | | (25,988 | ) | | | - | | | | (8,027 | ) |
Proceeds from policyholder deposits | | | 7,942 | | | | 4,538 | | | | 4,116 | | | | 3,403 | |
Surrenders of policyholder deposits | | | (6,935 | ) | | | (6,271 | ) | | | (4,890 | ) | | | (2,905 | ) |
Net cash used in financing activities | | | (10,299 | ) | | | (38,513 | ) | | | (12,585 | ) | | | (6,023 | ) |
Net (decrease) increase in cash and cash equivalents | | | (101,678 | ) | | | 102,467 | | |
Net increase (decrease) in cash and cash equivalents | | | | 115,456 | | | | (85,352 | ) |
Cash and cash equivalents: | | | | | | | | | | | | | | | | |
Beginning of period | | | 197,818 | | | | 110,037 | | | | 103,428 | | | | 197,818 | |
End of period | | $ | 96,140 | | | $ | 212,504 | | | $ | 218,884 | | | $ | 112,466 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited. In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries. The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.
In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included. The results of operations for the three months and six months ended June 30, 2016March 31, 2017 are not necessarily indicative of the results for the full year ending December 31, 2016.2017.
(2) | Recent Accounting Standards |
On January 5, 2016, March 10, 2017, the Financial Accounting Standards Board (FASB)FASB issued guidance to enhanceimprove the reporting model for financial instruments to provide userspresentation of financial statements with more decision-useful information. Amongdefined benefit costs in the many targeted improvements to U.S. GAAPincome statement. In particular, the guidance requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are (1) requiring equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee,required to be measured at fair value with changespresented in fair value recognized in net income; (2) simplifying the impairment assessmentincome statement separately from the service cost component and outside a subtotal of equity investments without readily determinable fair values by requiringincome from operations, if one is presented. Additionally, this guidance allows only the service cost component to be eligible for capitalization, when applicable (e.g., as a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the fair valuecost of financial instruments measured at amortized cost for entities that are not public business entities; and (4) clarifying that an entity should evaluate the need forinternally manufactured inventory or a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This guidance applies to all entities that hold financial assets or owe financial liabilities. self-constructed asset). For public companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact thatSince, we do not present a subtotal of income from operations, the adoption of this guidance mayshould not have a material impact on the Company'spresentation of the Company’s consolidated financial statements.result of operations.
On February 25, 2016, January 26, 2017, the FASB issued guidance to increase transparencysimplify the manner in which an entity is required to evaluate goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this guidance, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. This guidance sets out the principles(2) recognize an impairment charge for the recognition, measurement, presentationamount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, this guidance removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, disclosure of leases for both lessors and lessees. It requires lesseesif it fails such qualitative test, to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the termperform Step 2 of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The guidance requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact that the adoption of this guidance may have on the Company's consolidated financial statements.
On March 30, 2016, the FASB issued guidance to reduce complexity in accounting standards. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures; (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes:, (6) the practical expedient for estimating the expected term, and (7) intrinsic value.goodwill impairment test. For public companies, these amendments, are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this guidance may havewhich should be applied on the Company's consolidated financial statements.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
On May 9, 2016, the FASB issued guidance which affects only the narrow aspects of guidance related to revenue from contracts with customers that include: (1) clarification of the collectibility criterion and the addition of a new criterion to clarify when revenue would be recognized for a contract that fails to meet the criteria in step 1 of the core principle of the guidance (i.e., identifying the contracts with a customer); (2) presentation of sales taxes and similar taxes collected from customers; (3) non-cash consideration; (4) contract modifications at transition; (5) completed contracts at transition; and (6) clarification that an entity that retrospectively applies in the guidance to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption, but is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. For public companies, these amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.
On June 16, 2016, the FASB issued guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public companies, these amendmentsprospective basis, are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this guidance may have on the Company'sCompany’s consolidated financial statements.
Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the three months and six months ended June 30, 2016March 31, 2017 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(3) | Investment in Securities |
The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at June 30, 2016March 31, 2017 and December 31, 2015,2016, were as follows:
| | June 30, 2016 | | | March 31, 2017 | |
| | | | | | | | | | | | | | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of government-sponsored enterprises | | $ | 70,523 | | | $ | 791 | | | $ | - | | | $ | 71,314 | | | $ | 41,485 | | | $ | 61 | | | $ | - | | | $ | 41,546 | |
U.S. Treasury securities and obligations of U.S. government instrumentalities | | | 95,105 | | | | 1,517 | | | | - | | | | 96,622 | | | | 72,723 | | | | 169 | | | | (14 | ) | | | 72,878 | |
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | | | 25,981 | | | | 2,666 | | | | - | | | | 28,647 | | | | 18,248 | | | | 857 | | | | (37 | ) | | | 19,068 | |
Municipal securities | | | 648,892 | | | | 60,786 | | | | (5 | ) | | | 709,673 | | | | 651,091 | | | | 34,191 | | | | (304 | ) | | | 684,978 | |
Corporate bonds | | | 197,493 | | | | 20,776 | | | | - | | | | 218,269 | | | | 279,540 | | | | 12,457 | | | | (367 | ) | | | 291,630 | |
Residential mortgage-backed securities | | | 775 | | | | 47 | | | | - | | | | 822 | | | | 638 | | | | 29 | | | | - | | | | 667 | |
Collateralized mortgage obligations | | | 19,104 | | | | 138 | | | | (1 | ) | | | 19,241 | | | | 42,919 | | | | 83 | | | | (224 | ) | | | 42,778 | |
Total fixed maturities | | | 1,057,873 | | | | 86,721 | | | | (6 | ) | | | 1,144,588 | | | | 1,106,644 | | | | 47,847 | | | | (946 | ) | | | 1,153,545 | |
Equity securities - Mutual funds | | | 272,948 | | | | 38,044 | | | | (889 | ) | | | 310,103 | | | | 236,356 | | | | 40,910 | | | | (117 | ) | | | 277,149 | |
Total | | $ | 1,330,821 | | | $ | 124,765 | | | $ | (895 | ) | | $ | 1,454,691 | | | $ | 1,343,000 | | | $ | 88,757 | | | $ | (1,063 | ) | | $ | 1,430,694 | |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | December 31, 2015 | | | December 31, 2016 | |
| | | | | | | | | | | | | | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of government-sponsored enterprises | | $ | 115,965 | | | $ | 301 | | | $ | (26 | ) | | $ | 116,240 | | | $ | 41,442 | | | $ | 87 | | | $ | (15 | ) | | $ | 41,514 | |
U.S. Treasury securities and obligations of U.S. government instrumentalities | | | 163,322 | | | | 234 | | | | (286 | ) | | | 163,270 | | | | 85,652 | | | | 157 | | | | (9 | ) | | | 85,800 | |
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | | | 25,302 | | | | 317 | | | | - | | | | 25,619 | | | | 17,930 | | | | 2,189 | | | | (68 | ) | | | 20,051 | |
Municipal securities | | | 612,225 | | | | 35,418 | | | | (197 | ) | | | 647,446 | | | | 650,175 | | | | 34,187 | | | | (559 | ) | | | 683,803 | |
Corporate bonds | | | 148,198 | | | | 9,782 | | | | (572 | ) | | | 157,408 | | | | 263,351 | | | | 12,182 | | | | (661 | ) | | | 274,872 | |
Residential mortgage-backed securities | | | 883 | | | | 54 | | | | - | | | | 937 | | | | 684 | | | | 34 | | | | - | | | | 718 | |
Collateralized mortgage obligations | | | 22,363 | | | | 368 | | | | (6 | ) | | | 22,725 | | | | 45,069 | | | | 58 | | | | (242 | ) | | | 44,885 | |
Total fixed maturities | | | 1,088,258 | | | | 46,474 | | | | (1,087 | ) | | | 1,133,645 | | | | 1,104,303 | | | | 48,894 | | | | (1,554 | ) | | | 1,151,643 | |
Equity securities - Mutual funds | | | 169,593 | | | | 27,851 | | | | (373 | ) | | | 197,071 | | | | 240,699 | | | | 30,101 | | | | (451 | ) | | | 270,349 | |
Total | | $ | 1,257,851 | | | $ | 74,325 | | | $ | (1,460 | ) | | $ | 1,330,716 | | | $ | 1,345,002 | | | $ | 78,995 | | | $ | (2,005 | ) | | $ | 1,421,992 | |
| | June 30, 2016 | | | March 31, 2017 | |
| | | | | | | | | | | | | | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government instrumentalities | | $ | 620 | | | $ | 238 | | | $ | - | | | $ | 858 | | | $ | 619 | | | $ | 160 | | | $ | - | | | $ | 779 | |
Residential mortgage-backed securities | | | 191 | | | | 20 | | | | - | | | | 211 | | | | 191 | | | | 18 | | | | - | | | | 209 | |
Certificates of deposit | | | 2,027 | | | | - | | | | - | | | | 2,027 | | | | 1,704 | | | | - | | | | - | | | | 1,704 | |
Total | | $ | 2,838 | | | $ | 258 | | | $ | - | | | $ | 3,096 | | | $ | 2,514 | | | $ | 178 | | | $ | - | | | $ | 2,692 | |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | December 31, 2016 | |
| | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
Securities held to maturity: | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government instrumentalities | | $ | 619 | | | $ | 158 | | | $ | - | | | $ | 777 | |
Residential mortgage-backed securities | | | 191 | | | | 18 | | | | - | | | | 209 | |
Certificates of deposit | | | 2,026 | | | | - | | | | - | | | | 2,026 | |
Total | | $ | 2,836 | | | $ | 176 | | | $ | - | | | $ | 3,012 | |
| | December 31, 2015 | |
| | | | | | | | | | | | |
Securities held to maturity: | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government instrumentalities | | $ | 620 | | | $ | 178 | | | $ | - | | | $ | 798 | |
Residential mortgage-backed securities | | | 191 | | | | 17 | | | | - | | | | 208 | |
Certificates of deposit | | | 2,118 | | | | - | | | | - | | | | 2,118 | |
Total | | $ | 2,929 | | | $ | 195 | | | $ | - | | | $ | 3,124 | |
Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2016March 31, 2017 and December 31, 20152016 were as follows:
| | June 30, 2016 | |
| | Less than 12 months | | | 12 months or longer | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securites available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal securities | | $ | 7,857 | | | $ | (5 | ) | | | 1 | | | $ | - | | | $ | - | | | | - | | | $ | 7,857 | | | $ | (5 | ) | | | 1 | |
Collateralized mortgage obligations | | | 1,117 | | | | (1 | ) | | | 1 | | | | - | | | | - | | | | - | | | | 1,117 | | | | (1 | ) | | | 1 | |
Total fixed maturities | | | 8,974 | | | | (6 | ) | | | 2 | | | | - | | | | - | | | | - | | | | 8,974 | | | | (6 | ) | | | 2 | |
Equity securities-Mutual funds | | | 21,569 | | | | (889 | ) | | | 6 | | | | - | | | | - | | | | - | | | | 21,569 | | | | (889 | ) | | | 6 | |
Total for securities available for sale | | $ | 30,543 | | | $ | (895 | ) | | | 8 | | | $ | - | | | $ | - | | | | - | | | $ | 30,543 | | | $ | (895 | ) | | | 8 | |
| | December 31, 2015 | | | March 31, 2017 | |
| | Less than 12 months | | | 12 months or longer | | | Total | | | Less than 12 months | | | 12 months or longer | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Estimated Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Estimated Fair Value | | | Gross Unrealized Loss | | | Number of Securities | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securites available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of government-sponsored enterprises | | $ | 18,989 | | | $ | (26 | ) | | | 1 | | | $ | - | | | $ | - | | | | - | | | $ | 18,989 | | | $ | (26 | ) | | | 1 | | |
U.S. Treasury securities and obligations of U.S. governmental instrumentalities | | | 130,996 | | | | (286 | ) | | | 5 | | | | - | | | | - | | | | - | | | | 130,996 | | | | (286 | ) | | | 5 | | | $ | 12,940 | | | $ | (14 | ) | | | 1 | | | $ | - | | | $ | - | | | | - | | | $ | 12,940 | | | $ | (14 | ) | | | 1 | |
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | | | | 12,704 | | | | (37 | ) | | | 6 | | | | - | | | | - | | | | - | | | | 12,704 | | | | (37 | ) | | | 6 | |
Municipal securities | | | 43,937 | | | | (197 | ) | | | 11 | | | | - | | | | - | | | | - | | | | 43,937 | | | | (197 | ) | | | 11 | | | | 64,518 | | | | (304 | ) | | | 9 | | | | - | | | | - | | | | - | | | | 64,518 | | | | (304 | ) | | | 9 | |
Corporate bonds | | | 35,718 | | | | (572 | ) | | | 9 | | | | - | | | | - | | | | - | | | | 35,718 | | | | (572 | ) | | | 9 | | | | 84,093 | | | | (367 | ) | | | 18 | | | | - | | | | - | | | | - | | | | 84,093 | | | | (367 | ) | | | 18 | |
Collateralized mortgage obligations | | | 1,448 | | | | (6 | ) | | | 1 | | | | - | | | | - | | | | - | | | | 1,448 | | | | (6 | ) | | | 1 | | | | 26,043 | | | | (222 | ) | | | 6 | | | | 665 | | | | (2 | ) | | | 1 | | | | 26,708 | | | | (224 | ) | | | 7 | |
Total fixed maturities | | | 231,088 | | | | (1,087 | ) | | | 27 | | | | - | | | | - | | | | - | | | | 231,088 | | | | (1,087 | ) | | | 27 | | | | 200,298 | | | | (944 | ) | | | 40 | | | | 665 | | | | (2 | ) | | | 1 | | | | 200,963 | | | | (946 | ) | | | 41 | |
Equity securities-Mutual funds | | | 9,319 | | | | (373 | ) | | | 2 | | | | - | | | | - | | | | - | | | | 9,319 | | | | (373 | ) | | | 2 | | | | 2,831 | | | | (49 | ) | | | 4 | | | | 2,006 | | | | (68 | ) | | | 1 | | | | 4,837 | | | | (117 | ) | | | 5 | |
Total for securities available for sale | | $ | 240,407 | | | $ | (1,460 | ) | | | 29 | | | $ | - | | | $ | - | | | | - | | | $ | 240,407 | | | $ | (1,460 | ) | | | 29 | | | $ | 203,129 | | | $ | (993 | ) | | | 44 | | | $ | 2,671 | | | $ | (70 | ) | | | 2 | | | $ | 205,800 | | | $ | (1,063 | ) | | | 46 | |
Triple-S Management CorporationNotes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | December 31, 2016 | |
| | Less than 12 months | | | 12 months or longer | | | Total | |
| | Estimated Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Estimated Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Estimated Fair Value | | | Gross Unrealized Loss | | | Number of Securities | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securites available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of government-sponsored enterprises | | $ | 9,483 | | | $ | (15 | ) | | | 1 | | | $ | - | | | $ | - | | | | - | | | $ | 9,483 | | | $ | (15 | ) | | | 1 | |
U.S. Treasury securities and obligations of U.S. governmental instrumentalities | | | 12,937 | | | | (9 | ) | | | 1 | | | | - | | | | - | | | | - | | | | 12,937 | | | | (9 | ) | | | 1 | |
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | | | 7,758 | | | | (68 | ) | | | 5 | | | | - | | | | - | | | | - | | | | 7,758 | | | | (68 | ) | | | 5 | |
Municipal securities | | | 84,252 | | | | (559 | ) | | | 13 | | | | - | | | | - | | | | - | | | | 84,252 | | | | (559 | ) | | | 13 | |
Corporate bonds | | | 105,054 | | | | (661 | ) | | | 22 | | | | - | | | | - | | | | - | | | | 105,054 | | | | (661 | ) | | | 22 | |
Collateralized mortgage obligations | | | 32,120 | | | | (239 | ) | | | 8 | | | | 784 | | | | (3 | ) | | | 1 | | | | 32,904 | | | | (242 | ) | | | 9 | |
Total fixed maturities | | | 251,604 | | | | (1,551 | ) | | | 50 | | | | 784 | | | | (3 | ) | | | 1 | | | | 252,388 | | | | (1,554 | ) | | | 51 | |
Equity securities-Mutual funds | | | 22,615 | | | | (451 | ) | | | 4 | | | | - | | | | - | | | | - | | | | 22,615 | | | | (451 | ) | | | 4 | |
Total for securities available for sale | | $ | 274,219 | | | $ | (2,002 | ) | | | 54 | | | $ | 784 | | | $ | (3 | ) | | | 1 | | | $ | 275,003 | | | $ | (2,005 | ) | | | 55 | |
The Corporation reviews the investment portfolios under the Corporation’s impairment review policy. Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material other-than-temporary impairments may be recorded in future periods. The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
U.S. Government Instrumentalities and Municipal Securities: The unrealized losses on the Corporation’s investments in U.S. Government Instrumentalities and Municipal Securities were mainly caused by fluctuations in interest rates and general market conditions. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. In addition, these investments have investment grade ratings. Because the decline in fair value is attributable to changes in interest rates and not credit quality; because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $7,848 and a gross unrealized loss of $37, and (2) senior lien bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $11,220 and a gross unrealized gain of $857. As of March 31, 2017, investments in escrow bonds are not considered other-than-temporarily impaired based on the length of time the funds have been in a loss position, the decline in estimated fair value is principally attributable to changes in interest rates, and the fact that these bonds are backed by US Government securities, and therefore have an implicit AA+/Aaa rating.
