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Section 1: 10-K (10-K)


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

FORM 10-K

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

For the fiscal year ended December 31, 2019

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 OF INCORPORATION)
 
(I.R.S. ID)

1441 F.D. Roosevelt Avenue, San Juan, PR 00920
(787) 749-4949

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

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

Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.         
   Yes    No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   
  Yes    No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 Act).  
   Yes    No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2019 was $529,471,073 for the Class B common stock (the only stock of the registrant that trades in a public market) and $950,968 for the Class A common stock (valued at its par value of $1.00 since it is not publicly traded).

As of February 20, 2020, the registrant had 23,519,074 of its Class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 24, 2020 are incorporated by reference into Parts II and III of this Annual Report on Form 10-K.



Triple-S Management Corporation
 
FORM 10-K
 
For the Fiscal Year Ended December 31, 2019
 
Table of Contents

3
Item 1.   Business
3
Item 1A.   Risk Factors
29
Item 1B.   Unresolved Staff Comments
50
Item 2.   Properties
50
Item 3.   Legal Proceedings
51
Item 4.   Mine Safety Disclosures
51
51
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
51
Item 6.   Selected Financial Data
54
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
55
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
83
Item 8.   Financial Statements and Supplementary Data
86
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
88
Item 9A.   Controls and Procedures
89
9B.   Other Information
90
91
Item 10.   Directors, Executive Officers and Corporate Governance
91
Item 11.   Executive Compensation
91
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
91
Item 13.   Certain Relationships and Related Transactions, and Director Independence
91
Item 14.   Principal Accountant Fees and Services
91
92
Item 15.   Exhibits and Financial Statements Schedules
92
Item 16.   Form 10-K Summay
93
97



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Part I

Item 1.
Business

General Description of Business and Recent Developments

Triple-S Management Corporation (“Triple-S”, “TSM”, the “Company”, the “Corporation”, “we”, “us” or “our”) is one of the most significant players in the managed care industry in Puerto Rico, serving approximately 924,000 members, with a 28% market share in terms of premiums written in Puerto Rico for the nine-month period ended September 30, 2019.  We have the exclusive right to use the Blue Cross and Blue Shield (“BCBS”) name and mark throughout Puerto Rico, the U.S. Virgin Islands (“USVI”), Costa Rica, the British Virgin Islands (“BVI”) and Anguilla and over 60 years of experience in the managed care industry.  We offer a broad portfolio of managed care and related products in the Commercial, Medicare, and the Government of Puerto Rico Health Insurance Plan (similar to Medicaid) (“Medicaid” or “the Government health plan”) markets. We market our managed care products through an extensive network of independent agents and brokers located throughout Puerto Rico, as well as an internal salaried sales force.  Medicaid is funded by the Government of Puerto Rico and the Government of the United States of America (the “U.S. government” or “federal government”).

We also offer complementary products and services, including life insurance, accident and disability insurance and property and casualty insurance.  We are one of the leading providers of life insurance policies in Puerto Rico.

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

Operating revenues (with intersegment premiums/service revenues shown separately), operating income and total assets attributable to the reportable segments are set forth in Note 27, Segment Information, to the audited consolidated financial statements included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

In 2018, our subsidiary Triple-S Propiedad (“TSP”) experienced a reinsurance spillover for the first time since its incorporation 30 years ago.  This spillover was related to the losses caused by Hurricane Maria, a strong Category 4 hurricane that impacted Puerto Rico in September 2017.  Incurred losses related to Hurricane Maria did not increase during the year ended December 31, 2019.  Following the impact of Hurricane Maria, TSP strengthened its reinsurance program by increasing its catastrophe protection and decreasing its insured values.  See Note 14, Reinsurance Activity, to the audited consolidated financial statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.  Please refer also to “Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – III. Results of Operations – Property and Casualty Segment Operating Results”.

Our subsidiary Triple-S Salud, Inc. (“TSS”) was granted Utilization Review Accreditation Commission (“URAC”) effective March 1, 2017.  Reaccreditation was performed in January 2020 and we successfully maintained our accreditation.  This is a requirement for the Federal Employees Program representing over $170.0 million in premiums. The accreditation is extensive to the whole Commercial and Medicaid lines of business since they are managed in the same operational platforms as the Federal Employees Program.  Our STAR rating and URAC accreditation evidence the commitment to quality in health services for our members and affiliates.

In August 2017, we announced the immediate commencement of a Class B $30.0 million share repurchase program, as authorized by our Board of Directors.  In February 2018 the Company’s Board of Directors authorized a $25.0 million expansion to the existing $30.0 million Class B repurchase program.  In November 2019 the Company’s Board of Directors authorized an additional expansion to this repurchase program increasing its remaining balance up to a total of $25.0 million.  This program is conducted in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934.


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

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

Industry Overview

Managed Care

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

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

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


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Life Insurance

Total annual premiums in Puerto Rico for the year ended December 31, 2018 for the life insurance market approximated $1.7 billion.  The main products in this market are ordinary life, cancer and other dreaded diseases, term life, disability and annuities.  The main distribution channels are independent agents and an internal salaried sales force.  Banks have established general agencies to cross sell life insurance products, such as term life and credit life.

Property and Casualty Insurance

The total property and casualty market in Puerto Rico in terms of gross premiums written for the nine months ended September 30, 2019 was approximately $1.8 billion.  Property and casualty insurance companies compete for the same accounts through pricing, more favorable policy terms, and better quality of services.  The main lines of business in Puerto Rico are personal and commercial auto, commercial multi-peril, fire and allied lines and other general liabilities.  Approximately 69% of the market is written by the top six insurance groups or companies in terms of market share, and approximately 88% of the market is written by companies incorporated under the laws of and which operate principally in Puerto Rico.

The Puerto Rican property and casualty insurance market is highly dependent on reinsurance.  In September 2017 Puerto Rico was hit by two major hurricanes causing severe damages and losses to the insurance market.  As a result, premium rates and reinsurance costs increased significantly in 2018 and 2019.

