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Section 1: 10-Q (10-Q)


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 March 31, 2018
 
Or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from           to _____

COMMISSION FILE NUMBER:  001-33865
 
Triple-S Management Corporation
 
Puerto Rico
 
66-0555678
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico
 
 
00920
(Address of principal executive offices)
 
(Zip code)
 
(787) 749-4949
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 
Emerging growth company 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes  No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Title of each class
 
Outstanding at March 31, 2018
Common Stock Class A, $1.00 par value
 
950,968
Common Stock Class B, $1.00 par value
 
22,331,922
 


Triple-S Management Corporation
 
FORM 10-Q
 
For the Quarter Ended March 31, 2018
 
Table of Contents
 
Part I – Financial Information
3
   
  Item 1.
Financial Statements
3
       
   Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
       
   
Cautionary Statement Regarding Forward-Looking Information
33
   
Overview
33
   
Recent Developments
34
   
Recent Accounting Standards
36
   
Managed Care Membership
36
   
Consolidated Operating Results
37
   
Managed Care Operating Results
39
   
Life Insurance Operating Results
41
   
Property and Casualty Insurance Operating Results
42
   
Liquidity and Capital Resources
43
       
  Item 3.
Quantitative and Qualitative Disclosures about Market Risk
45
       
  Item 4.
Controls and Procedures
45
       
Part II – Other Information
45
   
  Item 1.
Legal Proceedings
45
       
  Item 1A.
Risk Factors
45
       
  Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
       
  Item 3.
Defaults Upon Senior Securities
46
       
  Item 4.
Mine Safety Disclosures
46
       
  Item 5.
Other Information
46
       
  Item 6.
Exhibits
46
       
SIGNATURES
47
 
2

Table of Contents
Part I – Financial Information
 
Item 1.
Financial Statements
 
Triple-S Management Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)

 
    
March 31,
2018
   
December 31,
2017
 
Assets
           
Investments and cash:
           
Fixed maturities available for sale, at fair value
 
$
1,323,777
   
$
1,216,788
 
Fixed maturities held to maturity, at amortized cost
   
2,483
     
2,319
 
Equity investments, at fair value
   
272,189
     
342,309
 
Other invested assets, at net asset value
   
44,149
     
34,984
 
Policy loans
   
9,262
     
9,077
 
Cash and cash equivalents
   
212,610
     
198,941
 
Total investments and cash
   
1,864,470
     
1,804,418
 
Premiums and other receivables, net
   
775,258
     
899,327
 
Deferred policy acquisition costs and value of business acquired
   
202,581
     
200,788
 
Property and equipment, net
   
76,825
     
74,716
 
Deferred tax asset
   
65,065
     
65,123
 
Goodwill
   
25,397
     
25,397
 
Other assets
   
91,395
     
46,996
 
Total assets
 
$
3,100,991
   
$
3,116,765
 
Liabilities and Stockholders' Equity
               
Claim liabilities
 
$
1,034,761
   
$
1,106,876
 
Liability for future policy benefits
   
344,536
     
339,507
 
Unearned premiums
   
174,056
     
86,349
 
Policyholder deposits
   
176,704
     
176,534
 
Liability to Federal Employees' Health Benefits and
               
Federal Employees' Programs
   
56,656
     
52,287
 
Accounts payable and accrued liabilities
   
334,945
     
354,894
 
Deferred tax liability
   
19,127
     
21,891
 
Long-term borrowings
   
31,275
     
32,073
 
Liability for pension benefits
   
33,382
     
33,672
 
Total liabilities
   
2,205,442
     
2,204,083
 
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 March 31, 2018 and December 31, 2017, respectively
   
951
     
951
 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 22,331,922 and 22,627,077 shares at March 31, 2018 and December 31, 2017, respectively
   
22,332
     
22,627
 
Additional paid-in capital
   
39,153
     
53,142
 
Retained earnings
   
829,186
     
785,390
 
Accumulated other comprehensive income
   
4,609
     
51,254
 
Total Triple-S Management Corporation stockholders' equity
   
896,231
     
913,364
 
Non-controlling interest in consolidated subsidiary
   
(682
)
   
(682
)
Total stockholders' equity
   
895,549
     
912,682
 
Total liabilities and stockholders' equity
 
$
3,100,991
   
$
3,116,765
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
3

Triple-S Management Corporation
Condensed Consolidated Statements of Earnings (Unaudited)
(dollar amounts in thousands, except per share data)
 
   
Three months ended
March 31,
 
   
2018
   
2017
 
Revenues:
           
Premiums earned, net
 
$
752,034
   
$
702,273
 
Administrative service fees
   
3,348
     
4,379
 
Net investment income
   
13,755
     
12,016
 
Other operating revenues
   
1,071
     
965
 
Total operating revenues
   
770,208
     
719,633
 
Net realized investment gains
   
2,942
     
336
 
Net unrealized investment losses on equity investments
   
(16,199
)
   
-
 
Other income, net
   
1,163
     
2,525
 
Total revenues
   
758,114
     
722,494
 
Benefits and expenses:
               
Claims incurred
   
618,989
     
620,863
 
Operating expenses
   
133,134
     
110,946
 
Total operating costs
   
752,123
     
731,809
 
Interest expense
   
1,690
     
1,686
 
Total benefits and expenses
   
753,813
     
733,495
 
Income (loss) before taxes
   
4,301
     
(11,001
)
Income taxes
   
387
     
(6,658
)
Net income (loss)
   