There was no impairment on Cofina during the three months ended March 31, 2017 and 2016.
Corporate Bonds: The unrealized losses of these bonds were principally caused by fluctuations in interest rates and general market conditions. All corporate bonds with an unrealized loss have investment grade ratings. Because the decline in estimated fair value is principally attributable to changes in interest rates; because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
Triple-S Management CorporationNotes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
Collateralized mortgage obligations: The unrealized losses on investments collateralized mortgage obligations (“CMOs”) were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities, other than private CMOs, are guaranteed by a U.S. government-sponsored enterprise. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Corporation owns. The Corporation does not consider these investments other-than-temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality; the Corporation does not intend to sell the investments and it is more likely than not that the Corporation will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows.
Mutual Funds: As of June 30, 2016,March 31, 2017, investments in mutual funds with unrealized losses are not considered other-than-temporarily impaired based on market conditions and the length of time the funds have been in a loss position. During the three and six months ended June 30, 2016, positions with a total fair market value of $11,582 were impaired by $1,434. There were no impairment on mutual funds during the 2015 period.
Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $16,426 and a gross unrealized gain of $55, and (2) bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $12,221 and a gross unrealized gain of $2,611.
Besides holdings in escrowed bonds, which are backed by US Government securities and therefore have an implicit AA+/Aaa rating, our exposure is in senior lien bonds issued by Cofina.
There was no impairment on Cofina during the three months ended March 31, 2017 and six months ended June 30, 2016. During the three and six months ended June 30, 2015, we recorded an other-than-temporary impairment related to these positions amounting to $1,660 and $2,862, respectively.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
Maturities of investment securities classified as available for sale and held to maturity were as follows:
| | June 30, 2016 | | | March 31, 2017 | |
| | | | | | | | Amortized cost | | | Estimated fair value | |
Securities available for sale: | | | | | | | | | | | | |
Due in one year or less | | $ | 43,982 | | | $ | 44,305 | | | $ | 48,742 | | | $ | 48,946 | |
Due after one year through five years | | | 329,658 | | | | 338,835 | | | | 322,122 | | | | 325,519 | |
Due after five years through ten years | | | 109,413 | | | | 122,168 | | | | 131,128 | | | | 137,138 | |
Due after ten years | | | 554,941 | | | | 619,217 | | | | 561,095 | | | | 598,497 | |
Residential mortgage-backed securities | | | 775 | | | | 822 | | | | 638 | | | | 667 | |
Collateralized mortgage obligations | | | 19,104 | | | | 19,241 | | | | 42,919 | | | | 42,778 | |
| | $ | 1,057,873 | | | $ | 1,144,588 | | | $ | 1,106,644 | | | $ | 1,153,545 | |
Securities held to maturity: | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 2,027 | | | $ | 2,027 | | | $ | 1,704 | | | $ | 1,704 | |
Due after ten years | | | 620 | | | | 858 | | | | 619 | | | | 779 | |
Residential mortgage-backed securities | | | 191 | | | | 211 | | | | 191 | | | | 209 | |
| | $ | 2,838 | | | $ | 3,096 | | | $ | 2,514 | | | $ | 2,692 | |
Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.
Information regarding realized and unrealized gains and losses from investments is as follows:
| | Three months ended June 30, | | | | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Realized gains (losses): | | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | |
Gross gains from sales | | $ | 912 | | | $ | 2,328 | | | $ | 1,873 | | | $ | 6,337 | |
Gross losses from sales | | | (103 | ) | | | (129 | ) | | | (1,462 | ) | | | (404 | ) |
Gross losses from other-than-temporary impairments | | | - | | | | (1,660 | ) | | | - | | | | (2,862 | ) |
Total fixed maturity securities | | | 809 | | | | 539 | | | | 411 | | | | 3,071 | |
Equity securities: | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | |
Gross gains from sales | | | 2,525 | | | | 10,138 | | | | 3,112 | | | | 13,874 | |
Gross losses from sales | | | (380 | ) | | | (70 | ) | | | (511 | ) | | | (125 | ) |
Gross losses from other-than-temporary impairments | | | (1,434 | ) | | | - | | | | (1,434 | ) | | | - | |
Total equity securities | | | 711 | | | | 10,068 | | | | 1,167 | | | | 13,749 | |
Net realized gains on securities available for sale | | $ | 1,520 | | | $ | 10,607 | | | $ | 1,578 | | | $ | 16,820 | |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | Three months ended June 30, | | | | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Changes in net unrealized gains (losses): | | | | | | | | | | | | |
Recognized in accumulated other comprehensive income: | | | | | | | | | | |
Fixed maturities – available for sale | | $ | 18,739 | | | $ | (23,848 | ) | | $ | 41,328 | | | $ | (19,757 | ) |
Equity securities – available for sale | | | 2,908 | | | | (11,595 | ) | | | 9,677 | | | | (12,873 | ) |
| | $ | 21,647 | | | $ | (35,443 | ) | | $ | 51,005 | | | $ | (32,630 | ) |
Not recognized in the consolidated financial statements: | | | | | | | | | | | | | | | | |
Fixed maturities – held to maturity | | $ | 27 | | | $ | (37 | ) | | $ | 63 | | | $ | (20 | ) |
Information regarding realized and unrealized gains and losses from investments is as follows:
| | Three months ended March 31, | |
| | 2017 | | | 2016 | |
Realized gains (losses): | | | | | | |
Fixed maturity securities: | | | | | | |
Securities available for sale: | | | | | | |
Gross gains from sales | | $ | 17 | | | $ | 961 | |
Gross losses from sales | | | (119 | ) | | | (1,359 | ) |
Total fixed maturity securities | | | (102 | ) | | | (398 | ) |
Equity securities: | | | | | | | | |
Securities available for sale: | | | | | | | | |
Gross gains from sales | | | 438 | | | | 587 | |
Gross losses from sales | | | - | | | | (131 | ) |
Total equity securities | | | 438 | | | | 456 | |
Net realized gains on securities available for sale | | $ | 336 | | | $ | 58 | |
| | Three months ended March 31, | |
| | 2017 | | | 2016 | |
Changes in net unrealized gains (losses): | | | | | | |
Recognized in accumulated other comprehensive income: | | | | | | |
Fixed maturities – available for sale | | $ | (439 | ) | | $ | 22,589 | |
Equity securities – available for sale | | | 11,143 | | | | 6,769 | |
| | $ | 10,704 | | | $ | 29,358 | |
Not recognized in the consolidated financial statements: | | | | | | | | |
Fixed maturities – held to maturity | | $ | 2 | | | $ | 36 | |
The change in deferred tax asset (liability)liability on unrealized gains change recognized in accumulated other comprehensive income during the sixthree months ended June 30,March 31, 2017 and 2016 and 2015 was ($15,598)$2,136 and $5,3809,781, respectively.
As of June 30, 2016March 31, 2017 and December 31, 2015,2016, no individual investment in securities exceeded 10% of stockholders’ equity.
Triple-S Management CorporationNotes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(4) | Premiums and Other Receivables, Net |
Premiums and other receivables, net were as follows:
| | | | | | |
Premium | | $ | 100,691 | | | $ | 91,528 | |
Self-funded group receivables | | | 50,643 | | | | 57,728 | |
FEHBP | | | 14,274 | | | | 14,321 | |
Agent balances | | | 27,468 | | | | 25,495 | |
Accrued interest | | | 11,338 | | | | 13,668 | |
Reinsurance recoverable | | | 54,854 | | | | 58,295 | |
Other | | | 65,152 | | | | 62,637 | |
| | | 324,420 | | | | 323,672 | |
Less allowance for doubtful receivables: | | | | | | | | |
Premium | | | 23,584 | | | | 27,320 | |
Other | | | 7,999 | | | | 9,987 | |
| | | 31,583 | | | | 37,307 | |
Total premium and other receivables, net | | $ | 292,837 | | | $ | 286,365 | |
As of June 30, 2016,March 31, 2017 and December 31, 2015 were as follows:
| | | | | | |
Premium | | $ | 137,649 | | | $ | 92,600 | |
Self-funded group receivables | | | 66,724 | | | | 73,552 | |
FEHBP | | | 14,129 | | | | 13,859 | |
Agent balances | | | 31,934 | | | | 25,424 | |
Accrued interest | | | 13,102 | | | | 12,624 | |
Reinsurance recoverable | | | 56,941 | | | | 48,506 | |
Other | | | 63,928 | | | | 53,325 | |
| | | 384,407 | | | | 319,890 | |
Less allowance for doubtful receivables: | | | | | | | | |
Premium | | | 27,805 | | | | 28,944 | |
Other | | | 8,398 | | | | 8,300 | |
| | | 36,203 | | | | 37,244 | |
Total premium and other receivables, net | | $ | 348,204 | | | $ | 282,646 | |
As of June 30, 2016, and December 31, 2015, the Company had premiums and other receivables of $90,670$51,533 and $78,230,$57,750, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations. The related allowance for doubtful receivables as of June 30, 2016March 31, 2017 and December 31, 20152016 were $18,315$14,050 and $19,133,$18,812, respectively.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(5) | Fair Value Measurements |
Assets recorded at fair value in theOur condensed consolidated balance sheets include the following financial instruments: securities available for sale, policy loans, policyholder deposits, and long-term borrowings. We consider the carrying amounts of policy loans, policyholder deposits, and long-term borrowings to approximate their fair value due to the short period of time between the origination of these instruments and the expected realization or payment. Certain assets are categorized based uponmeasured at fair value on a recurring basis and are disclosed below. These assets are classified into one of three levels of a hierarchy defined by GAAP. For a description of the level of judgment associated with the inputsmethods and assumptions that are used to measure their fair value. Level inputs, as defined by current accounting guidance forestimate the fair value measurements and disclosures, are as follows:
Level Input: | | Input Definition: |
Level 1 | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets atdetermine the measurement date. |
Level 2 | | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. |
Level 3 | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The Corporation uses observable inputs when available. Fair value is based upon quoted market prices when available. The Corporation limits valuation adjustments to those deemed necessary to ensure that the security’s fair value adequately representshierarchy classification of each class of financial instrument, see the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit qualityconsolidated financial statements and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.
The fair value of investment securities is estimated based on quoted market prices for those or similar investments. Additional information pertinent to the estimated fair value of investment in securities isnotes thereto included in note 3.our 2016 Form 10-K.
The following tables summarize fair value measurements by level at June 30, 2016 and December 31, 2015 for assets measured at fair value on a recurring basis:
| | June 30, 2016 | | | March 31, 2017 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of government-sponsored enterprises | | $ | - | | | $ | 71,314 | | | $ | - | | | $ | 71,314 | | | $ | - | | | $ | 41,546 | | | $ | - | | | $ | 41,546 | |
U.S. Treasury securities and obligations of U.S government instrumentalities | | | 96,622 | | | | - | | | | - | | | | 96,622 | | | | 72,878 | | | | - | | | | - | | | | 72,878 | |
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | | | - | | | | 28,647 | | | | - | | | | 28,647 | | | | - | | | | 19,068 | | | | - | | | | 19,068 | |
Municipal securities | | | - | | | | 709,673 | | | | - | | | | 709,673 | | | | - | | | | 684,978 | | | | - | | | | 684,978 | |
Corporate bonds | | | - | | | | 218,269 | | | | - | | | | 218,269 | | | | - | | | | 291,630 | | | | - | | | | 291,630 | |
Residential agency mortgage-backed securities | | | - | | | | 822 | | | | - | | | | 822 | | | | - | | | | 667 | | | | - | | | | 667 | |
Collateralized mortgage obligations | | | - | | | | 19,241 | | | | - | | | | 19,241 | | | | - | | | | 42,778 | | | | - | | | | 42,778 | |
Total fixed maturities | | | 96,622 | | | | 1,047,966 | | | | - | | | | 1,144,588 | | | | 72,878 | | | | 1,080,667 | | | | - | | | | 1,153,545 | |
Equity securities - Mutual funds | | | 230,610 | | | | 64,624 | | | | 14,869 | | | | 310,103 | | | | 174,593 | | | | 78,803 | | | | 23,753 | | | | 277,149 | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 327,232 | | | $ | 1,112,590 | | | $ | 14,869 | | | $ | 1,454,691 | | | $ | 247,471 | | | $ | 1,159,470 | | | $ | 23,753 | | | $ | 1,430,694 | |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | December 31, 2015 | | | December 31, 2016 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of government-sponsored enterprises | | | - | | | | 116,240 | | | | - | | | | 116,240 | | | $ | - | | | $ | 41,514 | | | $ | - | | | $ | 41,514 | |
U.S. Treasury securities and obligations of U.S government instrumentalities | | | 163,270 | | | | - | | | | - | | | | 163,270 | | | | 85,800 | | | | - | | | | - | | | | 85,800 | |
Obligations of the Commonwealth of Puerto Rico and its instrumentalities | | | - | | | | 25,619 | | | | - | | | | 25,619 | | | | - | | | | 20,051 | | | | - | | | | 20,051 | |
Municipal securities | | | - | | | | 647,446 | | | | - | | | | 647,446 | | | | - | | | | 683,803 | | | | - | | | | 683,803 | |
Corporate bonds | | | - | | | | 157,408 | | | | - | | | | 157,408 | | | | - | | | | 274,872 | | | | - | | | | 274,872 | |
Residential agency mortgage-backed securities | | | - | | | | 937 | | | | - | | | | 937 | | | | - | | | | 718 | | | | - | | | | 718 | |
Collateralized mortgage obligations | | | - | | | | 22,725 | | | | - | | | | 22,725 | | | | - | | | | 44,885 | | | | - | | | | 44,885 | |
Total fixed maturities | | | 163,270 | | | | 970,375 | | | | - | | | | 1,133,645 | | | | 85,800 | | | | 1,065,843 | | | | - | | | | 1,151,643 | |
Equity securities - Mutual funds | | | 167,082 | | | | 22,031 | | | | 7,958 | | | | 197,071 | | | | 166,595 | | | | 76,222 | | | | 27,532 | | | | 270,349 | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 330,352 | | | $ | 992,406 | | | $ | 7,958 | | | $ | 1,330,716 | | | $ | 252,395 | | | $ | 1,142,065 | | | $ | 27,532 | | | $ | 1,421,992 | |
The fair value of fixed maturity and equity securities included in the Level 2 category were based on market values obtained from independent pricing services, which utilize evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and when available loan performance data. Because many fixed income securities do not trade on a daily basis, the models used by independent pricing service providers to prepare evaluations apply available information, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. The independent pricing service providers monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The fair value of the investments in partnerships included in the Level 3 category was based on the net asset value (NAV) which is affected by the changes in the fair market value of the investments held in these partnerships.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. Transfers between levels, if any, are recorded as of the actual date of the event or change in circumstance that caused the transfer. There were no transfers in and/or out of Level 3 and between Levels 1 and 2 during the three months ended March 31, 2017 and six months ended June 30, 2016 and 2015.2016.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and six months ended June 30March 31 is as follows:
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | |
| | Three months ended June 30, | | | Six months ended June 30, | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Beginning balance | | $ | 6,997 | | | $ | 10,191 | | | $ | 7,958 | | | $ | 13,349 | | | $ | 27,532 | | | $ | 7,958 | |
Realized gains | | | 63 | | | | (700 | ) | | | 214 | | | | 1,412 | | | | 119 | | | | 151 | |
Unrealized in other accumulated comprehensive income | | | (321 | ) | | | (519 | ) | | | (969 | ) | | | (3,302 | ) | | | (64 | ) | | | (649 | ) |
Purchases | | | 8,525 | | | | 111 | | | | 8,633 | | | | 189 | | | | 5,260 | | | | 8 | |
Capital distributions | | | (395 | ) | | | - | | | | (967 | ) | | | (2,565 | ) | | | (9,094 | ) | | | (471 | ) |
Ending balance | | $ | 14,869 | | | $ | 9,083 | | | $ | 14,869 | | | $ | 9,083 | | | $ | 23,753 | | | $ | 6,997 | |
In addition to the preceding disclosures on assets recorded at fair value in the condensed consolidated balance sheets, accounting guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the condensed consolidated balance sheets.