Puerto Rico’s Economy

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

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

PROMESA and the Oversight Board

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

Commonwealth Fiscal Plan and Plan of Adjustment

The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated May 9, 2019 (the “Commonwealth Fiscal Plan”). The Commonwealth Fiscal Plan estimates a 4.7% contraction in real GNP in fiscal year 2018, after accounting for the impact of disaster relief funding and the measures and structural reforms contemplated by the plan. It also projects that disaster relief spending will have a short-term stimulative effect on the economy, which, combined with the estimated effects of the proposed fiscal measures and structural reforms, will result in real GNP growth of approximately 4% and 1.5% in fiscal years 2019 and 2020, respectively.  The Commonwealth Fiscal Plan, however, does not account for the effect of the recent earthquakes, further discussed below.  The Commonwealth Fiscal Plan estimates that the Commonwealth’s population will continue to decline at rates of approximately 1% to 2% annually through fiscal year 2024.


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On September 27, 2019, the Oversight Board filed a plan of adjustment for the Commonwealth, the Employees Retirement System of the Government of the Commonwealth and the Puerto Rico Public Buildings Authority in the pending debt restructuring proceedings under Title III of PROMESA.  On February 9, 2020, the Oversight Board announced that it had reached a new Plan Support Agreement with certain bondholders on a new framework for a plan of adjustment.  The Oversight Board stated that it intends to file an amended plan of adjustment on or before February 28, 2020.  While the agreement has not yet been confirmed by the Title III court, is not supported by the Governor of Puerto Rico in its current form, and may suffer significant changes before confirmation, it provides a preliminary framework for the Commonwealth to exit bankruptcy.

Recent Seismic Activity

On January 7, 2020, a magnitude 6.4 earthquake struck Puerto Rico, causing island-wide power outages and extensive damage to infrastructure and property in the southwest region of the island.  The 6.4 magnitude earthquake was preceded by foreshocks and followed by aftershocks.  The extent of the damages is still being calculated, and loss estimates vary, but the central government’s initial estimates put total earthquake-related Islandwide losses at $200 million.  It is still too early to assess the economic impact of the earthquake and seismic activity on the Puerto Rico economy.  Although TSP is also assessing the impact of the earthquake in its operations, we believe, based on the number and severity of claims received, the losses incurred could reach the $5 million retention limit per event of our catastrophe coverage but that we will not exceed our reinsurance coverage.  See Note 14, Reinsurance, to the audited consolidated financial statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

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”.

Products and Services

Managed Care

Through our subsidiaries TSS and Triple-S Advantage, Inc. (“TSA”), we offer a broad range of managed care products, including HMO plans, PPO plans, Medicare Supplement, Medicare Advantage, and Medicaid plans.  Managed care products represented approximately 92% of our consolidated premiums earned before elimination, net for each of the years ended December 31, 2019, 2018, and 2017.  We design our products to meet the needs and objectives of a wide range of customers, including employers, individuals and government entities.  Our customers either contract with us to assume underwriting risk or they self-fund underwriting risk and rely on us for provider network access, medical cost management, claim processing, stop-loss insurance and other administrative services.  Our products vary with respect to the level of benefits provided, the costs paid by employers and members, including deductibles and co-payments, and the extent to which our members' access to providers is subject to referral or preauthorization requirements.

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


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We currently offer the following managed care plans:

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

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

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

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

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

Life Insurance

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

Property and Casualty Insurance

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

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


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We maintain a comprehensive reinsurance program as a means of protecting our surplus in the event of a catastrophe.  Also, there is reinsurance to protect us from the impact of large unforeseen losses and prevent sudden and unpredictable changes in results of operations and equity.  Our policy is to enter into reinsurance agreements with reinsurers considered to be financially sound.  Practically all our reinsurers have an A.M. Best rating of ‘‘A-’’ or better, or an equivalent rating from other rating agencies.  During the year ended December 31, 2019, 34.8% of the premiums written in the Property and Casualty segment were ceded to reinsurers.  Although these reinsurance arrangements do not relieve us of our direct obligations to our insured, we believe that the risk of our reinsurers not paying balances due to us is low.

Marketing and Distribution

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

Branding and Marketing

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

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

Sales and Marketing

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

Distribution

Managed Care Segment.   We rely principally on our internal sales force and a network of independent brokers and agents to market our products.  Individual policies are sold entirely through independent agents who exclusively sell our individual products, and Medicare Advantage and group products are sold through our 420-person internal sales force (promoters and sales representatives), as well through over 200 independent brokers and agents.  We believe that each of these marketing methods is optimally suited to address the specific needs of the customer base to which it is assigned.

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


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Life Segment.    In our Life segment, we offer our insurance products through our own network of both company-employed and independent agents.  The majority of our premiums (63% in 2019 and 61% in 2018) were placed through our home service distribution channel selling directly to customers in their homes.  TSV employs approximately 700 full-time active agents and managers and utilizes approximately 300 independent agents and brokers.  For individual policies, we advance first year commissions upon issuance and for group policies, we pay commissions on a monthly basis based on premiums received.

Property and Casualty Segment.   In our Property and Casualty segment, business is primarily subscribed through approximately 15 general agencies, including our insurance agency, Triple-S Insurance Agency, Inc. (“TSIA”), where business is placed by independent insurance agents and brokers.  During the years ended December 31, 2019, 2018, and 2017 TSIA placed approximately 78%, 76%, and 69% of TSP’s total premium volume, respectively. General agencies contracted by TSP remit premiums net of their respective commission.

Customers

Managed Care

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

Market Sector
 
Enrollment at
December 31, 2019
   
Percentage of
Total Enrollment
 
Commercial
   
440,669
     
47.7
%
Medicare
   
127,789
     
13.8
%
Medicaid
   
355,465
     
38.5
%
Total
   
923,923
     
100.0
%

Commercial Sector

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

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

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

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

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


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

Medicare Advantage Sector

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

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

Medicaid

The government of Puerto Rico has privatized the delivery of services to the Medicaid and Child Health Insurance subscribers in Puerto Rico, as defined by the government, by contracting with private managed care companies instead of providing health services directly to such population.  This program is based on the Medicaid program, a joint federal and state health insurance program for medically indigent residents of the state.  The Medicaid program is structured to provide states the flexibility to establish eligibility requirements, benefits provided, payment rates, and program administration rules, subject to general federal guidelines.  As of December 31, 2019, this program provided healthcare coverage to over 1.1 million people.

Under the current agreement with the Health Department of Puerto Rico and the Puerto Rico Health Insurance Administration (“ASES” by its Spanish acronym), TSS is one of five MCOs that offer medical, mental, pharmacy, and dental health care services on an at-risk basis to the subscribers of the Government of Puerto Rico’s health insurance program.  With this agreement, TSS is now able to serve subscribers who enroll in our plan on an island-wide basis, rather than participating in the specific service regions assigned by ASES.  ASES pays TSS a per member per month rate that varies depending on the clinical condition or category of each subscriber.