3,914
     
(4,343
)
Less: Net loss attributable to non-controlling interest
   
-
     
1
 
Net income (loss) attributable to Triple-S Management Corporation
 
$
3,914
   
$
(4,342
)
Earnings per share attributable to Triple-S Management Corporation
               
Basic net income (loss) per share
 
$
0.17
   
$
(0.18
)
Diluted net income (loss) per share
 
$
0.17
   
$
(0.18
)
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
4

Triple-S Management Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(dollar amounts in thousands)
 
   
Three months ended
March 31,
 
   
2018
   
2017
 
Net income (loss)
 
$
3,914
   
$
(4,343
)
Other comprehensive (loss) income, net of tax:
               
Net unrealized change in fair value of available for sale securities, net of taxes
   
(6,894
)
   
8,472
 
Defined benefit pension plan:
               
Actuarial loss, net
   
131
     
53
 
Total other comprehensive (loss) income, net of tax
   
(6,763
)
   
8,525
 
Comprehensive (loss) income
   
(2,849
)
   
4,182
 
Comprehensive income attributable to non-controlling interest
   
-
     
1
 
Comprehensive (loss) income attributable to Triple-S Management Corporation
 
$
(2,849
)
 
$
4,183
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
5

Triple-S Management Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollar amounts in thousands)
 
   
2018
   
2017
 
Balance at January 1
 
$
913,364
   
$
863,163
 
Share-based compensation
   
391
     
(1,443
)
Repurchase and retirement of common stock
   
(14,675
)
   
-
 
Comprehensive (loss) income
   
(2,849
)
   
4,183
 
Total Triple-S Management Corporation stockholders' equity
   
896,231
     
865,903
 
Non-controlling interest in consolidated subsidiary
   
(682
)
   
(678
)
Balance at March 31
 
$
895,549
   
$
865,225
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
6

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

   
Three months ended
March 31,
 
   
2018
   
2017
 
Cash flows from operating activities:
           
Net income (loss)
 
$
3,914
   
$
(4,343
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
   
3,410
     
2,990
 
Net amortization of investments
   
1,939
     
2,356
 
Additions (reductions) to the allowance for doubtful receivables
   
709
     
(3,209
)
Deferred tax benefit
   
(1,503
)
   
(7,525
)
Net realized investment gain on sale of securities
   
(2,942
)
   
(336
)
Net unrealized loss on equity investments
   
16,199
     
-
 
Interest credited to policyholder deposits
   
1,094
     
991
 
Share-based compensation
   
391
     
(1,443
)
Decrease (increase) in assets:
               
Premium and other receivables, net
   
123,360
     
(3,263
)
Deferred policy acquisition costs and value of business acquired
   
(161
)
   
(822
)
Deferred taxes
   
431
     
(265
)
Other assets
   
(40,489
)
   
(37
)
(Decrease) increase in liabilities:
               
Claim liabilities
   
(72,115
)
   
42,361
 
Liability for future policy benefits
   
5,029
     
4,930
 
Unearned premiums
   
87,707
     
84,470
 
Liability to Federal Employees' Health Benefits and Federal Employees' Programs
   
4,369
     
2,836
 
Accounts payable and accrued liabilities
   
(869
)
   
11,274
 
Net cash provided by operating activities
   
130,473
     
130,965
 
(Continued)
               
 
7

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

   
Three months ended
March 31,
 
   
2018
   
2017
 
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
443,419
   
$
26,023
 
Fixed maturities matured/called
   
5,368
     
5,001
 
Securities held to maturity:
               
Fixed maturities matured/called
   
1,048
     
703
 
Equity investments sold
   
113,863
     
10,272
 
Other invested assets sold
   
845
     
-
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(575,694
)
   
(33,738
)
Securities held to maturity:
               
Fixed maturities
   
(1,212
)
   
(382
)
Equity investments
   
(49,591
)
   
(5,482
)
Other invested assets
   
(9,683
)
   
-
 
Increase in other investments
   
(4,136
)
   
(2,044
)
Net change in policy loans
   
(185
)
   
18
 
Net capital expenditures
   
(4,861
)
   
(3,295
)
Net cash used in investing activities
   
(80,819
)
   
(2,924
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
(19,992
)
   
(11,401
)
Repayments of long-term borrowings
   
(810
)
   
(24,676
)
Proceeds from long-term borrowings
   
-
     
24,266
 
Repurchase and retirement of common stock
   
(14,259
)
   
-
 
Proceeds from policyholder deposits
   
6,237
     
4,116
 
Surrenders of policyholder deposits
   
(7,161
)
   
(4,890
)
Net cash used in financing activities
   
(35,985
)
   
(12,585
)
Net increase in cash and cash equivalents
   
13,669
     
115,456
 
Cash and cash equivalents:
               
Beginning of period
   
198,941
     
103,428
 
End of period
 
$
212,610
   
$
218,884
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
8

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(1)
Basis of Presentation
 
The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited.  In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries.  The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America (GAAP or U.S. GAAP) for complete financial statement presentation.  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, 2017.
 
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 ended March 31, 2018 are not necessarily indicative of the results for the full year ending December 31, 2018.
 
(2)
Significant Accounting Policies
 
Investments
 
Fixed maturities and other invested assets
 
Investment in debt securities at March 31, 2018 and December 31, 2017 consists mainly of obligations of government‑sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, obligations of the Commonwealth of Puerto Rico and its instrumentalities, municipal securities, corporate bonds, residential mortgage-backed securities, collateralized mortgage obligations.  The Company classifies its debt securities in one of two categories: available-for-sale or held-to-maturity.  Securities classified as held-to-maturity are those securities in which the Company has the ability and intent to hold until maturity.  All other securities not included in held-to-maturity are classified as available-for-sale.
 