Non-financial instruments such as property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as claim liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.
The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, receivables, accounts payable and accrued liabilities, and short-term borrowings approximate fair value because of the short term nature of these items. These assets and liabilities are not listed in the table below.
The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:
Policy loans have no stated maturity dates and are part of the related insurance contract. The carrying amount of policy loans approximates fair value because their interest rate is reset periodically in accordance with current market rates.
(ii) | Policyholder Deposits |
The fair value of policyholder deposits is the amount payable on demand at the reporting date, and accordingly, the carrying value amount approximates fair value.
(iii) | Long-term Borrowings |
The carrying amount of the loans payable to bank – variable approximates fair value due to its floating interest-rate structure. The fair value of the senior unsecured notes payable was determined using broker quotations.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on our condensed consolidated balance sheets at June 30, 2016March 31, 2017 and December 31, 20152016 are as follows:
| | June 30, 2016 | | | March 31, 2017 | |
| | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Policy loans | | $ | 8,301 | | | $ | - | | | $ | 8,301 | | | $ | - | | | $ | 8,301 | | | $ | 8,546 | | | $ | - | | | $ | 8,546 | | | $ | - | | | $ | 8,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Policyholder deposits | | $ | 182,730 | | | $ | - | | | $ | 182,730 | | | $ | - | | | $ | 182,730 | | | $ | 179,599 | | | $ | - | | | $ | 179,599 | | | $ | - | | | $ | 179,599 | |
Long-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans payable to bank - variable | | | 12,007 | | | | - | | | | 12,007 | | | | - | | | | 12,007 | | | | 34,465 | | | | - | | | | 34,465 | | | | - | | | | 34,465 | |
6.6% senior unsecured notes payable | | | 24,000 | | | | - | | | | 19,200 | | | | - | | | | 19,200 | | |
Total long-term borrowings | | | 36,007 | | | | - | | | | 31,207 | | | | - | | | | 31,207 | | | | 34,465 | | | | - | | | | 34,465 | | | | - | | | | 34,465 | |
Total liabilities | | $ | 218,737 | | | $ | - | | | $ | 213,937 | | | $ | - | | | $ | 213,937 | | | $ | 214,064 | | | $ | - | | | $ | 214,064 | | | $ | - | | | $ | 214,064 | |
| | December 31, 2015 | | | December 31, 2016 | |
| | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Policy loans | | $ | 7,901 | | | $ | - | | | $ | 7,901 | | | $ | - | | | $ | 7,901 | | | $ | 8,564 | | | $ | - | | | $ | 8,564 | | | $ | - | | | $ | 8,564 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Policyholder deposits | | $ | 179,287 | | | $ | - | | | $ | 179,287 | | | $ | - | | | $ | 179,287 | | | $ | 179,382 | | | $ | - | | | $ | 179,382 | | | $ | - | | | $ | 179,382 | |
Long-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans payable to bank - variable | | | 12,827 | | | | - | | | | 12,827 | | | | - | | | | 12,827 | | | | 11,187 | | | | - | | | | 11,187 | | | | - | | | | 11,187 | |
6.6% senior unsecured notes payable | | | 24,000 | | | | - | | | | 19,920 | | | | - | | | | 19,920 | | | | 24,000 | | | | - | | | | 24,000 | | | | - | | | | 24,000 | |
Total long-term borrowings | | | 36,827 | | | | - | | | | 32,747 | | | | - | | | | 32,747 | | | | 35,187 | | | | - | | | | 35,187 | | | | - | | | | 35,187 | |
Total liabilities | | $ | 216,114 | | | $ | - | | | $ | 212,034 | | | $ | - | | | $ | 212,034 | | | $ | 214,569 | | | $ | - | | | $ | 214,569 | | | $ | - | | | $ | 214,569 | |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
The activity inA reconciliation of the beginning and ending balances of claim liabilities is as follows:
| | Three months ended June 30, | | | | | | Three months ended March 31, 2017 | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | Managed Care | | | Other Business Segments * | | | Consolidated | |
Claim liabilities at beginning of period | | $ | 525,066 | | | $ | 401,642 | | | $ | 491,765 | | | $ | 390,086 | | |
| | | | | | | | | | |
Claim liabilities at beginning of year | | | $ | 349,047 | | | $ | 138,896 | | | $ | 487,943 | |
Reinsurance recoverable on claim liabilities | | | (39,871 | ) | | | (39,958 | ) | | | (40,714 | ) | | | (40,635 | ) | | | - | | | | (38,998 | ) | | | (38,998 | ) |
Net claim liabilities at beginning of period | | | 485,195 | | | | 361,684 | | | | 451,051 | | | | 349,451 | | |
Incurred claims and loss-adjustment expenses: | | | | | | | | | | | | | | | | | |
Net claim liabilities at beginning of year | | | | 349,047 | | | | 99,898 | | | | 448,945 | |
Claims incurred | | | | | | | | | | | | | |
Current period insured events | | | 622,859 | | | | 628,900 | | | | 1,244,339 | | | | 1,080,137 | | | | 602,620 | | | | 28,226 | | | | 630,846 | |
Prior period insured events | | | (7,414 | ) | | | 3,783 | | | | (8,962 | ) | | | (21,901 | ) | | | (15,340 | ) | | | (1,333 | ) | | | (16,673 | ) |
Total | | | 615,445 | | | | 632,683 | | | | 1,235,377 | | | | 1,058,236 | | | | 587,280 | | | | 26,893 | | | | 614,173 | |
Payments of losses and loss-adjustment expenses: | | | | | | | | | | | | | | | | | |
Payments of losses and loss-adjustment expenses | | | | | | | | | | | | | |
Current period insured events | | | 599,938 | | | | 539,085 | | | | 970,073 | | | | 783,813 | | | | 350,450 | | | | 7,965 | | | | 358,415 | |
Prior period insured events | | | 56,947 | | | | 32,252 | | | | 272,600 | | | | 200,844 | | | | 192,352 | | | | 17,945 | | | | 210,297 | |
Total | | | 656,885 | | | | 571,337 | | | | 1,242,673 | | | | 984,657 | | | | 542,802 | | | | 25,910 | | | | 568,712 | |
Net claim liabilities at end of period | | | 443,755 | | | | 423,030 | | | | 443,755 | | | | 423,030 | | |
Net claim liabilities at end of year | | | | 393,525 | | | | 100,881 | | | | 494,406 | |
Reinsurance recoverable on claim liabilities | | | 38,109 | | | | 39,156 | | | | 38,109 | | | | 39,156 | | | | - | | | | 35,898 | | | | 35,898 | |
Claim liabilities at end of period | | $ | 481,864 | | | $ | 462,186 | | | $ | 481,864 | | | $ | 462,186 | | |
Claim liabilities at end of year | | | $ | 393,525 | | | $ | 136,779 | | | $ | 530,304 | |
Triple-S Management CorporationNotes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | Three months ended March 31, 2016 | |
| | Managed Care | | | Other Business Segments * | | | Consolidated | |
| | | | | | | | | |
Claim liabilities at beginning of year | | $ | 348,297 | | | $ | 143,468 | | | $ | 491,765 | |
Reinsurance recoverable on claim liabilities | | | - | | | | (40,714 | ) | | | (40,714 | ) |
Net claim liabilities at beginning of year | | | 348,297 | | | | 102,754 | | | | 451,051 | |
Claims incurred | | | | | | | | | | | | |
Current period insured events | | | 614,754 | | | | 25,890 | | | | 640,644 | |
Prior period insured events | | | (18,464 | ) | | | (2,248 | ) | | | (20,712 | ) |
Total | | | 596,290 | | | | 23,642 | | | | 619,932 | |
Payments of losses and loss-adjustment expenses | | | | | | | | | | | | |
Current period insured events | | | 365,039 | | | | 5,096 | | | | 370,135 | |
Prior period insured events | | | 198,100 | | | | 17,553 | | | | 215,653 | |
Total | | | 563,139 | | | | 22,649 | | | | 585,788 | |
Net claim liabilities at end of year | | | 381,448 | | | | 103,747 | | | | 485,195 | |
Reinsurance recoverable on claim liabilities | | | - | | | | 39,871 | | | | 39,871 | |
Claim liabilities at end of year | | $ | 381,448 | | | $ | 143,618 | | | $ | 525,066 | |
* | Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations. |
As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.
The favorable developments in the claims incurred and loss-adjustment expenses for prior period insured events for the three months ended March 31, 2017 and six months ended June 30, 2016 and for the six months ended June 30, 2015 are due primarily to better than expected utilization trends. The amount in the incurred claims and loss-adjustment expenses for the prior period insured events for the three months ended June 30, 2015 is due primarily to higher than anticipated utilization trends. Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements.
The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $6,642$6,690 and $13,404$6,762 during the three months ended March 31, 2017 and six months ended June 30, 2016, respectively. The change in the liability for future policy benefits during the three months and six months ended June 30, 2015 amounted to $5,215 and $12,092, respectively.
On March 11, 2016, Triple-S Salud, Inc. (TSS) entered into a $30,000 revolving loan agreement with a commercial bank in Puerto Rico. This line of credit, unused as of June 30, 2016, has an interest rate of LIBOR plus 220 basis points, matures on March 11, 2017, and contains certain financial and non-financial covenants that are customary for this type of facility.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
The following is information about total incurred but not reported (IBNR) liabilities plus expected development on reported claims included in the liability for unpaid claims adjustment expenses for the Managed Care segment as of March 31, 2017.
Incurred Year | | Total of IBNR Liabilities Plus Expected Development on Reported Claims | | |
2015 | | | 60,717 | | |
2016 | | | 80,062 | | |
2017 | | | 252,163 | | |
(8)(7) | Income TaxesLong-Term Borrowings |
In connection withA summary of the Puerto Rico tax code,borrowings entered by the Company is as amended, on April 15, 2015, the group of corporations that comprisefollows:
| | | | | | |
| | | | | | |
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%. | | $ | - | | | $ | 24,000 | |
Secured loan payable of $11,187, payable in monthly installments of $137 through October 1, 2023, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.79% at March 31, 2017.) | | | 10,777 | | | | 11,187 | |
Secured loan payable of $20,150, payable in monthly installments of $84 through January 1, 2024, plus interest at a rate reset periodically of 275 basis points over selected LIBOR maturity (which was 3.77% at March 31, 2017.) | | | 19,982 | | | | - | |
Secured loan payable of $4,116, payable in monthly installments of $49 through January 1, 2024, plus interest at a rate reset periodically of 325 basis points over selected LIBOR maturity (which was 4.27% at March 31, 2017.) | | | 4,018 | | | | - | |
Total borrowings | | | 34,777 | | | | 35,187 | |
| | | | | | | | |
Less unamortized debt issuance costs | | | 312 | | | | 102 | |
| | $ | 34,465 | | | $ | 35,085 | |
On December 28, 2016, TSM entered into a Closing Agreement$35,500 credit agreement with a commercial bank in Puerto Rico. The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11,187, (ii) Term Loan B in the principal amount of $20,150 and (iii) Term Loan C in the principal amount of $4,116. Term Loan A was used to refinance the previous $41,000 secured loan payable with the same commercial bank in Puerto Rico Department of Treasury. The Closing Agreement, among other matters, was related withRico. Proceeds from Term Loans B and C were received on January 11, 2017 and were used to prepay the paymentoutstanding principal amount plus accrued interest of the preferential tax rate6.6% Senior Unsecured Notes due January 2021 ($24,000), and fund a portion of a debt service reserve for the Loan (approximately $200). Interest payable commenced on January 1, 2017, in the case of Term Loan A, and on February 1, 2017, in the case of Term Loan B and Term Loan C. The Credit Agreement includes certain financial and non-financial covenants, including negative covenants imposing certain restrictions on the increase in value of some of its long-term capital assets, as permitted by Act No. 238 of 2014 and Act No. 44 of 2015. The agreement also covered certain tax attributes of the Corporation. During the three months ended June 30, 2015, as a result of the aforementioned tax laws and the Closing Agreement, the Company: (1) obtained a benefit from the lower tax rate provided under these statutes, (2) reassessed the realizability of some of its deferred taxes and (3) recorded a tax benefit of $3,129.Corporation’s business.
During the three months ended June 30,21
Triple-S Management CorporationNotes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
On March 11, 2016 our PropertyTriple-S Salud, Inc. (TSS) entered into a $30,000 revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit had an interest rate of LIBOR plus 220 basis points and Casualty subsidiary,contained certain financial and non-financial covenants that are customary for this type of facility. This revolving loan agreement matured on March 11, 2017, and was not renewed.
On April 18, 2017, Triple-S Propiedad,Advantage, Inc. (TSP), reassessed the tax(TSA) entered into a $10,000 revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit has an interest rate used to measure several temporary differences, from 20% to 39%, which resulted in an increase in the deferred tax expense of approximately $2,633.30-day LIBOR plus 25 basis points, matures on April 17, 2018, and includes certain financial and non-financial covenants that are customary for this type of facility.
The components of net periodic benefit cost for the three months and six months ended June 30March 31 were as follows:
| | Three months ended March 31, | |
| | 2017 | | | 2016 | |
Components of net periodic benefit cost: | | | | | | |
Service cost | | $ | - | | | $ | 1,250 | |
Interest cost | | | 1,798 | | | | 2,762 | |
Expected return on assets | | | (2,199 | ) | | | (2,926 | ) |
Amortization of prior service benefit | | | - | | | | (144 | ) |
Amortization of actuarial loss | | | 86 | | | | 1,183 | |
Net periodic benefit cost | | $ | (315 | ) | | $ | 2,125 | |
| | Three months ended June 30, | | | | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Components of net periodic benefit cost: | | | | | | | | | | | | |
Service cost | | $ | 878 | | | $ | 1,160 | | | $ | 2,128 | | | $ | 2,057 | |
Interest cost | | | 1,939 | | | | 2,322 | | | | 4,701 | | | | 4,222 | |
Expected return on assets | | | (2,054 | ) | | | (2,350 | ) | | | (4,980 | ) | | | (4,214 | ) |
Amortization of prior service benefit | | | (102 | ) | | | (126 | ) | | | (246 | ) | | | (226 | ) |
Amortization of actuarial loss | | | 831 | | | | 1,665 | | | | 2,014 | | | | 3,119 | |
Net periodic benefit cost | | $ | 1,492 | | | $ | 2,671 | | | $ | 3,617 | | | $ | 4,958 | |
Effective January 31, 2017, the Company froze the pay and service amounts used to calculate pension benefits for active employees who participated in the pension plan. Therefore, as of the Effective Date, active employees in the pension plan will not accrue additional benefits for future service and eligible compensation received.