In previous contracts, the government divided Puerto Rico into eight geographical areas.  Each of these geographical areas was awarded through a competitive bid process, to a managed care company doing business in Puerto Rico.  Up to October 31, 2018, we provided healthcare services on at-risk basis to subscribers in the Metro-North and West regions.

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


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Life Insurance

Our Life segment mainly targets individual life and cancer and other dreaded diseases insurance. Our customers consist primarily of individuals, who hold approximately 655,700 policies.  We also insure approximately 1,600 groups.

Property and Casualty Insurance

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

Underwriting and Pricing

Managed Care

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

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

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

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

Life Insurance

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

Property and Casualty Insurance

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


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

Quality Initiatives and Medical Management

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

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

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


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Provider Arrangements

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

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

We promote the use of electronic claims billing by our providers.  Approximately 91% of claims are submitted electronically through our fully automated claims processing system, and our “first-pass rate”, or rate at which a claim is approved for payment when first processed by our system without human intervention, for provider claims has averaged 93% in 2019.

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

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

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

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

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


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

Competition

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

Managed Care

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

Competitors in the managed care industry include national and local managed care plans.  At December 31, 2019, we had approximately 924,000 members enrolled in our Managed Care segment.  Our market share in terms of premiums written in Puerto Rico was estimated at approximately 28% for the nine-month period ended September 30, 2019.

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

Life Insurance

We are one of the leading providers of life insurance products in Puerto Rico.  In 2018, we were the second largest life insurance company in Puerto Rico, as measured by direct premiums, with a market share of approximately 10.9%.  We are the only life insurance company that distributes our products through home service.  However, we face competition in each of our product lines.  Excluding annuities, we are the largest company in the life insurance and cancer lines of business, with market shares of approximately 23.9% and 30.1% respectively.

Property & Casualty Insurance

The property and casualty insurance market in Puerto Rico is extremely competitive.  In addition, soft market conditions prevailed in Puerto Rico for a long period of time, mostly affecting local commercial risks, precluding rate increases and even provoking lower premiums on both renewals and new business.  After the hurricanes causing losses in Puerto Rico during 2017, the commercial markets experienced increases in pricing and modifications on policy conditions, which is the typical reaction in the period following a natural catastrophic event.  Property and casualty insurance companies tend to compete for the same accounts through price, policy terms and quality of services.  We compete by reasonably pricing our products and providing efficient services to producers, agents and clients.

In the nine-month period ended September 30, 2019, we were the sixth largest property and casualty insurance company in Puerto Rico, as measured by direct premiums, with a market share approximating 6.0%.


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Blue Cross and Blue Shield License

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

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

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

failure to maintain our total adjusted capital at or above 375% of Health Risk-Based Capital (“HRBC”) Authorized Control Level (“ACL”) as defined by the National Association of Insurance Commissioners (“NAIC”) for the for Primary Licensee (TSM) and Larger BCBS Controlled Affiliate (TSS) and 100% HRBC ACL for the Smaller BCBS Controlled Affiliate (TSA);
failure to maintain liquidity of greater than one month of underwritten claims and administrative expenses, as defined by the BCBSA, for two consecutive quarters;
failure to satisfy state-mandated statutory net worth requirements;
impending financial insolvency; and
a change of control not otherwise approved by the BCBSA or a violation of the BCBSA voting and ownership limitations on our capital stock.

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

Pursuant to our license agreements with BCBSA, at least 80% of the revenue that we earn from health care plans and related services in Puerto Rico, and at least 66.7% of the revenue that we earn from (or at least 66.7% of the enrollment for) health care plans and related services both in the United States and in Puerto Rico together, must be sold, marketed, administered, or underwritten through use of the BCBS name and marks.  This may limit the extent to which we will be able to expand our health care operations, whether through acquisitions of existing managed care providers or otherwise, in areas where a holder of an exclusive right to the BCBS name and marks is already present.  Currently, the BCBS name and marks are licensed to other entities in all markets of the continental United States, Hawaii, and Alaska.

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


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

Each license requires an annual fee to be paid to the BCBSA.  The fee is determined based on a per-contract charge from products using the BCBS name and marks.  The annual BCBSA fee for the year 2020 is $1,299,208.  During the years ended December 31, 2019 and 2018, we paid fees to the BCBSA in the amount of $1,367,352 and $1,409,481, respectively.  The BCBSA is a national trade association of 36 independent Primary Licensees (Plans), including TSM, the primary function of which is to promote and preserve the integrity of the BCBS name and marks, as well as to provide certain centralized services to entities licensed by the BCBSA (the “Member Plans”).  Each Member Plan is an independent legal organization and is not responsible for obligations of other BCBSA Member Plans.  With a few limited exceptions, we have no right to market products and services using the BCBS name and marks outside our BCBS licensed territory.

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

Trademarks

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

Regulation

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

grant, suspend and revoke licenses to transact business;
regulate many aspects of the products and services we offer, including the review and approval of health insurance rates in the individual and small group markets;
assess fines, penalties and/or sanctions;
monitor our solvency and the adequacy of our financial reserves; and
regulate our investment activities based on quality, diversification and other quantitative criteria, within the parameters of a list of permitted investments set forth in the insurance laws and regulations.


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

initiatives to provide greater access to coverage for uninsured and under-insured populations without adequate funding to health plans or to be funded through taxes or other negative financial levies on health plans;
other efforts or specific legislative changes to the Medicare or Medicaid program, including changes in the bidding process or other means that materially reduce premiums;
local government regulatory changes;
increased government enforcement, or changes in interpretation or application of fraud and abuse laws; and
regulations that increase the operational burden on health plans or laws that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health care plans.

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

          licensure;
          policy forms, including plan design and disclosures;
          premium rates and rating methodologies;
          underwriting rules and procedures;
          benefit mandates;
          eligibility requirements;
          security of electronically transmitted individually identifiable health information;
          geographic service areas;
          market conduct;
          utilization review;
          payment of claims, including timeliness and accuracy of payment;
          special rules on contracts to administer government programs;
          transactions with affiliated entities;
          limitations on the ability to pay dividends;
          payment rates to healthcare providers;
          rate review and approval;
          transactions resulting in a change of control;
          member rights and responsibilities;
          fraud and abuse;
          sales and marketing activities;
          quality assurance procedures;
          privacy of medical and other information and permitted disclosures;
          surcharges on payments to providers;
          provider contract forms;
          delegation of financial risk and other financial arrangements in rates paid to healthcare providers;
          agent licensing;
          financial condition (including reserves);
          reinsurance;
          business continuity plans;
          issuance of new capital stock shares;
          corporate governance;
          permissible investments; and
          guaranteed issue and renewability.