Available-for-sale securities are recorded at fair value.  The fair values of debt securities (both available-for-sale and held-to-maturity investments) are based on quoted market prices for those or similar investments at the reporting date.  Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts, respectively.  Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized.  Realized gains and losses from the sale of available-for-sale securities are included in earnings and are determined on a specific‑identification basis.
 
Transfers of securities between categories are recorded at fair value at the date of transfer.  Unrealized holding gains or losses associated with transfers of securities from held-to-maturity to available-for-sale are recorded as a separate component of other comprehensive income.  The unrealized holding gains or losses included in the separate component of other comprehensive income for securities transferred from available-for-sale to held-to-maturity, are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.
 
9

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that such securities will not have to be sold, but the Company expects not to fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income. Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.
 
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition.
 
A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.  To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.  Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, market conditions, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
 
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method.  Dividend and interest income are recognized when earned.
 
The Company regularly invests in mortgaged-backed securities and other securities subject to prepayment and call risk.  Significant changes in prevailing interest rates may adversely affect the timing and amount of cash flows on such securities.  In addition, the amortization of market premium and accretion of market discount for mortgaged-backed securities is based on historical experience and estimates of future payment speeds on the underlying mortgage loans.  Actual prepayment speeds may differ from original estimates and may result in material adjustments to amortization or accretion recorded in future periods.
 
Other invested assets at March 31, 2018 and December 31, 2017 consist mainly of alternative investments in partnerships which invest in several private debt and private equity funds.  Portfolios are diversified by vintage year, stage, geography, business sectors and number of investments. These investments are not redeemable with the funds. Distributions from each fund are received as the underlying investments of the funds are liquidated. It is estimated that the underlying assets of the funds will be liquidated in the next 5 to 12 years. The fair values of the investments in this class have been estimated using the net asset value (NAV) of the Company’s ownership interest in the partnerships. Total unfunded capital commitments for these positions as of March 31, 2018 amounted to $107,035.  The remaining average commitments period is approximately three years.
 
10

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Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Equity investments
 
Investment in equity securities at March 31, 2018 and December 31, 2017 consists of mutual funds whose underlying assets are comprised of domestic equity securities, international equity securities and higher risk fixed income instruments. Equity investments are recorded at fair value.  The fair values of equity investments are based on quoted market prices.  Unrealized holding gains and losses, on equity investments are included in earnings.  Realized gains and losses from the sale of equity investments are included in earnings and are determined on a specific‑identification basis.
 
Recent Accounting Standards
 
On February 28, 2018, the Financial Accounting Standard Board (FASB) issued guidance for Technical Corrections and Improvement to Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.  Areas for correction or improvement include (1) equity securities without a readily determinable fair value—discontinuation, (2) equity securities without a readily determinable fair value—adjustments, (3) forward contracts and purchased options, (4) presentation requirements for certain fair value option liabilities, (5) fair value option liabilities denominated in a foreign currency, and (6) transition guidance for equity securities without a readily determinable fair value. For public companies, these amendments, will be applied on a prospective basis, for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Public entities with fiscal years beginning between December 15, 2017 and June 15, 2018 are not required to adopt these amendments until the interim period beginning after June 15, 2018. The adoption of this guidance should not have a material impact on the presentation of the Company’s consolidated result of operations.

Recently Adopted Accounting Standards
 
On January 5, 2016, the FASB issued guidance to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  Among the many targeted improvements to U.S. GAAP are (1) requiring equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the fair value 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 for 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. The Company also adopted guidance issued by FASB on March 9, 2018 that removes the previous guidance for Other Than Temporary Impairment of Certain Investments in Equity Securities as required by SEC Staff Accounting Bulletin (SAB) No. 117 and SEC Release No. 33-9273, since it is no longer applicable.   For public companies, these amendments became effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this guidance for equity securities effective January 1, 2018.  A cumulative-effect adjustment of $39,882 was made from accumulated other comprehensive income to the beginning retained earnings at the implementation date.

Other than the accounting pronouncements disclosed above, there were no other new accounting pronouncements issued during the three months ended March 31, 2018 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.
 
11

Table of Contents
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 the Company’s investments in securities by major security type and class of security at March 31, 2018 and December 31, 2017, were as follows:

   
March 31, 2018
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
                         
Fixed maturities available for sale
                       
Obligations of government- sponsored enterprises
 
$
1,441
   
$
6
   
$
-
   
$
1,447
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
268,264
     
570
     
(335
)
   
268,499
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
8,117
     
9
     
-
     
8,126
 
Municipal securities
   
758,689
     
24,033
     
(1,587
)
   
781,135
 
Corporate bonds
   
187,392
     
14,349
     
(1,168
)
   
200,573
 
Residential mortgage-backed securities
   
52,624
     
149
     
(764
)
   
52,009
 
Collateralized mortgage obligations
   
12,335
     
6
     
(353
)
   
11,988
 
Total fixed maturities available for sale
 
$
1,288,862
   
$
39,122
   
$
(4,207
)
 
$
1,323,777
 
 
   
March 31, 2018
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Fixed maturities held to maturity
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
617
   
$
131
   
$
-
   
$
748
 
Residential mortgage-backed securities
   
191
     
2
     
-
     
193
 
Certificates of deposit
   
1,675
     
-
     
-
     
1,675
 
Total
 
$
2,483
   
$
133
   
$
-
   
$
2,616
 
 
   
March 31, 2018
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Equity investments - Mutual Funds
 
$
238,539
   
$
35,111
   
$
(1,461
)
 
$
272,189
 
 
12

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
March 31, 2018
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Other invested assets - Alternative investments
 
$
43,859
   
$
927
   
$
(637
)
 
$
44,149
 
 
   
December 31, 2017
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Securities available for sale
                       