Employer Contributions: The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 20152016 that it expected to contribute $8,000$4,000 to the pension program in 2016.2017. As of June 30, 2016,March 31, 2017, the Corporation has not made contributions to the pension program.
(10) | Stock Repurchase Program |
The Company repurchases shares through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, under repurchase programs authorized by the Board of Directors.
In November 2015 the Company’s Board of Directors authorized a $25,000 repurchase program of its Class B common stock. During the three months ended June 30, 2016, the Company repurchased and retired under this program 284,846 shares at an average per share price of $23.09, for an aggregate cost of $6,533. During the six months ended June 30, 2016, the Company repurchased and retired under this program 651,947 shares at an average per share price of $22.50, for an aggregate cost of $14,560.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(11)(9) | Comprehensive Income |
The accumulated balances for each classification of other comprehensive income, net of tax, are as follows:
| | Net Unrealized Gain on Securities | | | Three months ended March 31, | |
| | Three months ended June 30, | | | Six months ended June 30, | | | 2017 | | | 2016 | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | | | | | |
Beginning Balance | | $ | 82,055 | | | $ | 103,261 | | | $ | 62,478 | | | $ | 101,467 | | |
Net Unrealized Gain on Securities Beginning Balance | | | $ | 62,371 | | | $ | 62,478 | |
Other comprehensive income before reclassifications | | | 18,193 | | | | (12,336 | ) | | | 37,817 | | | | (11,504 | ) | | | 8,741 | | | | 19,623 | |
Amounts reclassified from accumulated other comprehensive income | | | (2,363 | ) | | | (16,708 | ) | | | (2,410 | ) | | | (15,746 | ) | | | (269 | ) | | | (46 | ) |
Net current period change | | | 15,830 | | | | (29,044 | ) | | | 35,407 | | | | (27,250 | ) | | | 8,472 | | | | 19,577 | |
Ending Balance | | $ | 97,885 | | | $ | 74,217 | | | $ | 97,885 | | | $ | 74,217 | | | | 70,843 | | | | 82,055 | |
Liability for Pension Benefits Beginning Balance | | | | (19,976 | ) | | | (36,855 | ) |
Amounts reclassified from accumulated other comprehensive income | | | | 53 | | | | 634 | |
Ending Balance | | | | (19,923 | ) | | | (36,221 | ) |
Accumulated Other Comprehensive Income Beginning Balance | | | | 42,395 | | | | 25,623 | |
Other comprehensive income before reclassifications | | | | 8,741 | | | | 19,623 | |
Amounts reclassified from accumulated other comprehensive income | | | | (216 | ) | | | 588 | |
Net current period change | | | | 8,525 | | | | 20,211 | |
Ending Balance | | | $ | 50,920 | | | $ | 45,834 | |
| | Liability for Pension Benefits | |
| | Three months ended June 30, | | | Six months ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Beginning Balance | | $ | (36,221 | ) | | $ | (51,865 | ) | | $ | (36,855 | ) | | $ | (52,691 | ) |
Other comprehensive income before reclassifications | | | - | | | | - | | | | - | | | | - | |
Amounts reclassified from accumulated other comprehensive income | | | 445 | | | | 939 | | | | 1,079 | | | | 1,765 | |
Net current period change | | | 445 | | | | 939 | | | | 1,079 | | | | 1,765 | |
Ending Balance | | $ | (35,776 | ) | | $ | (50,926 | ) | | $ | (35,776 | ) | | $ | (50,926 | ) |
| | Accumulated Other Comprehensive Income | |
| | Three months ended June 30, | | | Six months ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Beginning Balance | | $ | 45,834 | | | $ | 51,396 | | | $ | 25,623 | | | $ | 48,776 | |
Other comprehensive income before reclassifications | | | 18,193 | | | | (12,336 | ) | | | 37,817 | | | | (11,504 | ) |
Amounts reclassified from accumulated other comprehensive income | | | (1,918 | ) | | | (15,769 | ) | | | (1,331 | ) | | | (13,981 | ) |
Net current period change | | | 16,275 | | | | (28,105 | ) | | | 36,486 | | | | (25,485 | ) |
Ending Balance | | $ | 62,109 | | | $ | 23,291 | | | $ | 62,109 | | | $ | 23,291 | |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(12)(10) | Share-Based Compensation |
Share-based compensation (benefit) expense recorded during the three months and six months ended June 30,March 31, 2017 and 2016 was $1,228($1,443) and $2,313,$1,085, respectively. Share-based compensation expenseThe benefit recorded duringin the three months2017 period results from a decrease in the 2014 and six months ended June 30, 2015 was $1,316 and $3,199, respectively. grants expected performance shares payouts. There waswere no cash received from stock option exercises during the sixthree months ended June 30, 2016March 31, 2017 and 2015. During the six months ended June 30, 2016 and 2015, 2,290 and 7,235 shares, respectively, were repurchased and retired as a result of non-cash exercises of stock options.2016.
(13)(11) | Net Income Available to Stockholders and Net Income per Share |
The following table sets forth the computation of basic and diluted earnings per shareshare:
| | Three months ended March 31, | |
| | 2017 | | | 2016 | |
Numerator for earnings per share: | | | | | | |
Net (loss) income attributable to TSM available to stockholders | | $ | (4,342 | ) | | $ | 3,456 | |
Denominator for basic earnings per share: | | | | | | | | |
Weighted average of common shares | | | 24,143,261 | | | | 24,587,681 | |
Effect of dilutive securities | | | - | | | | 72,353 | |
Denominator for diluted earnings per share | | | 24,143,261 | | | | 24,660,034 | |
Basic net (loss) income per share attributable to TSM | | $ | (0.18 | ) | | $ | 0.14 | |
Diluted net (loss) income per share attributable to TSM | | $ | (0.18 | ) | | $ | 0.14 | |
The Company generated a loss from continuing operations attributable to the Company’s common stockholders for the three and six months ended June 30:March 31, 2017, so the effect of dilutive securities is not considered because their effect would be antidilutive. If the Company had generated income from continuing operations during the three months ended March 31, 2017, the effect of restricted stock awards on the diluted shares calculation would have been an increase in shares of 59,284 shares.
| | Three months ended June 30, | | | | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Numerator for earnings per share: | | | | | | | | | | | | |
Net income attributable to TSM available to stockholders | | $ | 3,880 | | | $ | 18,926 | | | $ | 7,336 | | | $ | 33,762 | |
Denominator for basic earnings per share: | | | | | | | | | | | | | | | | |
Weighted average of common shares | | | 24,624,070 | | | | 25,922,680 | | | | 24,609,749 | | | | 26,208,573 | |
Effect of dilutive securities | | | 45,364 | | | | 74,984 | | | | 58,892 | | | | 86,793 | |
Denominator for diluted earnings per share | | | 24,669,434 | | | | 25,997,664 | | | | 24,668,641 | | | | 26,295,366 | |
Basic net income per share attributable to TSM | | $ | 0.16 | | | $ | 0.73 | | | $ | 0.30 | | | $ | 1.29 | |
Diluted net income per share attributable to TSM | | $ | 0.16 | | | $ | 0.73 | | | $ | 0.30 | | | $ | 1.28 | |
The following information supplements and amends, as applicable, the disclosures in Note 24 to the Consolidated Financial Statements of the Company’s 20152016 Annual Report on Form 10-K. Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company'sCompany’s compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.
We are involved in various legal actions arising in the ordinary course of business. We are also defendants in various other litigations and proceedings, some of which are described below. Where the Company believes that a loss is both probable and estimable, such amounts have been recorded. Although we believe our estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution. The outcome of legal proceedings is inherently uncertain and pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any. Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material adverse effect on the consolidated financial condition, operating results and/or cash flows of the Company.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have rights to acquire shares of the Company on favorable terms pursuant to agreements previously entered by our predecessor managed care subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS), with physicians or dentists who joined our provider network to sell such new provider shares of SSS at a future date (Share Acquisition Agreements) or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.
Claims by Heirs of Former ShareholdersASES Audits
InThe Company is subject to numerous audits in connection with the case entitled Cebollero Santamaríprovision of services to private and governmental entities. These audits may include numerous aspects of our business, including claim payment practices, contractual obligations, service delivery, third-party obligations, and business practices, among others. Deficiencies in audits could have a v. Triple-S Salud, Inc., et al, was filedmaterial adverse effect on March 26, 2013,our reputation and the Company filed its response on May 16, 2013. On October 29, 2013, the Company filed a motion for summary judgment on the grounds that the claim is time-barred under the fifteen-year statutebusiness, including termination of limitations of the Puerto Rico Civil Code for collection of monies and,contracts, significant increases in the alternative, that plaintiff failed to statecost of managing and remediating deficiencies, payment of contractual penal clauses, and others, any of which could have a claim for which relief can be granted, which was denied by the court. On November 2, 2015, the Company filed a petitionmaterial and adverse effect on our results of Writ of Certiorari with the Puerto Rico Court of Appeals, which was denied on March 8, 2016. On March 23, 2016, the Company filed a request for reconsideration to its petition of Writ of Certiorari with the Puerto Rico Court of Appeals, which the plaintiff opposed. The Court of Appeals denied reconsideration on April 28, 2016. The Company filed a Writ of Certiorari before the Supreme Court on May 31, 2016. The same has been opposed by the plaintiff.
In the case entitled Gallardo Mendez, et al, v. Triple-S Management Corporation, which was filed on December 30, 2014, the Company filed a motion to dismiss on March 13, 2015. After an extension of time granted by the court, plaintiff did not file an opposition. Therefore, on June 16, 2015, the court deemed our motion to dismiss unopposed. On March 18, 2016, the court dismissed the complaint with prejudice. Since plaintiff did not file within 30 days an appeal brief opposing the trial court’s determination, the dismissal of the case is final.
Claims Relating to the Provision of Health Care Servicesoperations, financial position and cash flows.
On June 5,July 2, 2014, ASES initiatednotified TSS that the results of an administrative hearing againstaudit conducted in connection with the government health plan contract for several periods between October 2005 to September 2013, reflected an overpayment of premiums made to TSS moved by a primary medical group forpursuant to prior contracts with ASES in the amount of $7,900. The alleged outstanding claimsoverpayments were related to services provided to Medicaid beneficiaries from 2005 to 2010, totaling approximately $3,000.duplicated payments or payments made for deceased members, and ASES requested the reimbursement of the alleged overpayment. On June 19, 2014,January 16, 2015, TSS filed an injunction against ASES under the case Triple-S Salud, Inc. v. Administracion de Seguros de Salud de Puerto Rico. TSS contends that ASES’ request for reimbursement has no merits on several grounds, including a 2011 settlement between both parties covering the majority of the amount claimed by ASES, and that ASES, under the terms of the contracts, was responsible for certifying the membership. TSS also amended its response. On June 25, 2014,claim to include the hearing officer orderedPuerto Rico Health Department (PRHD), as it asserts the partiesPRHD is an indispensable party for the resolution of this matter and to fileseek the payment of approximately $5,000, since the premiums paid to TSS should have been higher than what ASES actually paid given the additional risk assumed by TSS. The case was assigned to a Special Commissioner, who has received a joint working plan and schedule. Inexpert report concerning the processcase. On March 17, 2017, the Special Commissioner issued a report recommending the court to dismiss the complaint in favor of executing said plan and after discovery was completed,TSS. TSS is awaiting the court’s decision in connection to the report issued by the Special Commissioner. TSS will continue to conduct a vigorous defense of this matter was settled for $316 on June 6, 2016.matter.
Triple-S Management CorporationNotes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(15)(13) | Segment Information |
The operations of the Corporation are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance. The Corporation evaluates performance based primarily on the operating revenues and operating income of each segment. Operating revenues include premiums earned, net, administrative service fees, net investment income, and revenues derived from other segments. Operating costs include claims incurred and operating expenses. The Corporation calculates operating income or loss as operating revenues less operating costs.
The Managed Care segment participates in the Commonwealth of Puerto Rico Health Insurance Plan (similar to Medicaid) (Medicaid) program to provide health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the government of Puerto Rico, by administering the provision of the physical health component in designated service regions in Puerto Rico. We served all eight service regions on an administrative service only basis (ASO) until March 31, 2015. Administrative service fees during the six months ended June 30, 2015 amounted to $24,238. Effective April 1, 2015, we started to provide healthcare services to only two regions of the Medicaid program on a risk based model.