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


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Puerto Rico Insurance Laws

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

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

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

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

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

Privacy of Financial and Health Information

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

Managed Care Provider Services

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


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Capital and Reserve Requirements

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

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

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

As of December 31, 2019, our insurance subsidiaries met and exceeded the minimum capital requirements established by the Commissioner of Insurance and the BCBSA, as applicable.

In addition to its catastrophic reinsurance coverage, TSP is required by local regulatory authorities to establish and maintain a reserve supported by a trust fund (the “Trust”) to protect policyholders against their dual exposure to hurricanes and earthquakes.  The funds in the Trust are solely to be used to pay catastrophic losses whenever qualifying catastrophic losses exceed 5% of catastrophe premiums or when authorized by the Commissioner of Insurance.  Contributions to the Trust, and accordingly additions to the reserve, are determined by a rate, imposed by the Commissioner of Insurance on the catastrophe premiums written in that year. As a result of the hurricanes affecting Puerto Rico in September 2017, TSP withdrew $10.0 million from the Trust in 2018.  No withdrawals from the Trust were made during the year ended December 31, 2019.

At December 31, 2019 and 2018, the reserve for catastrophes is $39.4 million and $37.7 million, respectively.  The supporting trust fund has assets of $41.0 million and $40.0 million as of December 31, 2019 and 2018, respectively.  Assets consist primarily of investment in securities available for sale, securities held for maturity, accrued investment income, cash and cash equivalents.  The income generated by investment securities deposited in the Trust becomes part of the Trust fund balance and are therefore considered an addition to the reserve.  For additional details see Note 17, Catastrophe Loss Reserve and Trust Fund, of the notes to consolidated financial statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.


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Dividend Restrictions

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

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

Guaranty Fund Assessments

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

Federal Regulation

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

Medicare Generally

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

Medicare is divided into 4 distinct parts:

Part A covers, among other things, inpatient hospital stays, skilled nursing facility stays, home health visits (also covered under Part B), and hospice care.  Individuals are automatically enrolled in Part A and inpatient hospital stays are subject to an annual deductible.
Part B covers physician visits, outpatient services, laboratory services, durable medical equipment, certain preventive services, and home health visits.  Enrollment in Part B is voluntary and subject to an annual deductible and monthly premiums.
Part C, which encompasses Medicare Advantage in addition to other supplemental plans, allows beneficiaries to enroll in private health plans and receive Medicare-covered benefits.
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Medicare Advantage. In 2019, one third of all Medicare beneficiaries—about 22 million—were enrolled in Medicare Advantage plans.  The Congressional Budget Office projects that the share of Medicare beneficiaries enrolled in Medicare Advantage will rise to about 47 percent by 2029.  Medicare Advantage plans are required to maintain a medical loss ratio (“MLR”) of at least 85%, meaning, very basically, that if Medicare Advantage plans do not spend at least 85% of their revenue on patient care costs, they may face various sanctions, including refunds, prohibition on enrolling new members, and contract termination. The Part C premium varies by plan.
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Other Medicare Supplemental Plans.  “Medicap” is another type of private plan that fill sin the patient out-of-pocket gaps in traditional fee-for-service Medicare Part A and B coverage.  These Medigap policies are standardize by CMS, but funded and administered by private organizations.
Part D is the voluntary, subsidized outpatient prescription drug benefit created under the Medicare Modernization Act of 2003 (the “MMA”).  Part D includes subsidies for beneficiaries with low incomes that do not apply to Puerto Rico.  Part D is offered through private plans that contract with Medicare, including stand-alone prescription drug plans and Medicare Advantage prescription drug plans.  Part D plans are also subject to MLR requirements and their premium varies by plan.


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

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

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

Medicare Advantage Program Over Time

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

Among other things, the ACA mandated several changes, implemented by CMS, to the Medicare Advantage and Medicare Part D programs, including strengthening CMS’ ability to remove poor performers from the Medicare Advantage and Part D programs beginning in 2015.  Beginning with Medicare contract year 2015, CMS has the authority to terminate its contract with any Medicare Advantage or Part D plan for substantial contract non-compliance, or refuse to renew such plan, if the plan fails to achieve an overall Star Rating of 3.0 stars (out of 5.0) for any consecutive three (3) year period.  Although CMS has issued annual Star Ratings for Part D plans since 2007 and for Medicare Advantage plans since 2008, CMS uses Star Ratings issued for Medicare contract years 2013 and beyond in implementing this provision. In April 2015, CMS announced that it would for the first time exercise its authority to terminate low performing Medicare Advantage and Part D plans beginning in 2016. CMS now issues Star Ratings on a prospective basis, typically in the fall preceding the contract year.  CMS also has the authority to use the lower Star Ratings as a means to invoke its existing authority under Section 1857(c)(2) of the Social Security Act to terminate a contract when CMS determines that the Medicare Advantage or Part D plan has failed to substantially carry out the contract or is carrying out the contract in a manner that is inconsistent with the efficient or effective administration of the Medicare Advantage or Part D program.

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


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Payments to Medicare Advantage Participating Plans

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

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

STARS Ratings for plans are calculated based on the results achieved by the plan on a contract in terms of measures (47 in the contract year 2020 draft call letter) spanning four categories: Healthcare Effectiveness Data and Information Set (HEDIS) measures, Consumer Assessment of Healthcare Providers and Systems (CAHPS) and Health Outcomes Survey (HOS) measures, Administrative measures and Part D measures.  CMS assigns from one to five stars for each numeric measure score by applying one of two methods: relative distribution with significance testing (CAHPS) or clustering (all other measures).  Case-mix adjustments are applied to the survey results as part of the scoring.  CMS has recognized that socio-economic factors create significant variations in results for some metrics.  CMS’ interim response to address the within-contract disparity in performance associated with a contract’s percentages of beneficiaries with low income subsidy and dual eligible (LIS/DE) and disability status revealed in our comprehensive research conducted over multiple years culminated in the creation of the Categorical Adjustment Index (CAI).  Each measure is also assigned a relative weight used in the calculation of the Part C, Part D and overall STAR Rating.  CMS has also adopted policies to consider the impact of extreme natural disasters in the results, recognizing that the aftermath can present unanticipated barriers to achieving solid results.