Fixed maturities
                       
Obligations of government- sponsored enterprises
 
$
1,431
   
$
13
   
$
-
   
$
1,444
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
118,858
     
41
     
(550
)
   
118,349
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
8,059
     
34
     
-
     
8,093
 
Municipal securities
   
771,789
     
30,468
     
(1,467
)
   
800,790
 
Corporate bonds
   
217,046
     
17,767
     
(489
)
   
234,324
 
Residential mortgage-backed securities
   
32,465
     
2
     
(355
)
   
32,112
 
Collateralized mortgage obligations
   
22,003
     
10
     
(337
)
   
21,676
 
Total fixed maturities
   
1,171,651
     
48,335
     
(3,198
)
   
1,216,788
 
Equity securities
                               
Mutual Funds
   
292,460
     
50,072
     
(223
)
   
342,309
 
Alternative investments
   
34,669
     
559
     
(244
)
   
34,984
 
Total equity securities
   
327,129
     
50,631
     
(467
)
   
377,293
 
Total
 
$
1,498,780
   
$
98,966
   
$
(3,665
)
 
$
1,594,081
 
 
13

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
December 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
 
$
617
   
$
154
   
$
-
   
$
771
 
Residential mortgage-backed securities
   
191
     
2
     
-
     
193
 
Certificates of deposit
   
1,511
     
-
     
-
     
1,511
 
Total
 
$
2,319
   
$
156
   
$
-
   
$
2,475
 
 
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 March 31, 2018 and December 31, 2017 were as follows:
 
   
March 31, 2018
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
                                                       
Fixed maturities available for sale
                                                     
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
 
$
70,224
   
$
(335
)
   
6
   
$
-
   
$
-
     
-
   
$
70,224
   
$
(335
)
   
6
 
Municipal securities
   
173,011
     
(1,581
)
   
26
     
712
     
(6
)
   
1
     
173,723
     
(1,587
)
   
27
 
Corporate bonds
   
94,616
     
(1,168
)
   
21
     
-
     
-
     
-
     
94,616
     
(1,168
)
   
21
 
Residential mortgage-backed securities
   
30,529
     
(764
)
   
19
     
-
     
-
     
-
     
30,529
     
(764
)
   
19
 
Collateralized mortgage obligations
   
3,464
     
(94
)
   
1
     
7,898
     
(259
)
   
2
     
11,362
     
(353
)
   
3
 
Total fixed maturities
 
$
371,844
   
$
(3,942
)
   
73
   
$
8,610
   
$
(265
)
   
3
   
$
380,454
   
$
(4,207
)
   
76
 
                                                                         
Other invested assets - Alternative investments
 
$
16,031
   
$
(185
)
   
5
   
$
5,694
   
$
(452
)
   
2
   
$
21,725
   
$
(637
)
   
7
 
 
14

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
December 31, 2017
 
   
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
                                                     
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
 
$
96,617
   
$
(550
)
   
7
   
$
-
   
$
-
     
-
   
$
96,617
   
$
(550
)
   
7
 
Municipal securities
   
162,731
     
(1,467
)
   
27
     
-
     
-
     
-
     
162,731
     
(1,467
)
   
27
 
Corporate bonds
   
80,374
     
(489
)
   
16
     
-
     
-
     
-
     
80,374
     
(489
)
   
16
 
Residential mortgage-backed securities
   
31,736
     
(355
)
   
19
     
-
     
-
     
-
     
31,736
     
(355
)
   
19
 
Collateralized mortgage obligations
   
13,630
     
(239
)
   
3
     
7,294
     
(98
)
   
2
     
20,924
     
(337
)
   
5
 
Total fixed maturities
   
385,088
     
(3,100
)
   
72
     
7,294
     
(98
)
   
2
     
392,382
     
(3,198
)
   
74
 
Equity securities
                                                                       
Mutual funds
   
42,983
     
(223
)
   
6
     
-
     
-
     
-
     
42,983
     
(223
)
   
6
 
Alternative investments
   
9,986
     
(212
)
   
5
     
3,162
     
(32
)
   
1
     
13,148
     
(244
)
   
6
 
Total equity securities
   
52,969
     
(435
)
   
11
     
3,162
     
(32
)
   
1
     
56,131
     
(467
)
   
12
 
Total for securities available for sale
 
$
438,057
   
$
(3,535
)
   
83
   
$
10,456
   
$
(130
)
   
3
   
$
448,513
   
$
(3,665
)
   
86
 

The Company reviews the available for sale and other invested assets portfolios under the Company’s impairment review policy.  Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material 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.
 
Obligations of U.S. Government Instrumentalities and Municipal Securities:  The unrealized losses on the Company’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 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.
 
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.
 
Residential mortgage-backed securities and Collateralized mortgage obligations: The unrealized losses on investments in residential mortgage-backed securities and 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 Company owns. The Company 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 Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company expects to collect all contractual cash flows.
 
15

Table of Contents
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:

   
March 31, 2018
 
   
Amortized
cost
   
Estimated
fair value
 
Fixed maturities available for sale
           
Due in one year or less
   
29,553
     
29,684
 
Due after one year through five years
   
382,708
     
383,269
 
Due after five years through ten years
   
350,676
     
353,952
 
Due after ten years
   
460,966
     
492,875
 
Residential mortgage-backed securities
   
52,624
     
52,009
 
Collateralized mortgage obligations
   
12,335
     
11,988
 
   
$
1,288,862
   
$
1,323,777
 
Fixed maturities held to maturity
               
Due in one year or less
   
1,675
     
1,675
 
Due after ten years
   
617
     
748
 
Residential mortgage-backed securities
   
191
     
193
 
   
$
2,483
   
$
2,616
 
 
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.
 