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
The following tables summarize the operations by reportable segment for the three and six months ended June 30, 2016March 31, 2017 and 2015:2016:
| | Three months ended June 30, | | | | | | Three months ended March 31, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Operating revenues: | | | | | | | | | | | | | | | | | | |
Managed Care: | | | | | | | | | | | | | | | | | | |
Premiums earned, net | | $ | 668,932 | | | $ | 695,517 | | | $ | 1,347,312 | | | $ | 1,167,684 | | | $ | 640,147 | | | $ | 678,380 | |
Administrative service fees | | | 4,520 | | | | 4,549 | | | | 9,603 | | | | 33,672 | | | | 4,379 | | | | 5,083 | |
Intersegment premiums/service fees | | | 1,652 | | | | 3,312 | | | | 3,137 | | | | 4,505 | | | | 1,534 | | | | 1,485 | |
Net investment income | | | 4,107 | | | | 2,719 | | | | 7,587 | | | | 5,717 | | | | 3,892 | | | | 3,480 | |
Total managed care | | | 679,211 | | | | 706,097 | | | | 1,367,639 | | | | 1,211,578 | | | | 649,952 | | | | 688,428 | |
Life Insurance: | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned, net | | | 38,591 | | | | 36,245 | | | | 77,557 | | | | 74,025 | | | | 40,298 | | | | 38,966 | |
Intersegment premiums | | | 202 | | | | 70 | | | | 339 | | | | 131 | | | | 191 | | | | 137 | |
Net investment income | | | 6,412 | | | | 6,103 | | | | 12,326 | | | | 11,884 | | | | 6,087 | | | | 5,914 | |
Total life insurance | | | 45,205 | | | | 42,418 | | | | 90,222 | | | | 86,040 | | | | 46,576 | | | | 45,017 | |
Property and Casualty Insurance: | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned, net | | | 21,526 | | | | 22,345 | | | | 42,714 | | | | 44,956 | | | | 21,548 | | | | 21,188 | |
Intersegment premiums | | | 154 | | | | 154 | | | | 307 | | | | 307 | | | | 153 | | | | 153 | |
Net investment income | | | 2,325 | | | | 2,131 | | | | 4,254 | | | | 4,221 | | | | 1,924 | | | | 1,929 | |
Total property and casualty insurance | | | 24,005 | | | | 24,630 | | | | 47,275 | | | | 49,484 | | | | 23,625 | | | | 23,270 | |
Other segments: * | | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment service revenues | | | 2,617 | | | | 2,779 | | | | 5,162 | | | | 5,162 | | | | 1,586 | | | | 2,545 | |
Operating revenues from external sources | | | 959 | | | | 680 | | | | 1,815 | | | | 1,863 | | | | 1,000 | | | | 856 | |
Total other segments | | | 3,576 | | | | 3,459 | | | | 6,977 | | | | 7,025 | | | | 2,586 | | | | 3,401 | |
Total business segments | | | 751,997 | | | | 776,604 | | | | 1,512,113 | | | | 1,354,127 | | | | 722,739 | | | | 760,116 | |
TSM operating revenues from external sources | | | 1 | | | | 16 | | | | 5 | | | | 30 | | | | 78 | | | | 4 | |
Elimination of intersegment premiums/service fees | | | (2,008 | ) | | | (3,536 | ) | | | (3,783 | ) | | | (4,943 | ) | | | (1,598 | ) | | | (1,775 | ) |
Elimination of intersegment service revenues | | | 2,518 | | | | (2,779 | ) | | | (27 | ) | | | (5,162 | ) | | | (1,586 | ) | | | (2,545 | ) |
Other intersegment eliminations | | | (5,149 | ) | | | (10 | ) | | | (5,162 | ) | | | (5 | ) | | | - | | | | (13 | ) |
Consolidated operating revenues | | $ | 747,359 | | | $ | 770,295 | | | $ | 1,503,146 | | | $ | 1,344,047 | | | $ | 719,633 | | | $ | 755,787 | |
* | Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic. |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | Three months ended June 30, | | | | | | Three months ended March 31, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Operating (loss) income: | | | | | | | | | | | | | |
Operating income (loss): | | | | | | | |
Managed care | | $ | (3,780 | ) | | $ | (2,515 | ) | | $ | (4,421 | ) | | $ | 8,457 | | | $ | (18,582 | ) | | $ | (641 | ) |
Life insurance | | | 5,054 | | | | 5,286 | | | | 10,652 | | | | 10,102 | | | | 3,935 | | | | 5,598 | |
Property and casualty insurance | | | 3,388 | | | | 2,454 | | | | 5,499 | | | | 3,960 | | | | 2,067 | | | | 2,111 | |
Other segments * | | | (182 | ) | | | (121 | ) | | | (361 | ) | | | (284 | ) | | | 143 | | | | (179 | ) |
Total business segments | | | 4,480 | | | | 5,104 | | | | 11,369 | | | | 22,235 | | | | (12,437 | ) | | | 6,889 | |
TSM operating revenues from external sources | | | 1 | | | | 16 | | | | 5 | | | | 30 | | | | 78 | | | | 4 | |
TSM unallocated operating expenses | | | (2,707 | ) | | | (1,937 | ) | | | (5,874 | ) | | | (7,540 | ) | | | (2,217 | ) | | | (3,167 | ) |
Elimination of TSM intersegment charges | | | 2,386 | | | | 2,390 | | | | 4,773 | | | | 4,795 | | | | 2,400 | | | | 2,387 | |
Consolidated operating income | | | 4,160 | | | | 5,573 | | | | 10,273 | | | | 19,520 | | |
Consolidated operating (loss) income | | | | (12,176 | ) | | | 6,113 | |
Consolidated net realized investment gains | | | 1,520 | | | | 10,607 | | | | 1,578 | | | | 16,820 | | | | 336 | | | | 58 | |
Consolidated interest expense | | | (1,954 | ) | | | (2,074 | ) | | | (3,836 | ) | | | (4,256 | ) | | | (1,686 | ) | | | (1,882 | ) |
Consolidated other income, net | | | 3,859 | | | | 1,083 | | | | 4,734 | | | | 2,842 | | | | 2,525 | | | | 875 | |
Consolidated income before taxes | | $ | 7,585 | | | $ | 15,189 | | | $ | 12,749 | | | $ | 34,926 | | |
Consolidated (loss) income before taxes | | | $ | (11,001 | ) | | $ | 5,164 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Managed care | | $ | 2,839 | | | $ | 3,281 | | | $ | 5,773 | | | $ | 6,760 | | | $ | 2,239 | | | $ | 2,934 | |
Life insurance | | | 249 | | | | 279 | | | | 504 | | | | 549 | | | | 280 | | | | 255 | |
Property and casualty insurance | | | 150 | | | | 88 | | | | 311 | | | | 190 | | | | 114 | | | | 161 | |
Other segments* | | | 166 | | | | 119 | | | | 319 | | | | 245 | | | | 160 | | | | 153 | |
Total business segments | | | 3,404 | | | | 3,767 | | | | 6,907 | | | | 7,744 | | | | 2,793 | | | | 3,503 | |
TSM depreciation expense | | | 196 | | | | 197 | | | | 393 | | | | 394 | | | | 197 | | | | 197 | |
Consolidated depreciation and amortization expense | | $ | 3,600 | | | $ | 3,964 | | | $ | 7,300 | | | $ | 8,138 | | | $ | 2,990 | | | $ | 3,700 | |
* | Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic. |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
| | | | | | |
Assets: | | | | | | |
Managed care | | $ | 1,126,240 | | | $ | 1,034,725 | |
Life insurance | | | 820,789 | | | | 770,721 | |
Property and casualty insurance | | | 364,565 | | | | 350,514 | |
Other segments * | | | 26,091 | | | | 25,629 | |
Total business segments | | | 2,337,685 | | | | 2,181,589 | |
Unallocated amounts related to TSM: | | | | | | | | |
Cash, cash equivalents, and investments | | | 1,487 | | | | 12,304 | |
Property and equipment, net | | | 22,859 | | | | 23,219 | |
Other assets | | | 30,909 | | | | 31,732 | |
| | | 55,255 | | | | 67,255 | |
Elimination entries-intersegment receivables and others | | | (77,646 | ) | | | (42,699 | ) |
Consolidated total assets | | $ | 2,315,294 | | | $ | 2,206,145 | |
| | March 31, 2017 | | | December 31, 2016 | |
Assets: | | | | | | |
Managed care | | $ | 1,144,927 | | | $ | 1,013,872 | |
Life insurance | | | 820,481 | | | | 816,920 | |
Property and casualty insurance | | | 347,282 | | | | 349,159 | |
Other segments * | | | 26,274 | | | | 26,034 | |
Total business segments | | | 2,338,964 | | | | 2,205,985 | |
Unallocated amounts related to TSM: | | | | | | | | |
Cash, cash equivalents, and investments | | | 22,531 | | | | 17,033 | |
Property and equipment, net | | | 22,228 | | | | 22,380 | |
Other assets | | | 21,337 | | | | 21,646 | |
| | | 66,096 | | | | 61,059 | |
Elimination entries-intersegment receivables and others | | | (46,605 | ) | | | (48,045 | ) |
Consolidated total assets | | $ | 2,358,455 | | | $ | 2,218,999 | |
* | Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic. |
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
(16)(14) | Subsequent Events |
The Company evaluated subsequent events through the date the financial statements were issued. No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standards Codification.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries. The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and six months ended June 30, 2016.March 31, 2017. Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 20152016 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months and six months ended June 30, 2016March 31, 2017 included in this Quarterly Report on Form 10-Q.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other of our publicly available documents may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations. These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control. These statements may address, among other things, future financial results, strategy for growth, and market position. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form. We are not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.
We are one of the most significant players in the managed care industry in Puerto Rico and have over 5055 years of experience in this industry. We offer a broad portfolio of managed care and related products in the Commercial, Medicaid and Medicare Advantage 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 fundedRico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid), by administering the provision of the physical health componentbenefits in designated service regions in Puerto Rico. We served all eight regions on an administrative service only basis (ASO) until March 31, 2015. Effective April 1, 2015, the government changed the Medicaid delivery model from ASO to a risk-based model that includes the physical and mental health components. We elected to participate in this sector as a fully-insured provider in only two regions of Puerto Rico. See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 20152016 under the sub-caption “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.”
We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands and Anguilla. As of June 30, 2016,March 31, 2017, we served approximately 1,048,0001,016,000 members across all regions of Puerto Rico. For the sixthree months ended June 30,March 31, 2017 and 2016 and 2015,respectively, our managed care segment represented approximately 92%91% and 91%, respectively,92% of our total consolidated premiums earned. We also have significant positions in the life insurance and property and casualty insurance markets.
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS) and Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB). TSS, TSA and Triple-S Blue, Inc. (TSB)TSB are Blue Cross Blue Shield Association (BCBSA) BCBSA licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands, and Anguilla.
We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc., and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP).
Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. Except as otherwise indicated, the numbers for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations. These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income. See note 1513 of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Our revenues primarily consist of premiums earned, net and administrative service fees. These revenues are derived from the sale of managed care products in the Commercial market to employer groups, individuals and government-sponsored programs, principally Medicare and the Government of Puerto Rico Health Insurance Plan. Premiums are derived from insurance contracts. Administrativecontracts and administrative service fees are derived from self-funded contracts, under which we provide a range of services, including claims administration, billing and membership services, among others. Revenues also include premiums earned from the sale of property and casualty and life insurance contracts, and investment income and revenues derived from other segments. Substantially all of our earnings are generated in Puerto Rico.
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. Each segment’s results of operations depend to a significant extent on their ability to accurately predict and effectively manage claims. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period. Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses. Operating expenses also includes the Health Insurance Providers Fee paid under the Affordable Care Act (ACA).
We use operating income as a measure of performance of the underwriting and investment functions of our segments. We also use the loss ratio and the operating expense ratio as measures of performance. The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100. The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.
Puerto Rico Economy
Update
During recent years,the past decade, Puerto Rico has been facing economic and fiscal challenges and its economy has been contracting.
On April 6, 2016, the Governor of Puerto Rico signed into law Act 21-2016, known as the “Puerto Rico Emergency Moratorium and Financial Rehabilitation Act” (as amended pursuant In response to Act 41-2016, Act 21). Act 21 allows the Governor to declare a moratorium on debt service payments and to stay related creditor remedies for a temporary period for the Commonwealth of Puerto Rico (Commonwealth)(the Commonwealth) fiscal and certain government instrumentalities in order to protect the health, safety and welfare of the residents of the Commonwealth. The temporary period set forth in Act 21 lasts until January 31, 2017, with a possible two-month extension at the Governor’s discretion. Pursuant to Act 21, the Governor signed several executive orders declaring GDB and other government instrumentalities in a state of emergency and has invoked a local debt moratorium resulting in payment defaults.
On April 6, 2016, the Governor of Puerto Rico signed into law Act. No. 71-2004, known as the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the Recovery Act), was challenged by certain private investors in Federal court and was declared unconstitutional by the United States District Court for the District of Puerto Ricoeconomic crisis, on February 6, 2015. The District Court’s decision was upheld by the United States Courts of Appeals for the First Circuit and subsequently upheld by the United States Supreme Court on June 13, 2016.
On June 30, 2016, the President of the United States signedU.S. Congress enacted the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA)(“PROMESA”), which, grantsamong other things, established a Federally-appointed oversight board (the “Oversight Board”) comprised of seven members with ample powers over the finances of the Commonwealth and its component units, access to an orderly mechanism to restructure their debts in exchange for significant federal oversight over the Commonwealth’s finances. In general,instrumentalities. PROMESA seeks to provide Puerto Rico with fiscal and economic discipline through the creation of a control board, relief from creditor lawsuits through the enactment ofalso established a temporary stay on litigation to enforce rights or remedies related to financial liabilities of the Commonwealth, its instrumentalities and municipalities, which expired on May 1, 2017. Finally, PROMESA established two alternative methodsseparate mechanisms to adjust unsustainable debt.restructure the debts of the Commonwealth, its public corporations and municipalities. The first mechanism permits modifications of financial indebtedness with the consent of a supermajority of affected financial creditors. The second mechanism, known as Title III, is a court-supervised debt-adjustment process, which is modeled after Chapter 9 of the U.S. Bankruptcy Code.
Pursuant to PROMESA, the Oversight Board required the Commonwealth to deliver a fiscal plan by January 15, 2017, which deadline was later extended until February 28, 2017. In a letter dated January 18, 2017, the Oversight Board recommended to the Governor a series of measures for inclusion in the fiscal plan, including: (i) a $1.0 billion reduction in health care spending by fiscal year 2019, (ii) the elimination of budgetary subsidies to municipalities and (iii) significant reductions in payroll expenditures and pension and/or pension-related benefits. On February 28, 2017, the Governor of Puerto Rico submitted a 10-year fiscal plan to the Oversight Board, for its review and approval. After certain revisions, a final plan was approved by the Oversight Board on March 13, 2017, which includes spending reductions of $25.7 billion. The plan implies larger concessions from bondholders since there would be approximately $8 billion available for debt service payments over the next 10 years, compared to around $35 billion that is owed over that period. The plan also proposes (i) certain significant changes to the Commonwealth’s healthcare delivery model in order to reduce expenses and (ii) the elimination of subsidies to the municipalities, many of which have contracts for the provision of healthcare or other insurance products with our subsidiaries. The plan, however, does not provide details about the proposed changes or the timeline for their implementation. Also, it is uncertain if and how the elimination of municipal subsidies will affect municipal finances and their ability to continue to meet their contractual obligations.
The Oversight Board also required that certain Commonwealth instrumentalities, such as Government Development Bank for Puerto Rico, the Puerto Rico Aqueduct and Sewer Authority, the Puerto Rico Electric Power Authority and the University of Puerto Rico, prepare and submit fiscal plans. All such fiscal plans have been submitted and approved, other than the plan for the University of Puerto Rico, and include significant expenditure reductions across all types of expenses. In the future, the Oversight Board may require other instrumentalities and municipalities to prepare and submit fiscal plans.
On May 1, 2017, the temporary stay on litigation established by PROMESA expired. After the expiration of the temporary stay, several investors holding general obligation and sales and use tax-backed bonds filed lawsuits to enforce their rights and remedies related to the financial liabilities of the Commonwealth, its instrumentalities and municipalities. On May 3, 2017, after not reaching an agreement with its creditors, the Oversight Board filed an order seeking the protection of the provisions of Title III of PROMESA for the Commonwealth. On May 5, 2017, the Oversight Board also sought the protection of Title III of PROMESA for the Puerto Rico Sales Tax Financing Corporation (“COFINA” by its Spanish acronym), which issued the sales and use tax-backed bonds. While the proceedings under Title III of PROMESA are ongoing, all enforcement and collection actions against the Commonwealth and COFINA by its creditors are stayed. As a result of this court-supervised debt-adjustment process, the principal and interest payments due on general obligation and sales and use tax-backed bonds will likely be restructured and such restructuring could lead to significant additional losses on such holdings.
Although the Oversight Board has not sought the protection of Title III of PROMESA for the Puerto Rico Health Insurance Administration (“ASES” by its Spanish acronym), the instrumentality responsible for the administration of the Government’s health plan, ASES may be affected by the Commonwealth’s fiscal plan and the proceedings commenced for the Commonwealth under Title III of PROMESA because its state-based funding is solely dependent on appropriations from the Government’s general fund. Notwithstanding the Government’s statement in recent legislation that its public policy includes guaranteeing the continuity of public services in essential areas such as health, security, education, social work and development, among others, it is uncertain how the Commonwealth’s Title III proceeding will affect ASES and the contracts administered by it.
If the liquidity of the Government of Puerto Rico, its agencies, municipalities and public corporations becomes significantly affected as a result of their inability to raise funding in the market or generate enough revenues, we may face credit losses in our premium and fees receivables from these and other government related entities. As of June 30, 2016,March 31, 2017, the Company had premiums and other receivables of $90.7$51.5 million from the Government of Puerto Rico, including its agencies, municipalities and public corporations with a related allowance for doubtful receivables of $18.3$14.1 million. We also hold several positions categorized as Obligations of the Commonwealth of Puerto Rico, including Cofina bonds, which are susceptible to aforementioned recent developments in the economy, see note 3 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
Puerto Rico Government Health Reform Program
Current Medicaid premiums rates are effective until June 30, 2017; the negotiation for new rates, until the end of the three year agreement, is ongoing. See Item 1A. Risk Factors—Risks Related to Our Business – “Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us.” and “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.business.’’ included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Managed Care – Medicare AdvantagePolitical and Regulatory Developments
On April 4, 2016, CMS published the Final MA Ratebook and Call Letter with the 2017announced final benchmark rates for MAthe 2018 Medicare Advantage plans. The call letter included revenue adjustments reflecting the physician payment increases, maintaining the zero claims adjustment, and allowing certain Puerto Rico’s MARico counties to qualify for double bonus status. The impact of these updates result in a benchmark rates are estimatedincrease of about 4%. See Item 1A. Risk Factors—Risks Related to decrease approximately 2.4% compared to 2016 funding levels. We expectthe Regulation of our rates to remain flat mostly as a result ofIndustry – “The revised rate calculation system for Medicare Advantage, the payment system for the Medicare Part D and changes in the risk score model.