Medicaid Generally

Medicaid is a public insurance program intended for low-income individuals and families.  Medicaid, as of October 2019, provides coverage to over 71 million Americans, including children, pregnant women, and individuals with disabilities.  To participate in Medicaid, states are required to cover certain groups, but may cover additional population groups at their discretion.  States may apply to CMS for waivers to provide coverage to populations beyond what is normally covered under the program.  States are able to establish eligibility criteria within federal minimum standards.  States are allowed to set Medicaid provider payment rates, and may reimburse providers through fee-for-service or managed care.  They also have the flexibility to determine the type, amount, duration, and scope of services of their respective Medicaid programs, as long as they keep within federal guidelines, although states are required to cover certain mandatory benefits.  In Puerto Rico, the Medicaid program is administered locally by ASES.

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


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Dual-Eligible Beneficiaries

A “dual-eligible” beneficiary is a person who is eligible for both Medicare, because of age or other qualifying status, and Medicaid, because of economic status.  Dual-eligibles are a high cost population that account for a disproportionate share of government health care expenditures.  In 2018, there were approximately 12.2 million dual-eligibles, receiving both Medicare and Medicaid benefits nationwide. Given the disproportionately high cost of treating dual-eligibles, there has been a spate of initiatives designed to address the issue.  The government of Puerto Rico established a model that wraps-around benefits included in Medicaid that were not included in original Medicare benefits.  Dual-eligible beneficiaries in Puerto Rico have the option to participate in this model called Platino.  Health plans that offer Platino products receive premiums from CMS and the government of Puerto Rico.  In this plan the government, rather than the insured, will assume all of the premiums for additional benefits not included in traditional Medicare programs, such as prescription drug benefits.  By managing utilization and implementing disease management programs, many Medicare Advantage plans can profitably care for dual-eligible members.  The MMA established subsidies and reduced or eliminated deductibles for certain low-income beneficiaries, including dual-eligible individuals.  Pursuant to the MMA, dual-eligible individuals receive their drug coverage from the Medicare program rather than the Medicaid program.  Companies offering Medicare Part D stand-alone prescription drug plans with bids at or below the regional weighted average bid resulting from the annual bidding process received a pro-rata allocation and auto-enrollment of the dual-eligible beneficiaries within the applicable region.

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

Special Needs Plans

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

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

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

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


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Federal False Claims Act.    Federal regulations also strictly prohibit the presentation of false claims or the submission of false information to the federal government.  Under the federal False Claims Act, any person or entity that has knowingly presented or caused to be presented a false or fraudulent request for payment from the federal government or who has made a false statement or used a false record in the submission of a claim may be subject to treble damages and penalties of up to $21,916 per claim.  The ACA codified the federal government’s prior position that claims presented in relationships that violate the federal Anti-Kickback Statute may also be considered to be violations of the federal False Claims Act.  Furthermore, the federal False Claims Act permits private citizen “whistleblowers” to bring actions on behalf of the federal government for violations of the False Claims Act and to share in the settlement or judgment that may result from the lawsuit.  Financial recoveries from civil health care matters brought under the False Claims Act are significant.

HIPAA, HITECH, and Gramm-Leach-Bliley Act

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

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

In 2015 we entered into two agreements with federal and Puerto Rican regulators to resolve investigations in connection with privacy incidents at our Managed Care segment. The agreements include the payment of a combined amount of $5.0 million and the adoption of a three year corrective action plan. We have satisfactorily completed the corrective action plan.

HHS has released rules mandating the use of standard formats in electronic health care transactions (for example, health care claims submission and payment, plan eligibility, precertification, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules mandating the use of standardized code sets and unique identifiers for employers and providers.  Our Managed Care subsidiaries believe that they are in material compliance with these requirements. In addition, the federal government required healthcare organizations, including health insurers, upgrade to updated and expanded standardized code sets used for describing health conditions by converting from the ICD-9 diagnosis and procedure code set to the ICD-10 diagnosis and procedure code by October 1, 2015.  Our conversion from the ICD-9 code set to the ICD-10 code set, which required a substantial investment, was successfully completed.


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

Employee Retirement Income Security Act of 1974

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

Dodd-Frank Act

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

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

Legislative and Regulatory Initiatives

Puerto Rico Initiatives

On July 23, 2017, the government of Puerto Rico enacted Act 47-2017 (“Act 47”), which, among other things, imposes restrictions on utilization review (“UR”) processes related to hospitalizations and the ability of MCOs to conduct internal review processes at any level of appeal.  Act 47 also creates a statutory cause of action against MCOs for intervening with the “diagnostic and medical treatment of a patient” making them jointly and severally liable in those cases in which the patient suffers damages as a direct or indirect result of such intervention.


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The Oversight Board approved Regulation No. 9063 promulgated by the Puerto Rico Patient Advocate under Act 47 (“Regulation 9063”) in February 2019.  However, it reserved the right to continue to monitor how Act 47 and Regulation 9063 are implemented in order to ensure that their application is not inconsistent with the value-based reforms and other cost containment strategies included in the Commonwealth Fiscal Plan. We are closely monitoring how Act 47 and Regulation 9063 will impact the Company.

On April 29, 2017, the government of Puerto Rico enacted Act 26-2017 (“Act 26”), which, among other things, calls for a considerable reduction in public corporations’ health plan contributions to its employees, to the extent required to comply with the government’s Fiscal Plan.  Contributions to employees with pre-existing catastrophic, chronic or terminal conditions, however, shall remain the same.  Act 26 also authorizes the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) to negotiate health insurance coverage for such public employees.  Through Administrative Order No. OA-2018-08, as amended by OA-2018-12, AAFAF ordered public corporations to participate in ASES’s public employee health plan negotiation process, but authorized them to negotiate and contract with insurers independently, as they currently do.  However, thereductions contemplated by Act 26 have not been implemented.  If and when implemented, the provisions of Act 26 would create uncertainty in the market for public corporation health plans.