16

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Information regarding realized and unrealized gains and losses from investments is as follows:

 
 
 
Three months ended
March 31,
 
 
2018
   
2017
 
Realized gains (losses)
           
Fixed maturity securities:
           
Securities available for sale:
           
Gross gains
 
$
172
   
$
17
 
Gross losses
   
(7,930
)
   
(119
)
Total debt securities
   
(7,758
)
   
(102
)
Equity investments:
               
Gross gains
   
8,203
     
438
 
Gross losses
   
(499
)
   
-
 
Total equity securities
   
7,704
     
438
 
Other invested assets:
               
Gross gains
   
3,207
     
-
 
Gross losses
   
(211
)
   
-
 
Total other invested assets
   
2,996
     
-
 
Net realized investment gains
 
$
2,942
   
$
336
 

 
 
Three months ended
March 31,
 
 
2018
   
2017
 
Changes in net unrealized gains (losses):
           
Recognized in accumulated other comprehensive income:
           
Fixed maturities – available for sale
 
$
(10,222
)
 
$
(439
)
Other invested assets
   
(25
)
   
11,143
 
 
$
(10,247
)
 
$
10,704
 
Not recognized in the consolidated financial statements:
               
Fixed maturities – held to maturity
 
$
(23
)
 
$
2
 
 
The change in deferred tax liability on unrealized gains recognized in accumulated other comprehensive income during the three months ended March 31, 2018 and 2017 was $3,679 and $2,136, respectively.
 
As of March 31, 2018 and December 31, 2017, no individual investment in securities exceeded 10% of stockholders’ equity.
 
17

Table of Contents
Triple-S Management Corporation
Notes 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:

   
March 31,
2018
   
December 31,
2017
 
Premium
 
$
84,731
   
$
103,027
 
Self-funded group receivables
   
40,236
     
39,859
 
FEHBP
   
14,084
     
13,346
 
Agent balances
   
29,346
     
32,818
 
Accrued interest
   
12,417
     
14,331
 
Reinsurance recoverable
   
552,615
     
661,679
 
Other
   
78,053
     
70,150
 
     
811,482
     
935,210
 
Less allowance for doubtful receivables:
               
Premium
   
27,002
     
26,490
 
Other
   
9,222
     
9,393
 
     
36,224
     
35,883
 
Total premium and other receivables, net
 
$
775,258
   
$
899,327
 

As of March 31, 2018 and December 31, 2017, the Company had premiums and other receivables of $51,976 and $81,838, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of March 31, 2018 and December 31, 2017 were $17,009 and $16,436, respectively.
 
18

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(5)
Fair Value Measurements
 
Our condensed consolidated balance sheets include the following financial instruments: securities available for sale, equity investments, 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 measured at fair value on a recurring basis and are disclosed below. These assets are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2017 Annual Report on Form 10-K.
 
The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:

   
March 31, 2018
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Fixed maturity securities available for sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
1,447
   
$
-
   
$
1,447
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
268,499
     
-
     
-
     
268,499
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
8,126
     
-
     
8,126
 
Municipal securities
   
-
     
781,135
     
-
     
781,135
 
Corporate bonds
   
-
     
200,573
     
-
     
200,573
 
Residential agency mortgage-backed securities
   
-
     
52,009
     
-
     
52,009
 
Collateralized mortgage obligations
   
-
     
11,988
     
-
     
11,988
 
Total fixed maturities
 
$
268,499
   
$
1,055,278
   
$
-
   
$
1,323,777
 
                                 
Equity investments
 
$
138,685
   
$
133,504
   
$
-
   
$
272,189
 
                                 
Alternative investments - measured at net asset value
 
$
-
   
$
-
   
$
-
   
$
44,149
 
 
   
December 31, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
1,444
   
$
-
   
$
1,444
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
118,349
     
-
     
-
     
118,349
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
8,093
     
-
     
8,093
 
Municipal securities
   
-
     
800,790
     
-
     
800,790
 
Corporate bonds
   
-
     
234,324
     
-
     
234,324
 
Residential agency mortgage-backed securities
   
-
     
32,112
     
-
     
32,112
 
Collateralized mortgage obligations
   
-
     
21,676
     
-
     
21,676
 
Total fixed maturities
   
118,349
     
1,098,439
     
-
     
1,216,788
 
Equity securities - Mutual funds
   
193,160
     
149,149
     
-
     
342,309
 
Alternative investments - measured at net asset value
   
-
     
-
     
-
     
34,984
 
Total equity securities
   
193,160
     
149,149
     
-
     
377,293
 
                                 
Total
 
$
311,509
   
$
1,247,588
   
$
-
   
$
1,594,081
 
 
19

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
There were no transfers between Levels 1 and 2 during the three months ended March 31, 2018 and 2017.
 
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 March 31, 2018 and December 31, 2017 are as follows:
 
   
March 31, 2018
 
   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
9,262
   
$
-
   
$
9,262
   
$
-
   
$
9,262
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
176,704
   
$
-
   
$
176,704
   
$
-
   
$
176,704
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
31,541
     
-
     
31,541
     
-
     
31,541
 
Total liabilities
 
$
208,245
   
$
-
   
$
208,245
   
$
-
   
$
208,245
 
 
   
December 31, 2017
 
   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
9,077
   
$
-
   
$
9,077
   
$
-
   
$
9,077
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
176,534
   
$
-
   
$
176,534
   
$
-
   
$
176,534
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
32,350
     
-
     
32,350
     
-
     
32,350
 
Total liabilities
 
$
208,884
   
$
-
   
$
208,884
   
$
-
   
$
208,884
 
 
20

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(6)
Claim Liabilities
 
A reconciliation of the beginning and ending balances of claim liabilities is as follows:

   
Three months ended
March 31, 2018
 
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
                   
Claim liabilities at beginning of period
 
$
367,357
   
$
739,519
   
$
1,106,876
 
Reinsurance recoverable on claim liabilities
   
-
     
(633,099
)
   
(633,099
)
Net claim liabilities at beginning of period
   
367,357
     
106,420
     
473,777
 
Claims incurred
                       
Current period insured events
   
603,947
     
30,907
     
634,854
 
Prior period insured events
   
(20,226
)
   
(1,818
)
   
(22,044
)
Total
   
583,721
     
29,089
     
612,810
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
322,388
     
7,021
     
329,409
 
Prior period insured events
   
226,246
     
22,746
     
248,992
 
Total
   
548,634
     
29,767
     
578,401
 
Net claim liabilities at end of period
   
402,444
     
105,742
     
508,186
 
Reinsurance recoverable on claim liabilities
   
-
     
526,575
     
526,575
 
Claim liabilities at end of period
 
$
402,444
   
$
632,317
   
$
1,034,761
 
 
*
Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations.
 
21

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
Three months ended
March 31, 2017
 
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
                   
Claim liabilities at beginning of period
 
$
349,047
   
$
138,896
   
$
487,943
 
Reinsurance recoverable on claim liabilities
   
-
     
(38,998
)
   
(38,998
)
Net claim liabilities at beginning of period
   
349,047
     
99,898
     
448,945
 
Claims incurred
                       
Current period insured events
   
602,620
     
28,226
     
630,846
 
Prior period insured events
   
(15,340
)
   
(1,333
)
   
(16,673
)
Total
   
587,280
     
26,893
     
614,173
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
350,450
     
7,965
     
358,415
 
Prior period insured events
   
192,352
     
17,945
     
210,297
 
Total
   
542,802
     
25,910
     
568,712
 
Net claim liabilities at end of period
   
393,525
     
100,881
     
494,406
 
Reinsurance recoverable on claim liabilities
   
-
     
35,898
     
35,898
 
Claim liabilities at end of period
 
$
393,525
   
$
136,779
   
$
530,304
 
 
*
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, 2018 and 2017 are due primarily to better than expected 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 $6,179 and $6,690 during the three months ended March 31, 2018 and 2017, respectively.
 
22

Table of Contents
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, 2018.

Incurred
Year
 
 
Total of IBNR Liabilities Plus Expected
Development on Reported Claims
 
2017
 
   
44,970
 
2018
 
   
281,559
 

(7)
Pension Plan
 
The components of net periodic benefit cost were as follows:
 
   
Three months ended
March 31,
 
   
2018
   
2017
 
Components of net periodic benefit cost:
           
Interest cost
 
$
1,693
   
$
1,798
 
Expected return on assets
   
(2,281
)
   
(2,199
)
Amortization of actuarial loss
   
215
     
86
 
Settlement loss
   
325
     
-
 
Net periodic benefit cost
 
$
(48
)
 
$
(315
)

Employer Contributions:  The Company disclosed in its audited consolidated financial statements for the year ended December 31, 2017 that it expected to contribute $2,000 to the pension program in 2018.  As of March 31, 2018, the Company has not made contributions to the pension program.
 
23

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(8)
Comprehensive Income
 
The accumulated balances for each classification of other comprehensive income, net of tax, are as follows:

   
Three months ended
March 31,
 
   
2018
   
2017
 
             
Net Unrealized Gain on Securities Beginning Balance
 
$
76,238
   
$
62,371
 
Unrealized loss reclassified to beginning retained earnings as a result of implementation new accounting pronouncement
   
(39,882
)
   
-
 
Other comprehensive income before reclassifications
   
(4,540
)
   
8,741
 
Amounts reclassified from accumulated other comprehensive income
   
(2,354
)
   
(269
)
Net current period change
   
(6,894
)
   
8,472
 
Ending Balance
   
29,462
     
70,843
 
               
Liability for Pension Benefits Beginning Balance
   
(24,984
)
   
(19,976
)
Amounts reclassified from accumulated other comprehensive income
   
131
     
53
 
Ending Balance
   
(24,853
)
   
(19,923
)
Accumulated Other Comprehensive Income Beginning Balance
   
51,254
     
42,395
 
Unrealized loss reclassified to beginning retained earnings as a result of implementation new accounting pronouncement
   
(39,882
)
 
$
-
 
Other comprehensive income before reclassifications
   
(4,540
)
   
8,741
 
Amounts reclassified from accumulated other comprehensive income
   
(2,223
)
   
(216
)
Net current period change
   
(6,763
)
   
8,525
 
Ending Balance
 
$
4,609
   
$
50,920
 
 
(9)
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 August 2017 the Company’s Board of Directors authorized a $30,000 repurchase program of its Class B common stock, and in February 2018 the Company’s Board of Directors authorized a $25,000 expansion of this program.  During the three months ended March 31, 2018, the Company repurchased and retired under this program 563,559 shares at an average per share price of $25.10, for an aggregate cost of $14,259.
 
24

Table of Contents
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(10)
Share-Based Compensation
 
Share-based compensation expense (benefit) recorded during the three months ended March 31, 2018 and 2017 was $391 and ($1,443), respectively.  The benefit recorded in the 2017 period results from a decrease in the 2014 and 2015 grants expected performance shares payouts.  During the three months ended March 31, 2018, 16,271 shares repurchased and retired as a result of non-cash tax withholdings upon vesting of shares. There were no non-cash tax withholdings during the three months ended March 31, 2017.
 