Managed Care – Puerto Rico Health Reform Program (Medicaid)
We have concluded Medicaid rate negotiationsmethodology and payment policies used by CMS to establish rates could reduce our profitability and the benefits we offer our beneficiaries’’ included in our Annual Report on Form 10-K for the contract year that began on July 1, 2016 and are awaiting final approval of the agreement from CMS. There will be no changes to the regions that we serve. The new rates for the next year are approximately 4% lower than the existing one, reflecting better than expected utilization over the last 15 months. The contract’s profit sharing clause established in the agreement based on certain quality metrics, has been extended into June 30, 2017.ended December 31, 2016.
Recent Accounting Standards
For a description of recent accounting standards, see note 2 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
| | As of June 30, | | | As of March 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Managed care enrollment: | | | | | | | | | | | | |
Commercial 1 | | | 528,902 | | | | 561,440 | | | | 505,848 | | | | 544,846 | |
Medicare | | | 116,215 | | | | 120,147 | | | | 121,352 | | | | 119,224 | |
Medicaid | | | 402,661 | | | | 433,093 | | | | 389,130 | | | | 402,933 | |
Total | | | 1,047,778 | | | | 1,114,680 | | | | 1,016,330 | | | | 1,067,003 | |
Managed care enrollment by funding arrangement: | | | | | | | | | | | | | | | | |
Fully-insured | | | 868,157 | | | | 928,323 | | | | 847,327 | | | | 886,547 | |
Self-insured | | | 179,621 | | | | 186,357 | | | | 169,003 | | | | 180,456 | |
Total | | | 1,047,778 | | | | 1,114,680 | | | | 1,016,330 | | | | 1,067,003 | |
(1) | Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, Federal government employees and local government employees. |
Consolidated Operating Results
The following table sets forth the Corporation’s consolidated operating results. Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.
| | Three months ended June 30, | | | | | | Three months ended March 31, | |
(dollar amounts in millions) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Revenues: | | | | | | | | | | | | | | | | | | |
Premiums earned, net | | $ | 729.1 | | | $ | 754.1 | | | $ | 1,467.6 | | | $ | 1,286.7 | | | $ | 702.3 | | | $ | 738.5 | |
Administrative service fees | | | 4.5 | | | | 4.6 | | | | 9.6 | | | | 33.7 | | | | 4.4 | | | | 5.1 | |
Net investment income | | | 12.9 | | | | 11.0 | | | | 24.2 | | | | 21.9 | | | | 12.0 | | | | 11.4 | |
Other operating revenues | | | 0.9 | | | | 0.6 | | | | 1.7 | | | | 1.7 | | | | 0.9 | | | | 0.8 | |
Total operating revenues | | | 747.4 | | | | 770.3 | | | | 1,503.1 | | | | 1,344.0 | | | | 719.6 | | | | 755.8 | |
Net realized investment gains | | | 1.5 | | | | 10.6 | | | | 1.6 | | | | 16.8 | | | | 0.3 | | | | - | |
Other income, net | | | 3.8 | | | | 1.1 | | | | 4.7 | | | | 2.9 | | | | 2.6 | | | | 0.9 | |
Total revenues | | | 752.7 | | | | 782.0 | | | | 1,509.4 | | | | 1,363.7 | | | | 722.5 | | | | 756.7 | |
Benefits and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Claims incurred | | | 622.1 | | | | 637.9 | | | | 1,248.8 | | | | 1,070.3 | | | | 620.9 | | | | 626.7 | |
Operating expenses | | | 121.1 | | | | 126.8 | | | | 244.1 | | | | 254.2 | | | | 110.9 | | | | 123.0 | |
Total operating expenses | | | 743.2 | | | | 764.7 | | | | 1,492.9 | | | | 1,324.5 | | | | 731.8 | | | | 749.7 | |
Interest expense | | | 1.9 | | | | 2.1 | | | | 3.8 | | | | 4.3 | | | | 1.7 | | | | 1.9 | |
Total benefits and expenses | | | 745.1 | | | | 766.8 | | | | 1,496.7 | | | | 1,328.8 | | | | 733.5 | | | | 751.6 | |
Income before taxes | | | 7.6 | | | | 15.2 | | | | 12.7 | | | | 34.9 | | |
Income tax expense (benefit) | | | 3.7 | | | | (3.7 | ) | | | 5.4 | | | | 1.2 | | |
Net income | | | 3.9 | | | | 18.9 | | | | 7.3 | | | | 33.7 | | |
Less: net loss attributable to non-controlling interest | | | - | | | | - | | | | - | | | | 0.1 | | |
Net income attributable to TSM | | $ | 3.9 | | | $ | 18.9 | | | $ | 7.3 | | | $ | 33.8 | | |
(Loss) income before taxes | | | | (11.0 | ) | | | 5.1 | |
Income taxes (benefit) / expense | | | | (6.7 | ) | | | 1.7 | |
Net (loss) income attributable to TSM | | | $ | (4.3 | ) | | $ | 3.4 | |
Three Months Ended June 30, 2016March 31, 2017 Compared to Three Months Ended June 30, 2015March 31, 2016
Operating Revenues
Consolidated premiums earned, net for the three months ended March 31, 2017 decreased by $25.0$36.2 million, or 3.3%4.9%, to $729.1 million.$702.3 million when compared to the three months ended March 31, 2016. This decrease primarily reflects lower premiums in the Managed Care segment by $26.6$38.2 million mainly due to lower fully-insured membership across all sectors and a reduction to Medicaid premiums of $14.6 million recognized as return premiums to the government of Puerto Rico. This return premium accrual is in line with the provisions of the Medicaid at-risk contract. These fluctuations are offset in part by higher premium rates in the segment’s Medicaid and Commercial business.
Net investment income increased by $1.9 million, or 17.1%, to $12.9 million when compared to the same period in 2015, mostly as a result of higher invested balances.businesses.
Other Income, Net
The $2.7$1.7 million increase in consolidated other income reflects the collection of interest charged for late payment related to the current Medicaid contract.
Claims Incurred
Consolidated claims incurred decreased by $15.8$5.8 million, or 2.5%0.9%, to $622.1$620.9 million during the three months ended March 31, 2017 when compared to the claims incurred during the three months ended March 31, 2016, mostly due to lower claims in the Managed Care segment’ssegment. The decrease in fully-insured membership, partiallyManaged Care claims primarily reflects lower claims incurred in the segment’s Medicaid and Commercial businesses primarily driven by lower enrollment, offset in part by higher pharmacy claims trends in the Medicare and Medicaid businesses, higher Part B drugs in the Medicare business, and enhanced benefits in the Medicare 2017 offerings. This decrease was also offset by increased medical cost ashigher claims incurred in the result of the usual overall cost trend.Life Insurance segment. The consolidated loss ratio increased by 70350 basis points to 85.3%. Excluding the impact of prior period reserve developments, as well as moving the mid-year and 2015 final risk score revenue adjustments to its corresponding period, consolidated loss ratio was 85.0%88.4%.
Operating Expenses
Consolidated operating expenses during the three months ended March 31, 2017 decreased by $5.7$12.1 million, or 4.5%9.8%, to $121.1 million. The decrease reflects lower expenses related$110.9 million as compared to the change inoperating expenses during the Medicaid membership after we elected to decrease the number of regions we serve, from eight regions under an ASO agreement to only two regions when the contract changed to a fully-insured model.three months ended March 31, 2016. The lower operating expenses also reflect a decrease inare mostly the provision for doubtful accounts, mostly due to the strengtheningresult of the allowance for doubtful receivables in the 2015 period. This decrease in the operating expenses was partially offset by a new business-to-business tax implemented in Puerto Rico during the third quarter of 2015 and an increase in the Health Insurance Providers Fee reflecting(HIP fee) of $10.8 million due to the Medicaid enrollment after the model change.2017 tax holiday, and lower personnel costs. For the three months ended June 30, 2016,March 31, 2017, the consolidated operating expense ratio decreased 2080 basis points to 16.5%15.7%.
Income Taxes
Consolidated income taxes increaseddecreased by $7.4 million, from a tax benefit of $3.7$8.4 million, to a tax expensebenefit of $3.7$6.7 million for the three months ended June 30, 2016.March 31, 2017. The higheryear over year change in income taxtaxes primarily results from a loss before taxes incurred in the net effect of2017 period incurred in the following:
· | The Property and Casualty segment reassessed the tax rate used to measure several temporary differences; as a consequence such rate was increased from 20% to 39%, resulting in an increase to its deferred tax expense of approximately $2.6 million. |
· | During the 2015 period, the Company executed a Closing Agreement between TSM and its subsidiaries and the Puerto Rico Treasury Department in connection with a local law that provided a temporary preferential tax rate in capital asset transactions. These events allowed the Company to record a $3.1 million benefit in the 2015 period resulting from the enacted lower taxable rate and the reassessment of the realizability of some of its deferred taxes. |
Managed Care segment.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Operating Revenues
Consolidated premiums earned, net increased by $180.9 million, or 14.1%, to $1.5 billion. This increase primarily reflects higher premiums in the Managed Care segment by $179.6 million after the change in the Medicaid business model from an ASO agreement to a fully insured model effective April 1, 2015.
The consolidated administrative service fees decreased $24.1 million, or 71.5%, mostly as a result of the previously mentioned change in the Medicaid contract model. Total administrative fees related to the previous Medicaid ASO agreement during the 2015 period amounted to $23.6 million.
Net investment income increased by $2.3 million, or 10.5%, to $24.2 million mostly as a result of higher invested balances.
Other Income, Net
The $1.8 million increase in consolidated other income reflects the collection of interest charged for late payment related to the current Medicaid contract.
Claims Incurred
Consolidated claims incurred increased by $178.5 million, or 16.7%, to $1.3 billion, mostly due to higher claims in the Managed Care segment. This increase primarily reflects higher claims incurred in the segment’s Medicaid business by $158.0 million after the contract changed to a fully insured model and the impact of Managed Care prior period reserve developments as well as the increased medical cost as the result of usual overall cost trends. The consolidated loss ratio increased by 190 basis points to 85.1%. Excluding the impact of prior period development, as well as moving the mid-year and 2015 final risk score revenue adjustments to its corresponding period, consolidated loss ratio was 85.4%.
Operating Expenses
Consolidated operating expenses decreased by $10.1 million, or 4.0%, to $244.1 million. The decrease reflects lower expenses related to the change in the Medicaid membership after we elected to decrease the number of regions we serve, from eight regions under an ASO agreement to only two regions when the contract changed to a fully-insured model. The lower operating expenses also reflect a decrease in the provision for doubtful accounts, mostly due to the strengthening of the allowance for doubtful receivables in the 2015 period. This decrease in the operating expenses was partially offset by a new business-to-business tax implemented in Puerto Rico during the third quarter 2015 and an increase in the Health Insurance Providers Fee, reflecting the Medicaid enrollment after the model change. For the six months ended June 30, 2016, the consolidated operating expense ratio decreased 280 basis points to 16.5%.
Income Taxes
Consolidated income taxes increased by $4.2 million, to $5.4 million. The higher income tax primarily results from the net effect of the following:
· | The Property and Casualty segment reassessed the tax rate used to measure several temporary differences; as a consequence such rate was increased from 20% to 39%, resulting in an increase to its deferred tax expense of approximately $2.6 million. |
· | During the 2015 period, the Company executed a Closing Agreement between TSM and its subsidiaries and the Puerto Rico Treasury Department in connection with a local law that provided a temporary preferential tax rate in capital asset transactions. These events allowed the Company to record a $3.1 million benefit in the 2015 period resulting from the enacted lower taxable rate and the reassessment of the realizability of some of its deferred taxes. |
Managed Care Operating Results | | Three months ended June 30, | | | | |
(dollar amounts in millions) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Operating revenues: | | | | | | | | | | | | |
Medical premiums earned, net: | | | | | | | | | | | | |
Commercial | | $ | 215.0 | | | $ | 211.6 | | | $ | 430.5 | | | $ | 424.1 | |
Medicare | | | 273.1 | | | | 278.6 | | | | 534.0 | | | | 538.6 | |
Medicaid | | | 181.2 | | | | 205.6 | | | | 383.4 | | | | 205.6 | |
Medical premiums earned, net | | | 669.3 | | | | 695.8 | | | | 1,347.9 | | | | 1,168.3 | |
Administrative service fees | | | 5.8 | | | | 7.6 | | | | 12.1 | | | | 37.6 | |
Net investment income | | | 4.1 | | | | 2.7 | | | | 7.6 | | | | 5.7 | |
Total operating revenues | | | 679.2 | | | | 706.1 | | | | 1,367.6 | | | | 1,211.6 | |
Medical operating costs: | | | | | | | | | | | | | | | | |
Medical claims incurred | | | 590.2 | | | | 608.4 | | | | 1,186.5 | | | | 1,008.5 | |
Medical operating expenses | | | 92.8 | | | | 100.2 | | | | 185.5 | | | | 194.6 | |
Total medical operating costs | | | 683.0 | | | | 708.6 | | | | 1,372.0 | | | | 1,203.1 | |
Medical operating (loss) income | | $ | (3.8 | ) | | $ | (2.5 | ) | | $ | (4.4 | ) | | $ | 8.5 | |
Additional data: | | | | | | | | | | | | | | | | |
Member months enrollment: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Fully-insured | | | 1,063,422 | | | | 1,125,363 | | | | 2,159,704 | | | | 2,269,092 | |
Self-funded | | | 540,221 | | | | 561,220 | | | | 1,083,247 | | | | 1,135,554 | |
Total Commercial member months | | | 1,603,643 | | | | 1,686,583 | | | | 3,242,951 | | | | 3,404,646 | |
| | | | | | | | | | | | | | | | |
Medicare member months | | | 351,108 | | | | 355,942 | | | | 715,535 | | | | 703,024 | |
| | | | | | | | | | | | | | | | |
Medicaid: | | | | | | | | | | | | | | | | |
Fully-insured | | | 1,206,345 | | | | 1,303,512 | | | | 2,428,237 | | | | 1,303,512 | |
Self-insured | | | - | | | | - | | | | - | | | | 4,229,082 | |
Total Medicaid member months | | | 1,206,345 | | | | 1,303,512 | | | | 2,428,237 | | | | 5,532,594 | |
Total member months | | | 3,161,096 | | | | 3,346,037 | | | | 6,386,723 | | | | 9,640,264 | |
Medical loss ratio | | | 88.2 | % | | | 87.4 | % | | | 88.0 | % | | | 86.3 | % |
Operating expense ratio | | | 13.7 | % | | | 14.2 | % | | | 13.6 | % | | | 16.1 | % |
| | Three months ended March 31, | |
(dollar amounts in millions) | | 2017 | | | 2016 | |
Operating revenues: | | | | | | |
Medical premiums earned, net: | | | | | | |
Commercial | | $ | 205.1 | | | $ | 215.5 | |
Medicare | | | 257.7 | | | | 261.0 | |
Medicaid | | | 177.7 | | | | 202.2 | |
Medical premiums earned, net | | | 640.5 | | | | 678.7 | |
Administrative service fees | | | 5.6 | | | | 6.3 | |
Net investment income | | | 3.9 | | | | 3.5 | |
Total operating revenues | | | 650.0 | | | | 688.5 | |
Medical operating costs: | | | | | | | | |
Medical claims incurred | | | 587.3 | | | | 596.3 | |
Medical operating expenses | | | 81.3 | | | | 92.8 | |
Total medical operating costs | | | 668.6 | | | | 689.1 | |
Medical operating loss | | $ | (18.6 | ) | | $ | (0.6 | ) |
Additional data: | | | | | | | | |
Member months enrollment: | | | | | | | | |
Commercial: | | | | | | | | |
Fully-insured | | | 1,013,205 | | | | 1,096,282 | |
Self-funded | | | 507,167 | | | | 543,026 | |
Total Commercial | | | 1,520,372 | | | | 1,639,308 | |
Medicare | | | 363,727 | | | | 364,427 | |
Medicaid | | | 1,173,273 | | | | 1,221,892 | |
Total member months | | | 3,057,372 | | | | 3,225,627 | |
Medical loss ratio | | | 91.7 | % | | | 87.9 | % |
Operating expense ratio | | | 12.6 | % | | | 13.5 | % |
Three Months Ended June 30, 2016March 31, 2017 Compared to Three Months Ended June 30, 2015March 31, 2016
Medical Operating Revenues
Medical premiums earned for the three months ended June 30, 2016March 31, 2017 decreased by $26.5$38.2 million, or 3.8%5.6%, to $669.3 million.$640.5 million when compared to the medical premiums earned during the three months ended March 31, 2016. This decrease is principally the result of the following:
· | Medicaid premiums decreased by $24.4 million, or 11.9% primarily as the result of a decrease in member month enrollment by 97,167, or 7.5%, reflecting the population decline in Puerto Rico. This decrease also includes, as a reduction to Medicaid premiums, the accrual of $14.6 million of excess profit (return premiums) due to a better loss experience that resulted in profits over the allowable 2.5% margin threshold. |
Medical premiums generated by the Medicaid business amounted to $177.7 million, $24.5 million, or 12.1% lower when compared to the medical premiums earned during the three months ended March 31, 2016. Decrease primarily reflects lower fully-insured member months enrollment by approximately 48,600 lives and the 4% decrease in average premium rates that went into effect July 1, 2016. Also contributing to the lower premiums during this period are last year’s partial reversal of the accrued 2.5% excess profit of $3.6 million and to $2.6 million related to the suspension of the HIP fee pass-through as a result of the 2017 moratorium.