On August 1, 2019, the government of Puerto Rico enacted Act 138-2019 (“Act 138”), which, among other things, requires health services organizations to contract any provider who requests to become a provider for the organization, when such provider meets the necessary requirements for practicing the medical profession and/or is authorized by the competent entities.  Act 138 also forbids organizations from terminating a provider’s contract without cause, and provides for the Government of Puerto Rico’s automatic cancellation of all contracts with any organization that incurs in practices inconsistent with the purposes of the law or seeks to use subterfuges to circumvent its objectives.  While it is too early to fully assess Act 138’s exact impact on the Company, we believe it may increase operational costs as a result of an increase in provider contract volume.  Act 138 may also hinder our ability to enter into exclusive provider and preferred network agreements and the cost containment and quality measures we achieve through such agreements, among other adverse effects.

Federal Initiatives

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

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

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


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The HIP Fee was allocated to health insurers based on the ratio of the amount of an insurer’s net premium revenues, and was assessed on plans in Puerto Rico even though Puerto Ricans did not receive subsidies or other ACA benefits.  In the years that followed, Congress waived the HIP Fee for 2017 and 2019, which – applied broadly – also provided relief to plans operating in Puerto Rico.  The total tax levied on the health insurance industry was $11.3 billion in 2016 and $14.3 billion in 2018.  We incurred $44.2 million and of $50.1 million in fees during 2016 and 2018, respectively.  For 2020 the industry-wide fee projected to be levied on plans is between $15.5 and $16 billion. In December 2019, the HIP Fee was permanently repealed for calendar years beginning after December 31, 2020 as part of the Further Consolidated Appropriations Act of 2020.

The Budget Control Act of 2011 was enacted to reduce the deficit and avoid default on the national debt.  When a joint committee of Congress established to develop debt reduction legislation failed to cut at least $1.5 trillion over the coming 10 years, an automatic process of across-the-board cuts (“sequestration”) split equally between defense and non-defense programs was triggered.  Under the sequestration, automatic spending cuts for mandatory portion became effective beginning April 1, 2013, and these cuts have been extended through subsequent legislation through 2029 unless additional Congressional action is taken.  This resulted in a 2% cut to Medicare payments to providers.  Medicaid programs are not subject to automatic spending cuts.  Of note, the budget caps that were enacted to reduce the deficit are no longer in effect and were lifted for the final time last year for FY2019 and 2020 in the Bipartisan Budget Act of 2019 that set the stage for the Further Consolidated Appropriations Act of 2020.

In December 2017 Congress passed tax reform, the 2017 Tax Cuts and Jobs Act (“TCJA”), that also zeroed out the individual mandate tax penalty for not complying with the requirement to purchase qualified health insurance coverage.  In light of zeroing out the tax penalty, in 2018 a group of 20 states, led by Texas, sued the federal government in February 2018, (Texas v. Azar) seeking to have the entire ACA declared unconstitutional arguing that with the removal of the tax penalty, the individual mandate and the entire law was no longer constitutional based on the SCOTUS’ previous ruling in 2012 that the individual mandate could be upheld under Congress’ constitutional authority to tax.  The case is currently making its way through court and is expected to ultimately be taken up by SCOTUS after the 2020 federal election.

We do not anticipate significant legislative action regarding the repeal and replacement of the ACA in Washington in the near future. However, the White House and various federal agencies, including, but not limited to, HHS, DOL, and the U.S. Department of the Treasury continue to issue Executive Orders and regulations related to the stabilization of the individual insurance market.

See Part I, Item 1A “Risk Factors―The health care reform law and the implementation of the law could have a material effect on our business, financial condition, cash flows, or results of operations” for more information.

Employees

As of December 31, 2019, we had 3,909 full-time employees and 165 temporary employees.  TSS has a collective bargaining agreement with the “Unión General de Trabajadores”, which represents approximately 21.9% of two of our Managed Care subsidiaries’ approximately 2,174 regular employees.  The collective bargaining agreement expires in February 2023.  The Corporation considers its relations with employees to be good.


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Available Information

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

Special Note Regarding Forward-Looking Statements

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

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

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


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trends in health care costs and utilization rates;
ability to secure sufficient premium rate increases;
competitor pricing below market trends of increasing costs;
re-estimates of our policy and contract liabilities;
changes in government laws and regulations of managed care, life insurance or property and casualty insurance;
significant acquisitions or divestitures by major competitors;
introduction and use of new prescription drugs and technologies;
a downgrade in our financial strength ratings;
litigation or legislation targeted at managed care, life insurance or property and casualty insurance companies;
ability to contract with providers and government agencies consistent with past practice;
ability to successfully implement our disease management and utilization management programs;
ability to maintain Federal Employees, Medicare, and Medicaid contracts;
volatility in the securities markets and investment losses and defaults; and
general economic downturns, major disasters and epidemics.

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

Item 1A.   Risk Factors

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

While we consider the foregoing to be the overarching risks we face in 2019, they are not the only material risks we face. We face numerous other challenges, as described elsewhere in this Annual Report, including below in this “Risk Factors” discussion, and other unanticipated risks may develop.


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Risks Related to Our Business

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

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

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

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

Our profitability is dependent upon our ability to contract on favorable terms with hospitals, physicians and other managed care providers. In recent years some groups of providers have been pressing for legislation that would allow them to collectively negotiate certain contract terms through cooperatives.  As a result, Puerto Rico enacted legislation authorizing providers to collectively negotiate the services fees through cooperatives, on a voluntary basis, with health insurance companies and other healthcare-related organizations. This legislation requires that the Public Corporation for the Supervision and Insurance of Cooperatives adopt regulation that may have a material adverse effect in our business. If collective negotiations with providers become mandatory or we are otherwise required to enter into collective negotiations with providers, it could become more difficult to maintain cost-effective managed care provider contracts, which could adversely affect our business.

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

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

Commercial:    One of our Managed Care subsidiaries is a qualified contractor to provide managed care coverage to federal government employees within Puerto Rico.  Such coverage is provided pursuant to a contract with the OPM that is subject to termination in the event of non-compliance not corrected to the satisfaction of the OPM.  During each of the years ended December 31, 2019, 2018, and 2017 premiums generated under this contract represented 5.3%, 5.5%, and 5.7% of our consolidated premiums earned, net, respectively.


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Under the commercial business, we also provide health coverage to certain employees of the Government of Puerto Rico and its instrumentalities.  During each of the years ended December 31, 2019, 2018, and 2017, earned premium revenue related to such health plans represented 2.2%, 3.0%, and 3.4% of our consolidated premiums earned, net, respectively.