(11)
Net Income (Loss) Available to Stockholders and Net Income (Loss) per Share
 
The following table sets forth the computation of basic and diluted earnings per share:

   
Three months ended
March 31,
 
   
2018
   
2017
 
Numerator for earnings per share:
           
Net income (loss) attributable to TSM available to stockholders
 
$
3,914
   
$
(4,342
)
Denominator for basic earnings per share:
               
Weighted average of common shares
   
23,277,633
     
24,143,261
 
Effect of dilutive securities
   
117,364
     
-
 
Denominator for diluted earnings per share
   
23,394,997
     
24,143,261
 
Basic net income (loss) per share attributable to TSM
 
$
0.17
   
$
(0.18
)
Diluted net income (loss) per share attributable to TSM
 
$
0.17
   
$
(0.18
)

The Company generated a loss from continuing operations attributable to the Company’s common stockholders for the three months ended 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.
 
(12)
Contingencies
 
The following information supplements and amends, as applicable, the disclosures in Note 23 to the Consolidated Financial Statements of the Company’s 2017 Annual Report on Form 10-K.  Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, U.S. Virgin Islands (USVI), Costa Rica, British Virgin Islands (BVI), and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company's compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.
 
25

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


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.

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 Shareholders

On August 28, 2017, local Court of First Instance entered summary judgement in Heirs of Dr. Juan Acevedo, et al., v. Triple-S Management Corporation, et al. ordering the Company to issue 63,000 stock shares in favor of Plaintiffs, plus costs and legal fees. The Company appealed said judgement and on March 15, 2018, Puerto Rico Court of Appeals revoked said judgement and ruled in favor of the Company dismissing the complaint with prejudice. The Court ’s opinion held that issuance of Dr. Blanco’s shares of stock occurred under the Puerto Rico Corporations Statute of 1956, therefore the Corporations Statute of 1995 was inapplicable to the controversy; applicable law was Puerto Rico Insurance Code and Puerto Rico Corporations Statute of 1956; the amendment approved by the stockholders on April 29, 1990 was a relaxation of the restrictions to transfer the shares of stock by inheritance, not a restriction by itself; Dr. Blanco had actual notice of the original restrictions and as such it was not necessary for the restrictions to appear clear and conspicuously on the certificates of the shares of stock he owned; Dr. Blanco’s actual notice of the restrictions was attributable to Plaintiffs as heirs; and Dr. Blanco’s shares were correctly redeemed by the Company.

In re Blue Cross Blue Shield Antitrust Litigation

TSS is a co-defendant with multiple Blue Plans and the Blue Cross Blue Shield Association (BCBSA) in a multi-district class action litigation filed by a group of providers and subscribers on July 24, 2012 and October 1, 2012, respectively, that has since been consolidated by the United States District Court for the Northern District of Alabama, Southern Division, in the case captioned In re Blue Cross Blue Shield Association Antitrust Litigation. Essentially, provider plaintiffs allege that the exclusive service area requirements of the Primary License Agreements with the Blue Plans constitute an illegal horizontal market allocation under federal antitrust laws. As per provider plaintiffs, the quid pro quo for said “market allocation” is a horizontal price fixing and boycott conspiracy” implemented through the Inter-Plans Program Committee (“IPPC”) and whose benefits are allegedly derived through the BCBSA’s Blue Card/National Accounts Program. Among the remedies sought, provider plaintiffs seek increased compensation rates and operational changes. In turn, subscriber plaintiffs allege that the alleged conspiracy to allocate markets have prevented subscribers from being offered competitive prices and resulted in higher premiums for Blue Plan subscribers. Subscribers seek damages in the form of supra-competitive premiums allegedly charged by the Blue Plans and/or the difference between what subscribers have paid the Blues and the lower competitive premiums that non-competing Blues would have charged. Both actions seek injunctive relief.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Prior to consolidation, motions to dismiss were filed by several plans, including TSS - whose request was ultimately denied by the court without prejudice. On April 6, 2015, plaintiffs filed suit in the United States District Court of Puerto Rico against TSS. Said complaint, nonetheless, is believed not to preclude TSS’ jurisdictional arguments. Since inception, the Company has joined BCBSA and other Blue Plans in vigorously contesting these claims. On April 5, 2018, the United States District Court for the Northern District of Alabama, Southern Division, issued it’s ruling on the parties’ respective motions for partial summary judgment on the standard of review applicable to plaintiffs’ claims under Section 1 of the Sherman Act and subscriber plaintiffs’ motion for partial summary judgment on the Blue Plan’s single entity defense. After considering the “undisputed” facts (for summary judgment purposes only) and evidence currently on record in the light most favorable to defendants, the court essentially found that: (a) the Exclusive Service Areas constitute horizontal market allocations that are subject to the Per Se standard of review; (b) the National Best Efforts Rule constitutes an “output restriction” subject to the Per Se standard of review; (c) there remain genuine issues of material fact as to whether defendants’ conduct can be shielded by the “single entity” defense; and (d) claims concerning the BlueCard Program and uncoupling rules are due to be analyzed under the Rule of Reason standard.

Presently, the court’s ruling is being reviewed and evaluated for purposes of determining the course to follow. Meanwhile, the settlement negotiations between the parties through mediation have been suspended for the time being.

Claims Relating to the Provision of Health Care Services

TSS was a defendant in several claims for collection of monies in connection with the provision of health care services. Among them are individual complaints filed before ASES by six community health centers alleging TSS breached their contracts with respect to certain capitation payments and other monetary claims. The Company has reached a settlement agreement with all six community health centers totaling $1,200, which has been accrued as of March 31, 2018.

ASES Audits

The Company is subject to audits in connection with the provision 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 material adverse effect on our reputation and business, including termination of contracts, significant increases in the cost of managing and remediating deficiencies, payment of contractual penal clauses, and others, any of which could have a material and adverse effect on our results of operations, financial position and cash flows.