· | Medicare premiums decrease of $5.5 million, or 2.0% primarily results from lower enrollment by 4,834 member month when compared to 2015 combined with a 2.5% average reduction in 2016 Medicare reimbursement rates. |
Medical premiums generated by the Commercial business decreased by $10.4 million, or 4.8%, to $205.1 million. This fluctuation primarily reflects lower fully-insured member enrollment during the quarter of approximately 83,000 member months and $3.5 million related to the suspension of the HIP fee pass-through; offset by an increase in average premium rates of approximately 5%.
Medical premiums generated by the Medicare business decreased by $3.3 million, or 1.3%, to $257.7 million, primarily reflecting lower average premium rates due to a change in membership mix, with the current period presenting a higher concentration of non-dual individuals and groups and a reduction in the 2017 Medicare reimbursement rates.
· | Commercial premiums increase of $3.4 million, or 1.6%, primarily results from the approximately 7% year over year increase in average premium rates, partially offset by a decrease in fully insured member month enrollment by 61,941, or 5.5%. |
Administrative service fees decreased by $1.8 million, or 23.7%, to $5.8 million mainly due to a decrease in the Commercial self-funded member month enrollment during the 2016 period.
Medical Claims Incurred
Medical claims incurred during the three months ended March 31, 2017 decreased by $18.2$9.0 million, or 3.0%1.5%, to $590.2 million.$587.3 million when compared to the three months ended March 31, 2016. The medical loss ratio (MLR) of the segment increased 80380 basis points during the 20162017 period, to 88.2%91.7%. This fluctuation is primarily attributed to the net effect of the following:
· | The medical claims incurred of the Medicaid business decreased by $24.3 million during the 2016 period primarily reflecting a favorable prior period reserve development due to lower utilization trends and the previously described lower member month enrollment. The favorable prior period reserve developments was in part, responsible for generating a profit for this program in excess of the allowable 2.5% maximum margin which made it necessary for us to record the previously discussed return premium. The Medicaid MLR was 89.3%, 120 basis points lower than last year. |
The medical claims incurred in the Medicaid business decreased by $8.4 million, or 4.6%, during the 2017 period, mostly driven by lower enrollment offset by higher utilization. The MLR, at 97.8%, was 770 basis point higher than the same period last year. The higher MLR primarily reflects increased pharmacy and outpatient claim trends and the lower premium rates that went into effect July 1, 2016.
· | The medical claims incurred of the Medicare business decreased by $5.0 million, or 2.1%, during the 2016 period reflecting the previously mentioned decrease in membership and lower benefits in the 2016 products as compared to 2015 as the result of the decrease in reimbursement rates. Adjusting for the effect of prior period reserve developments, and moving the mid-year and 2015 final risk score revenue adjustments to their corresponding periods, our Medicare MLR would have been approximately 88.7% this quarter, about 280 basis points higher than last year, mostly driven by increased Part B drug costs, mainly related to cancer and rheumatoid arthritis. |
The medical claims incurred of the Commercial business decreased by $7.6 million, or 4.3%, during the 2017 period mostly driven by lower enrollment. The MLR, at 83.5%, was 70 basis point higher than the same month last year. Adjusting for the effect of prior period reserve developments, the Commercial MLR would have been 83.3%, 240 basis points lower than the adjusted MLR for last year primarily reflecting claim trends that are lower than our premium trends following the continuity of our underwriting discipline.
· | The medical claims incurred of the Commercial business increased by $11.0 million, or 6.1%, during the 2016 period. The Commercial MLR was 89.2%, which is 380 basis points higher than the MLR for the prior year. These increases reflect the impact of unfavorable prior period reserve development. Excluding the effect of prior period reserve developments in 2016 and 2015, the MLR would have decreased by 100 basis points to 85.7%. |
The medical claims incurred of the Medicare business increased by $7.0 million, or 3.0%, during the 2017 period and its MLR increased by 390 basis points, to 94.0%. Adjusting for the effect of prior period reserve developments in 2017 and 2016 and moving the risk score revenue adjustments to their corresponding period, the Medicare MLR would have been approximately 95.6% this quarter, about 280 basis points higher than last year, primarily reflecting higher trends in Part B drugs, pharmacy benefits and the improvement of benefits in 2017 products taking advantage of the HIP fee moratorium.
Medical Operating Expenses
Medical operating expenses decreased by $7.4 million, or 7.4%, to $92.8 million. The decrease reflects lower expenses related to the change in the Medicaid membership after we elected to decrease the number of regions we serve from eight regions under an ASO agreement to only two regions when the contract was changed to a fully-insured model. The lower operating expenses also reflect a decrease in the provision for doubtful accounts, mostly due to the strengthening of the allowance for doubtful receivables in the 2015 period. This decrease in the operating expenses was partially offset by a new business-to-business tax implemented in Puerto Rico during the third quarter 2015 and an increase in the Health Insurance Providers Fee, reflecting the Medicaid enrollment after the model change. For the three months ended June 30, 2016, the operating expense ratioMarch 31, 2017 decreased 50 basis points, to 13.7%.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Medical Operating Revenues
Medical premiums earned increased by $179.6$11.5 million, or 15.4%,12.4 %, to $1.3 billion. This increase is principally the result of the following:
· | Medical premiums generated by the Medicaid business increased by $177.8 million to $383.4 million during the six months ended June 30, 2016. This fluctuation is primarily the result of the change in the Medicaid service model, from an ASO agreement to a fully insured model effective April 1, 2015. This decrease also includes, as a reduction to Medicaid premiums, the accrual of $10.9 million of excess profit (return premiums) due to a better loss experience that resulted in profits over the allowable 2.5% margin threshold. |
· | Medical premiums generated by the Commercial business increased by $6.4 million, or 1.5%, to $430.5 million. This fluctuation is primarily the result of approximately 7% year over year increase in average premium rates, partially offset by a decrease in fully insured member month enrollment. |
· | Medical premiums generated by the Medicare business decreased by $4.6 million, or 0.9%, to $534.0 million. This fluctuation primarily results from lower risk score revenue as$81.3 million when compared with 2015 and a reduction in 2016 Medicare reimbursement rates, offset in part by higher member month enrollment. |
Administrative service fees decreased by $25.5 million, or 67.8%, to $12.1 million mainly due to the previously mentioned change in the Medicaid contract effective April 1, 2015.
Medical Claims Incurred
Medical claims incurred increased by $178.0 million, or 17.6%, to $1.2 billion. The MLR of the segment increased 170 basis points during the 2016 period, to 88.0%. These fluctuations are primarily attributed to the net effect of the following:
· | The medical claims incurred of the Medicaid business increased by $157.9 million during the 2016 period reflecting the previously mentioned change in the Medicaid contract effective April 1, 2015. The Medicaid MLR was 89.7%, 80 basis points lower than last year, primarily reflecting lower utilization. |
· | The medical claims incurred of the Commercial business increased by $12.8 million, or 3.6%, during the 2016 period mostly reflecting the impact of prior period reserve development. The Commercial MLR was 86.0%, which is 170 basis points higher than the MLR for the prior year. Excluding the effect of prior period reserve developments in 2016 and 2015, the MLR would have decreased by 240 basis points, reflecting the continuity of our underwriting discipline and premium trends higher than claims trends. |
· | The medical claims incurred of the Medicare business increased by $7.3 million, or 1.6%, during the 2016 period and its MLR was 88.3%, which is 210 basis points higher than the MLR for the prior period. Adjusting for the effect of prior period reserve developments, and moving the 2015 final risk score revenue adjustment to its corresponding period, our Medicare MLR would have been 90.4%, about 270 basis points higher than last year. The higher MLR primarily reflects, a higher number of HRAs completed in 2016 compared to last year and higher Part B drug costs, mainly related to cancer and rheumatoid arthritis. |
Medical Operating Expenses
Medical operating expenses decreased by $9.0 million, or 4.6%, to $185.6 million. The decrease mostly reflects lower expenses related to the change in the Medicaid membership after we elected to decrease the number of regions we serve from eight regions under an ASO agreement to only two regions when the contract was changed to a fully-insured model. The lower operating expenses also reflect a decrease in the provision for doubtful accounts, mostly due to the strengthening of the allowance for doubtful receivables in the 2015 period. This decrease in the operating expenses was partially offset by a new business-to-business tax implemented in Puerto Rico during the third quarter 2015 and an increase in the Health Insurance Providers Fee, reflecting the Medicaid enrollment after the model change.three months ended March 31, 2016. The operating expense ratio decreased 250by 90 basis points to 13.6%12.6% in 2016 as a2017. The lower operating expenses and expense ratio are mostly the result of the increasedecrease in premiums revenue andthe HIP Fee of $10.7 million due to the 2017 moratorium as well as lower expenses.personnel costs.
Life Insurance Operating Results
| | Three months ended June 30, | | | | | | Three months ended March 31, | |
(dollar amounts in millions) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Operating revenues: | | | | | | | | | | | | | | | | | | |
Premiums earned, net: | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 39.7 | | | $ | 38.1 | | | $ | 79.5 | | | $ | 76.8 | | | $ | 41.8 | | | $ | 39.8 | |
Assumed earned premiums | | | 1.2 | | | | 0.6 | | | | 2.7 | | | | 2.2 | | | | 0.9 | | | | 1.5 | |
Ceded premiums earned | | | (2.1 | ) | | | (2.4 | ) | | | (4.3 | ) | | | (4.9 | ) | | | (2.2 | ) | | | (2.2 | ) |
Premiums earned, net | | | 38.8 | | | | 36.3 | | | | 77.9 | | | | 74.1 | | | | 40.5 | | | | 39.1 | |
Net investment income | | | 6.4 | | | | 6.1 | | | | 12.3 | | | | 11.9 | | | | 6.1 | | | | 5.9 | |
Total operating revenues | | | 45.2 | | | | 42.4 | | | | 90.2 | | | | 86.0 | | | | 46.6 | | | | 45.0 | |
Operating costs: | | | | | | | | | | | | | | | | | | | | | | | | |
Policy benefits and claims incurred | | | 21.9 | | | | 19.2 | | | | 43.4 | | | | 40.7 | | | | 23.7 | | | | 21.4 | |
Underwriting and other expenses | | | 18.2 | | | | 17.9 | | | | 36.2 | | | | 35.2 | | | | 19.0 | | | | 18.0 | |
Total operating costs | | | 40.1 | | | | 37.1 | | | | 79.6 | | | | 75.9 | | | | 42.7 | | | | 39.4 | |
Operating income | | $ | 5.1 | | | $ | 5.3 | | | $ | 10.6 | | | $ | 10.1 | | | $ | 3.9 | | | $ | 5.6 | |
Additional data: | | | | | | | | | | | | | | | | | | | | | | | | |
Loss ratio | | | 56.4 | % | | | 52.9 | % | | | 55.7 | % | | | 54.9 | % | | | 58.5 | % | | | 54.7 | % |
Operating expense ratio | | | 46.9 | % | | | 49.3 | % | | | 46.5 | % | | | 47.5 | % | | | 46.9 | % | | | 46.0 | % |
Three Months Ended June 30, 2016March 31, 2017 Compared to Three Months Ended June 30, 2015March 31, 2016
Operating Revenues
Premiums earned, net increased by $2.5$1.4 million, or 6.9%3.6% to $38.8$40.5 million as the result of premium growth in the segment’s Individual Life and Cancer lines of business, as well as growth in the premiums assumed on reinsurance agreements.Costa Rica operations.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred increased by $2.7$2.3 million, or 14.1%10.7%, to $21.9$23.7 million, mostly reflecting aas the result of the higher volume of business during the year, particularly in the Individual Life and Cancer lines of business and inhigher number of claims assumed under reinsurance retrocession agreements, which carry a high loss ratio, and an increase in actuarial reserves.paid. The loss ratio for the period increased from 52.9%to 58.5% in 20152017, or 380 basis points, reflecting the higher volume in the Cancer line of business, which has a higher loss ratio, as well as to 56.4%a higher claims experience in 2016, or 350 basis points.this particular line of business.
Underwriting and Other Expenses
Increase in underwriting and other expenses of $1.0 million, or 5.6%, to $19.0 million mostly reflects higher commissions following the segment’s premium growth mentioned above. In addition, the segment has incurred in higher development and marketing expenses related to the developmentexpansion of the Costa Rica operations. TheAs a result, the segment’s operating expense ratio decreased 240increased to 46.9%, 90 basis points from 49.3% in 2015 to 46.9% in 2016, reflecting the increase in premiums during the period.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Operating Revenues
Premiums earned, net increased by $3.8 million, or 5.1% to $77.9 million as the result of premium growth in the segment’s Individual Life and Cancer lines of business as well as in the premiums assumed on reinsurance agreements.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred increased by $2.7 million, or 6.6%, to $43.4 million, mostly reflecting a higher volume of business during the year, particularly in the Cancer business which has a higher loss ratio, and an increase in the actuarial reserves. The loss ratio for the period increased from 54.9% in 2015 to 55.7% in 2016, or 80 basis points.
Underwriting and Other Expenses
Underwriting and other expenses increased by $1.0 million, or 2.8%, primarily reflecting higher development and marketing expenses related to the development of the Costa Rica operations. The segment’s operating expense ratio decreased 100 basis points from 47.5% in 2015 to 46.5% in 2016, reflecting the increase in premiums during the period.