Medicare:    We provide services through our Medicare Advantage products pursuant to a limited number of contracts with CMS.  These contracts generally have terms of one year and must be renewed each year.  Each of our contracts with CMS is cancellable for cause if we breach a material provision of the contract or violate relevant laws or regulations.  If we are unable to renew, or to successfully re-bid or compete for any of these contracts, or if the process for bidding materially changes or if any of these contracts are terminated, our business could be materially impaired.  During each of the years ended December 31, 2019, 2018, and 2017, contracts with CMS represented 43.3%, 38.5%, and 36.6% of our consolidated premiums earned, net, respectively.

Medicaid:    We participate in the government of Puerto Rico Health Reform Program (similar to Medicaid), known as Vital (“Vital”), to provide health coverage to medically indigent citizens in Puerto Rico.  The current agreement, which became effective November 1, 2018, requires MCOs to serve subscribers on an island-wide basis, rather than assigning each MCO to specific regions, as under the previous model.  The term of the agreement ends on September 30, 2021, which may be extended for an additional year at ASES’s option.  Under the current agreement, TSS is responsible for providing medical, mental, pharmacy and dental healthcare services on an at-risk basis to subscribers who enroll with TSS.  ASES pays TSS a per member per month rate that varies depending on the particular clinical condition or category of the subscriber.  Premium rates will be negotiated for each contract year.  Participants may change insurance carriers once every year.  As of December 31, 2019 and 2018, our Medicaid membership was approximately 355,000 and 319,000 members, respectively.  Under the previous agreement with ASES, we provided services to eligible members in the Metro North and West regions of Puerto Rico.  During the years ended December 31, 2019, 2018 and 2017 Medicaid premiums generated through our agreements with ASES represented 26.5%, 26.4% and 26.6%, respectively.

If any of these contracts is terminated for any reason, including by reason of any non-compliance by us, or not renewed or replaced by a comparable contract, our consolidated premiums and profitability earned could be materially adversely affected.  See also “Risks Relating to the Regulation of our Industry—As a Medicare Advantage program participant, we are subject to complex regulations.

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

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

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

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


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

We are a party to license agreements with the BCBSA that entitle us to the exclusive use of the BCBS name and mark in Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands and Anguilla.  These license agreements contain certain standards, requirements and restrictions regarding our operations and our use of the BCBS name and mark which may be modified in certain instances by the BCBSA. Changes to the terms of our license agreements may restrict various potential business activities.  Failure to comply with the standards, requirements and restrictions established could result in the termination of a license agreement.  Events that could cause the termination of a license agreement with the BCBSA include failure to comply with minimum capital requirements imposed by the BCBSA, a change of control or violation of the BCBSA ownership limitations on our capital stock, impending financial insolvency and the appointment of a trustee or receiver or the commencement of any action against a licensee seeking its dissolution.  Upon termination of a license agreement, the BCBSA would impose a re-establishment fee upon us, which would allow the BCBSA to entitle another managed care company to use the BCBS name and marks in the service areas we currently serve.  This re-establishment fee is currently $98.33 per licensed enrollee.  If the re-establishment fee were applied to our total BCBS enrollees as of December 31, 2019, we would be assessed approximately $91.0 million by the BCBSA.

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

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

Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company.  We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity.  During 2019, 34.8%, or $52.3 million, of the premiums written in the Property and Casualty segment and 4.4%, or $8.3 million, of the premiums written in the Life segment were ceded to reinsurers.  Total premiums ceded, on a consolidated basis, represent 2.0%, or $66.3 million of our premiums.  The premiums ceded and the availability and cost of reinsurance is subject to changing market conditions and may vary significantly over time.  Any decrease in the amount of our reinsurance coverage will increase our risk of loss.  We may be unable to maintain our desired reinsurance coverage or obtain other reinsurance coverage in adequate amounts and at favorable rates.  If we are unable to renew our expiring coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.

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


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

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

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

Ratings assigned by A.M. Best are an important factor influencing the competitive position of the property and casualty insurance companies in Puerto Rico.  In May 2019, A.M. Best affirmed its November 2018 downgrade of the rating of our Property and Casualty subsidiary from an “A-” (Excellent) to a “B+” (Good).  The rating revision follows the losses related to Hurricane Maria losses experienced by this segment during the second and third quarters of 2018.

A.M. Best ratings represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors.  Financial strength ratings are used by brokers and customers as a means of assessing the financial strength and quality of insurers.  A.M. Best reviews its ratings periodically and we may be further downgraded following their annual evaluation.  Since the lines of business that this segment writes and the market in which it operates are particularly sensitive to changes in A.M. Best financial strength ratings, any further downgrade of our Property and Casualty segment’s rating could limit or prevent us from writing and renewing certain types of business or accounts that requires insurers with stronger ratings.

We are dependent on the success of our relationships with third parties for various services and functions, including PBM services.

We contract with various third parties to perform certain functions and services and provide us with certain information technology systems.  Certain of these third parties provide us with significant portions of our business infrastructure and operating requirements, and we could become overly dependent on key vendors, which could cause us to lose core competencies.  We are also dependent on some third parties for certain regulatory compliance-related matters.  A termination of our agreements with, or disruption in the performance of, one or more of these service providers could result in service disruptions or unavailability, reduced service quality and effectiveness, increased or duplicative costs, fines or corrective action plans imposed by our regulators, or an inability to meet our obligations to our customers.  In addition, we may also have to seek alternative service providers, which may be unavailable or only available on less favorable contract terms. Any of these outcomes could adversely affect our business, reputation, cash flows, financial condition and operating results.

TSS has a Master Services Agreement (“MSA”) with OptumInsight, Inc. (“Optum”), pursuant to which Optum provides healthcare technology and operations services, including information technology, claims processing and application development, to Triple-S and its affiliates.  As a result, we are dependent on Optum for the provision of essential services to our business, and there can be no assurances that the quality of the services will be appropriate or that Optum will be able to continue to provide us with the necessary claims processing and technology services.  Potential breakdowns or failures of Optum could harm our business by disrupting our delivery of services, which could have a material adverse impact on our financial condition and results of operations.

TSS consolidated PBM services for its Medicare Advantage and Commercial lines of business through an agreement with Abarca Health, effective January 2019.  As a result of this consolidation, any issues or failures affecting this vendor could have an impact on a significant portion of our managed care business, which could adversely affect our reputation, financial condition and operating results.