On July 2, 2014, ASES notified TSS that the results of an audit conducted in connection with the government health plan contract for several periods between October 2005 and September 2013, reflected an overpayment of premiums made to TSS pursuant to prior contracts with ASES in the amount of $7,900. The alleged overpayments were related to duplicated payments or payments made for deceased members, and ASES requested the reimbursement of the alleged overpayment. On January 16, 2015, TSS filed an injunction against ASES under the case Triple-S Salud, Inc. v. Administración 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. On May 26, 2017, the court issued a partial judgement dismissing the complaint in favor of TSS with respect to the alleged overpayments for the period between October 2005 and September 2010, which represented approximately $7,400 of the total alleged claim. On July 27, 2017, ASES appealed the court’s partial judgement and on January 31, 2018, the Puerto Rico Court of Appeals entered judgement in favor of the Company, thus validating the 2011 settlement agreement.  No plea for reconsideration nor a writ of certiorari was filed by ASES before the Court of Appeals or the Puerto Rico Supreme Court.  The parties reached a settlement agreement for the remaining amount in controversy subject to the final approval of ASES Board of Directors.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(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.
 
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 months ended March 31, 2018 and 2017:
 
   
Three months ended
March 31,
 
   
2018
   
2017
 
Operating revenues:
           
Managed Care:
           
Premiums earned, net
 
$
686,602
   
$
640,147
 
Administrative service fees
   
3,348
     
4,379
 
Intersegment premiums/service fees
   
1,348
     
1,534
 
Net investment income
   
4,857
     
3,892
 
Total managed care
   
696,155
     
649,952
 
Life Insurance:
               
Premiums earned, net
   
41,089
     
40,298
 
Intersegment premiums
   
381
     
191
 
Net investment income
   
6,058
     
6,087
 
Total life insurance
   
47,528
     
46,576
 
Property and Casualty Insurance:
               
Premiums earned, net
   
24,063
     
21,548
 
Intersegment premiums
   
153
     
153
 
Net investment income
   
2,442
     
1,924
 
Total property and casualty insurance
   
26,658
     
23,625
 
Other segments: *
               
Intersegment service revenues
   
239
     
1,586
 
Operating revenues from external sources
   
1,071
     
1,000
 
Total other segments
   
1,310
     
2,586
 
Total business segments
   
771,651
     
722,739
 
TSM operating revenues from external sources
   
398
     
78
 
Elimination of intersegment premiums/service fees
   
(1,602
)
   
(1,598
)
Elimination of intersegment service revenues
   
(239
)
   
(1,586
)
Consolidated operating revenues
 
$
770,208
   
$
719,633
 

*
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
March 31,
 
   
2018
   
2017
 
Operating income (loss):
           
Managed care
 
$
10,618
   
$
(18,582
)
Life insurance
   
3,625
     
3,935
 
Property and casualty insurance
   
3,079
     
2,067
 
Other segments *
   
175
     
143
 
Total business segments
   
17,497
     
(12,437
)
TSM operating revenues from external sources
   
398
     
78
 
TSM unallocated operating expenses
   
(2,210
)
   
(2,217
)
Elimination of TSM intersegment charges
   
2,400
     
2,400
 
Consolidated operating income (loss)
   
18,085
     
(12,176
)
Consolidated net realized investment gains
   
2,942
     
336
 
Consolidated net unrealized investment losses on equity investments
   
(16,199
)
   
-
 
Consolidated interest expense
   
(1,690
)
   
(1,686
)
Consolidated other income, net
   
1,163
     
2,525
 
Consolidated income (loss) before taxes
 
$
4,301
   
$
(11,001
)
                 
Depreciation and amortization expense:
               
Managed care
 
$
2,641
   
$
2,239
 
Life insurance
   
300
     
280
 
Property and casualty insurance
   
104
     
114
 
Other segments*
   
168
     
160
 
Total business segments
   
3,213
     
2,793
 
TSM depreciation expense
   
197
     
197
 
Consolidated depreciation and amortization expense
 
$
3,410
   
$
2,990
 

*
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)
 
   
March 31,
2018
   
December 31,
2017
 
Assets:
           
Managed care
 
$
1,253,980
   
$
1,092,715
 
Life insurance
   
860,674
     
853,289
 
Property and casualty insurance
   
915,910
     
1,094,773
 
Other segments *
   
18,304
     
19,027
 
Total business segments
   
3,048,868
     
3,059,804
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
64,099
     
81,169
 
Property and equipment, net
   
22,370
     
22,257
 
Other assets
   
25,036
     
22,763
 
     
111,505
     
126,189
 
Elimination entries-intersegment receivables and others
   
(59,382
)
   
(69,228
)
Consolidated total assets
 
$
3,100,991
   
$
3,116,765
 

*
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)
 
(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 ended March 31, 2018.  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, 2017 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months ended March 31, 2018 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.

Overview
 
We are one of the most significant players in the managed care industry in Puerto Rico and have over 55 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-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 health benefits in designated service regions in 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, 2017 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 (USVI), Costa Rica, the British Virgin Islands (BVI) and Anguilla.  As of March 31, 2018, we served approximately 974,000 managed care members across all regions of Puerto Rico.  For the three months ended March 31, 2018 and 2017, our managed care segment represented approximately 91% 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); Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB).  TSS, TSA and TSB are Blue Cross Blue Shield Association (BCBSA) licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the USVI, Costa Rica, the BVI, 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 13 of the Condensed Consolidated Financial Statements included in 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 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, investment income, and revenues derived from other non-reportable 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 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.

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.

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