Property and Casualty Insurance Operating Results
| | Three months ended June 30, | | | | | | Three months ended March 31, | |
(Dollar amounts in millions) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | |
(dollar amounts in millions) | | | 2017 | | | 2016 | |
Operating revenues: | | | | | | | | | | | | | | | | | | |
Premiums earned, net: | | | | | | | | | | | | | | | | | | |
Premiums written | | $ | 40.9 | | | $ | 39.1 | | | $ | 68.5 | | | $ | 67.0 | | | $ | 27.4 | | | $ | 27.6 | |
Premiums ceded | | | (13.1 | ) | | | (12.5 | ) | | | (23.5 | ) | | | (23.3 | ) | | | (10.1 | ) | | | (10.4 | ) |
Change in unearned premiums | | | (6.1 | ) | | | (4.1 | ) | | | (2.0 | ) | | | 1.6 | | | | 4.4 | | | | 4.1 | |
Premiums earned, net | | | 21.7 | | | | 22.5 | | | | 43.0 | | | | 45.3 | | | | 21.7 | | | | 21.3 | |
Net investment income | | | 2.3 | | | | 2.1 | | | | 4.3 | | | | 4.2 | | | | 1.9 | | | | 1.9 | |
Total operating revenues | | | 24.0 | | | | 24.6 | | | | 47.3 | | | | 49.5 | | | | 23.6 | | | | 23.2 | |
Operating costs: | | | | | | | | | | | | | | | | | | | | | | | | |
Claims incurred | | | 10.8 | | | | 11.4 | | | | 20.6 | | | | 22.7 | | | | 10.6 | | | | 9.7 | |
Underwriting and other expenses | | | 9.8 | | | | 10.7 | | | | 21.2 | | | | 22.8 | | | | 10.9 | | | | 11.4 | |
Total operating costs | | | 20.6 | | | | 22.1 | | | | 41.8 | | | | 45.5 | | | | 21.5 | | | | 21.1 | |
Operating income | | $ | 3.4 | | | $ | 2.5 | | | $ | 5.5 | | | $ | 4.0 | | | $ | 2.1 | | | $ | 2.1 | |
Additional data: | | | | | | | | | | | | | | | | | | | | | | | | |
Loss ratio | | | 49.8 | % | | | 50.7 | % | | | 47.9 | % | | | 50.1 | % | | | 48.8 | % | | | 45.5 | % |
Operating expense ratio | | | 45.2 | % | | | 47.6 | % | | | 49.3 | % | | | 50.3 | % | | | 50.2 | % | | | 53.5 | % |
Combined ratio | | | 95.0 | % | | | 98.3 | % | | | 97.2 | % | | | 100.4 | % | |
Three Months Ended June 30, 2016March 31, 2017 Compared to Three Months Ended June 30, 2015March 31, 2016
Operating Revenues
Total premiums written increaseddecreased by $1.8$0.2 million, or 4.6%0.7%, to $40.9$27.4 million, mostly resulting from higherdriven by lower sales of Commercial and Compulsory Vehicle Liabilitypackage products.
The premiums ceded to reinsurers decreased by $0.3 million, or 2.9%, mostly reflecting lower premiums written in Commercial insurance products.
The change in unearned premiums presents an increase of $2.0$0.3 million mostly resulting fromreflecting the segment’s higher volume ofsegments lower premiums written in 2016.2017 and lower cost.
Claims Incurred
Claims incurred decreasedincreased by $0.6$0.9 million, or 5.3%9.3%, to $10.8$10.6 million. The loss ratio decreasedincreased by 90330 basis points, to 49.8%48.8% during this period, primarily as a result of favorable loss experience in the General Liability and Surety business.
Underwriting and Other Expenses
Underwriting and other operating expenses decreased by $0.9 million, or 8.4%, to $9.8 million primarily due to the receipt of a refund distribution from the Joint Underwriting Association (JUA) during the 2016 period.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Operating Revenues
Total premiums written increased by $1.5 million, or 2.2%, to $68.5 million, mostly reflecting higher sales of Compulsory Vehicle Liability and Commercial insurance products.
The change in unearned premiums presents a decrease of $3.6 million mostly reflecting the segments higher volume of premiums written in 2016.
Claims Incurred
Claims incurred decreased by $2.1 million, or 9.3%, to $20.6 million. The loss ratio decreased by 220 basis points, to 47.9% during this period, primarily as a result of favorablean unfavorable loss experience in the Commercial and Personal Auto linelines of business.
Underwriting and Other Expenses
Underwriting and other operating expenses decreased by $1.6$0.5 million, or 7.0%4.4%, to $21.2$10.9 million mostly due to lower net commission expenses driven by a decrease in net premiums earned, and the receiptpersonnel costs. The operating expense ratio was 50.2%, 330 basis points lower than last year.
38
Liquidity and Capital Resources
Cash Flows
A summary of our major sources and uses of cash for the periods indicated is presented in the following table:
| | | | | Three months ended March 31, | |
(dollar amounts in millions) | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Sources (uses) of cash: | | | | | | | | | | | | |
Cash (used in) provided by operating activities | | $ | (10.6 | ) | | $ | 76.7 | | |
Net (purchases) proceeds of investment securities | | | (76.3 | ) | | | 69.9 | | |
Cash provided by operating activities | | | $ | 131.0 | | | $ | 31.3 | |
Net proceeds (purchases) of investment securities | | | | 0.4 | | | | (108.9 | ) |
Net capital expenditures | | | (2.7 | ) | | | (3.0 | ) | | | (3.3 | ) | | | (1.5 | ) |
Proceeds from long-term borrowings | | | | 24.3 | | | | - | |
Payments of long-term borrowings | | | (0.8 | ) | | | (11.8 | ) | | | (24.7 | ) | | | (0.4 | ) |
Proceeds from policyholder deposits | | | 7.9 | | | | 4.5 | | | | 4.1 | | | | 3.4 | |
Surrenders of policyholder deposits | | | (6.9 | ) | | | (6.3 | ) | | | (4.9 | ) | | | (2.9 | ) |
Repurchase and retirement of common stock | | | (14.6 | ) | | | (26.0 | ) | | | - | | | | (8.0 | ) |
Other | | | 2.3 | | | | (1.5 | ) | | | (11.4 | ) | | | 1.6 | |
Net (decrease) increase in cash and cash equivalents | | $ | (101.7 | ) | | $ | 102.5 | | |
Net increase (decrease) in cash and cash equivalents | | | $ | 115.5 | | | $ | (85.4 | ) |
Cash flow from operating activities decreasedincreased by $99.7 million for the three months ended March 31, 2017 as a result of higher claims paid by $262.7 million, offset in part bycompared to the three months ended March 31, 2016, principally due to an increase in premium collections of $160.3$67.1 million,, lower claims paid by $16.5 million and a decrease in cash paid to suppliers and employees of $11.1$14.4 million. The increasehigher premium collections follow the collection in claims paid and premiums collected is principally the resultadvance of the changeApril 2017 Medicare premiums from CMS.
Net proceeds from sales of investments securities primarily results from net cash flows received from the sales, maturities, and purchases of investment securities during the period following our asset/liability management strategy.
During the three months ended March 31, 2017, we received $24.3 million from a commercial bank in Puerto Rico related with a credit agreement entered into in December 2016. These proceeds were used during the 2017 period to prepay the outstanding principal amount of $24.0 million of the 6.6% senior unsecured notes.
There were no repurchase and retirement of common stock during the three months ended March 31, 2017.
The fluctuation in the Medicaid delivery model from an ASO agreementOther uses/sources of cash is attributed to a fully insured model effective April 1, 2015.
During 2016, we increasedchanges in the amount of investments in securities as part of our asset/liability management strategy using cash on hand.
Payments of long-term borrowings decreased by $11.0 million during the six months ended June 30, 2016, primarily due to an $11.0 million repayment of certain senior unsecured notes principal during the 2015 period.outstanding checks over bank balances.
In November 2015 the Company’s Board of Directors authorized a $25.0 million repurchase program of our Class B common stock. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the six months ended June 30, 2016, the Company repurchased and retired 651,947 shares of our Class B Common Stock at an average per share price of $22.50, for an aggregate cost of $14.6 million.
Financing and Financing Capacity
We have several short-term facilities available to address timing differences between cash receipts and disbursements. These short-term facilities are mostly in the form of arrangements to sell securities under repurchase agreements. As of June 30, 2016,March 31, 2017, we had $60.0 million of available credit under these facilities. There are no outstanding short-term borrowings under these facilities as of June 30, 2016.March 31, 2017.
On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes originally due December 2020 (the 6.6% notes). On October 1, 2010 and May 14, 2015 we repaid $25.0 million and $11.0 million, respectively, of the principal of these seniorThese unsecured notes. Amount currently outstanding is $24.0 million. The 6.6% notes contain certain non-financial covenants with which we arewere paid in compliance at June 30, 2016.full on January 11, 2017.
In addition, we areOn December 28, 2016, TSM entered into a party to a secured term loan$35.5 million credit agreement with a commercial bank in Puerto Rico. ThisThe agreement consists of three term loans: (i) Term Loan A in the principal amount of $11.2 million, (ii) Term Loan B in the principal amount of $20.2 million and (iii) Term Loan C in the principal amount of $4.1 million. Term Loan A matures in October 2023 while the Term Loans B and C mature in January 2024. Term Loan A was used to refinance the previous $41.0 million secured loan payable with originalthe same commercial bank in Puerto Rico. Proceeds from Term Loans B and C were received on January 11, 2017 and were used to prepay the outstanding principal balanceamount plus accrued interest of $41.0 million, bears interest at a rate equalthe 6.6% senior unsecured notes due January 2021 ($24.0 million). Pursuant to the London Interbank Offered Rate (LIBOR) plus 100 basis points and requires monthly principal repayments of $0.1 million. As of June 30, 2016, this secured loan had ancredit agreement, interest is payable on the outstanding balance of $12.0 millionthe Loan at the following annual rate: (i) 1% over LIBOR for Term Loan A, (ii) 2.75% over LIBOR for Term Loan B, and average annual interest rate of 1.41%. This secured(iii) 3.25% over LIBOR for Term Loan C. The loan is guaranteed by a first lien on our land, buildingsincludes certain financial and substantially all leasehold improvements, as collateral for the term of the agreements under a continuing general security agreement. This secured loan contains certain non-financial covenants, thatwhich are customary for this type of facility, including but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of June 30, 2016 we are in compliance with these covenants.control and dividends. Failure to meet these covenants may trigger the accelerated payment of the outstanding balance. As of March 31, 2017 we are in compliance with these covenants.
On November 4, 2015, March 11, 2016 TSS entered into a $50.0$30.0 million revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit had an interest rate of LIBOR plus 220 basis points and includes certain financial and non-financial covenants that are customary for this type of facility. This revolving loan agreement matured on March 11, 2017, and was not renewed.
On April 18, 2017, TSA entered into a $10.0 million revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit has an interest rate of 30-day LIBOR plus 25025 basis points, matures on November 4, 2016, and contains certain financial and non-financial covenants that are customary for this type of facility. The agreement stipulates that any unused balance would become unavailable should TSS stop collecting payments under the Medicaid contract for four consecutive weeks.
On March 11, 2016, TSS entered into a $30.0 million revolving loan agreement with a commercial bank in Puerto Rico. This line of credit, unused as of June 30, 2016, has an interest rate of LIBOR plus 220 basis points, matures on March 11, 2017, and contains certain financial and non-financial covenants that are customary for this type of facility.
We anticipate that we will have sufficient liquidity to support our currently expected needs.
Further details regarding the senior unsecured notes and the credit agreements are incorporated by reference to “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business. We have exposure to market risk mostly in our investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in our exposure to financial market risks since December 31, 2015.2016. A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
In 2016 we have increased our market risk exposure to equity instruments to include certain mutual funds, whose underlying assets are mostly comprised of US and international equities, debt instruments and loan participations, and a smaller amount of private investments. We hold these positions in our available-for-sale portfolio. The mutual funds invest primarily in equity and debt securities issued or guaranteed by corporations and financial institutions that are either unrated or have non-investment grade ratings from either Standard & Poor’s or Moody’s. The private investments are comprised of private equity style closed end funds, which make direct equity and debt investments. Our additional investments increase our exposure to equity price risk and credit risk. We manage this indirect exposure to credit risk by closely monitoring the performance of these mutual funds. Assuming an immediate decrease of 10% in the market value of our investments in equity securities as of June 30, 2016 and December 31, 2015, the hypothetical loss in the fair value of these investments would have been approximately $31.0 million and $19.7 million, respectively. See note 3 to consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Evaluation of Disclosure Controls and Procedures
BasedIn connection with the preparation of this Quarterly Report on an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures conductedForm 10-Q, management, under the supervision and with the participation of management, the chief executive officer (CEO) and the chief financial officer, (CFO) concluded that, as of June 30, 2016, which is the endconducted an evaluation of the period covered by this Quarterly Report on Form 10-Q, our disclosureeffectiveness of the “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. Disclosure controls and procedures are effectivedesigned to ensure that information required to be disclosed by the Corporation in the report that it filesreports filed or submitssubmitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the CEOchief executive officer and CFO, as appropriatechief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of March 31, 2017, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.
There were no significant changes in our disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the CEOchief executive officer and CFOchief financial officer completed the evaluation referred to above.
Changes in Internal Controls Over Financial Reporting
No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended June 30, 2016March 31, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II – Other Information
For a description of legal proceedings that have experienced significant developments during this quarter, see note 1413 to the unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q.
For a description of our risk factors see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
43The following text updates the disclosure included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016, under the sub-caption “The health care reform law and the implementation of that law could have a material adverse effect on our business, financial condition, cash flows, or results of operations.”
On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Further, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. Following the passage of the Budget Resolution, on March 6, 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act, which, if enacted, would amend or repeal significant portions of the ACA. Among other changes, the American Health Care Act would sunset the annual insurance industry assessment as of December 31, 2017, essentially eliminate the individual and employer mandates by eliminating penalties and providing retroactive relief for failing to maintain or provide minimum essential coverage, and permit insurers to charge individuals a 30% surcharge on premiums for failing to demonstrate continuous coverage. The American Health Care Act would also make significant changes to Medicaid by, among other things, making the ACA Medicaid expansion optional for states, repealing the ACA requirement that state Medicaid plans provide the same essential health benefits that are required by plans available through the exchanges, implementing a per capita cap on federal payments to states beginning in fiscal year 2020, and changing certain eligibility requirements. On May 4, 2017, the U.S. House of Representatives approved the American Health Care Act to repeal portions of the ACA. The American Health Care Act will now be considered by the U.S. Senate. While it is uncertain when or if the provisions in the American Health Care Act will become law, or the extent to which any such changes may impact our business, it is clear that Congress is taking concrete steps to repeal and replace certain aspects of the ACA.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of Equity Securities by the IssuerNot applicable.
The following table presents information related to our repurchases of common stock for the period indicated:
(Dollar amounts in millions, except per share data) | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Programs ¹ | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | |
| | | | | | | | | | | | |
April 1, 2016 to April 30, 2016 | | | - | | | $ | - | | | | - | | | $ | 13.3 | |
May 1, 2016 to May 31, 2016 | | | 177,678 | | | | 22.42 | | | | 177,678 | | | | 9.3 | |
June 1, 2016 to June 30, 2016 | | | 107,168 | | | | 23.75 | | | | 107,168 | | | | 6.8 | |
¹ | In November 2015 the Company's Board of Directors authorized a $25.0 million Share Repurchase Program of its Class B common stock. |
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Mine Safety Disclosures |
Not applicable.
Not applicable.
Exhibits | Description |
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3(i)(c) | Articles of Incorporation of Triple-S Management Corporation, incorporated by reference to Exhibit 3(i)(c) to TSM’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-33865). |
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| Amendments to Article Tenth and Thirteenth of the Amended and Restated Articles of Incorporation of Triple-S Management Corporation. |
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| Composite Amended and Restated Articles of Incorporation of Triple-S Management Corporation. |
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11 | Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q. |
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| Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a). |
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| Certification of the Executive Vice President and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a). |
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| Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350. |
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| Certification of the Executive Vice President and Chief Financial Officer required pursuant to 18 U.S.C Section 1350. |
All other exhibits for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | Triple-S Management Corporation | |
| | | | Registrant | |
| | | | | |
Date: | August 5, 2016May 9, 2017 | | By: | /s/ Roberto García-Rodríguez | |
| | | | Roberto García-Rodríguez | |
| | | | President and Chief Executive Officer | |
| | | | | |
Date: | August 5, 2016May 9, 2017 | | By: | /s/ Juan J. Román-Jiménez | |
| | | | Juan J. Román-Jiménez | |
| | | | Executive Vice President and Chief Financial Officer | |