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Significant competition and market conditions in Puerto Rico could negatively affect our ability to maintain or increase our profitability.

We are subject to strong competition in each line of business in which we operate.  Competition in the insurance industry is based on many factors, including premiums charged, services provided, speed of claim payments and reputation.  This competitive environment has produced and will likely continue to produce significant pressures in our profitability. The industry in which we operate has unique characteristics that, if we are unable to manage adequately, may adversely affect our business, financial conditions and results of operations.  Some of the trends and characteristics related to the competition we face in our different lines of business include the following:

The managed care market in Puerto Rico is mature.  According to the U.S. Census Bureau, Puerto Rico’s population decreased by 2.2% between 2000 and 2010; however, the national population rate grew 9.7% during the same period.  According to the U.S. Census Bureau, the older population is an important and growing segment of the United States population.  Between 2000 and 2010, the population 65 years and older increased at a faster rate (15.1%) than the total U.S. population.  In Puerto Rico, for the same period, the population 65 years and older increased by 27.5 %.  As a result, the competition for this segment of the market is significant.

Local economy is in a downturn.  A challenging economy and a shrinking population in Puerto Rico continue to produce conditions that are adverse to the generation of new sources of business in this segment.  As a result, insurance companies compete for the same customers through pricing, policy terms and quality of services.  Also, our industry is subject to aggressive marketing and sales practices that target our current and prospective customers. We may not be successful in attracting and retaining our customers. See “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.”

Our industry is highly regulated.  Future legislation at the federal and local levels may also result in increased competition, especially in the Managed Care segment.  While we do not anticipate that any of the current legislative proposals of which we are aware would increase the competition we face, future legislative proposals, if enacted, might do so.

Market concentration. Concentration in our industry has created an increasingly competitive environment, both for customers and for potential acquisition targets, which may make it difficult for us to grow our business.  The parent companies of some of our competitors are larger and have greater financial and other resources than we do.  We may have difficulty competing with larger companies, which can create downward price pressures on premium rates.

We believe these trends will continue.  There can be no assurance that these competitive pressures will not adversely affect our business, financial condition and results of operations.

As a holding company, we are largely dependent on rental payments, dividends and other payments from our subsidiaries, although the ability of our regulated subsidiaries to pay dividends or make other payments to us is subject to the regulations of the Commissioner of Insurance, including maintenance of minimum levels of capital, as well as covenant restrictions in their indebtedness.

We are a holding company whose assets include, among other things, all of the outstanding shares of common stock of our subsidiaries, including our regulated insurance subsidiaries.  We principally rely on rental income and dividends from our subsidiaries to fund our debt service, dividend payments and operating expenses, although our subsidiaries may not declare dividends every year.  We also benefit to a lesser extent from income on our investment portfolio.

Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance requiring, among other things, to maintain certain levels of capital, thereby restricting the amount of earnings that can be distributed.  See “Risks Related to Our Business―Our insurance subsidiaries are subject to minimum capital requirements.  Our failure to meet these standards could subject us to regulatory actions.”  Our subsidiaries’ ability to make any payments to us will also depend on their earnings, the terms of their indebtedness, if any, and other business and legal restrictions.  Furthermore, our subsidiaries are not obligated to make funds available to us, and creditors of our subsidiaries have a superior claim to such subsidiaries’ assets.  Our subsidiaries may not be able to pay dividends or otherwise contribute or distribute funds to us in an amount sufficient for us to meet our financial obligations.  In addition, from time to time, we may find it necessary to provide financial assistance, either through subordinated loans or capital infusions to our subsidiaries that may adversely affect our financial condition.


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Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry.

Results of companies in the insurance industry, historically have been subject to significant fluctuations and uncertainties.  The industry’s profitability can be affected significantly by

rising levels of actual costs that are not known by companies at the time they price their products;
volatile and unpredictable developments, including man-made and natural catastrophes;
changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and
fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital.

Historically, the financial performance of the insurance industry has fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting from increased competition, followed by periods of high premium rates and a shortage of underwriting capacity resulting from decreased competition.  Fluctuations in underwriting capacity, demand and competition, and the impact on us of the other factors identified above, could have a negative impact on our results of operations and financial condition.  We believe that underwriting capacity and price competition in the current market is increasing.  This additional underwriting capacity may result in increased competition from other insurers seeking to expand the kinds or amounts of business they write or cause some insurers to seek to maintain market share at the expense of underwriting discipline.  We may not be able to retain or attract customers in the future at prices we consider adequate.

Our investment portfolios are subject to varying economic and market conditions.

We have exposure to market risk and credit risk in our investment activities.  The fair values of our investments vary from time to time depending on economic and market conditions.  Fixed maturity securities expose us to interest rate risk as well as credit risk.  Equity securities expose us to equity price risk.  Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions.  These and other factors also affect the equity securities owned by us.  The outlook of our investment portfolio depends on the future direction of interest rates, fluctuations in the equity markets and the amount of cash flows available for investment.  For additional information, see “Item 7A.   Quantitative and Qualitative Disclosures About Market Risk” for an analysis of our exposure to interest and equity price risks and the procedures in place to manage these risks.  Our investment portfolios may lose money in future periods, which could have a material adverse effect on our financial condition.

In addition, our insurance subsidiaries are subject to local laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain riskier investment categories, such as below-investment-grade fixed income securities, equities, and private market investments, among others, which could generate higher returns on our investments.  If we fail to comply with these laws and regulations, any investments exceeding regulatory limitations would be treated as non-admitted assets for purposes of measuring statutory surplus and risk-based capital.

The securities and credit markets could experience extreme volatility and disruption.

Adverse conditions in the U.S. and global capital markets could significantly and adversely affect the value of our investments in debt and equity securities, other investments, our profitability and our financial position.


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As an insurer, we have a substantial investment portfolio that is comprised particularly of debt and equity securities of issuers located in the U.S.  As a result, the income we earn from our investment portfolio is largely driven by the level of interest rates in the U.S. financial markets, volatility, uncertainty and/or disruptions in the global capital markets, particularly the U.S. credit markets, and governments’ monetary policy.  These factors can significantly and adversely affect the value of our investment portfolio, our profitability and/or our financial position by:

Significantly reducing the value of the debt and equity securities we hold in our investment portfolio, and creating net unrealized capital losses that reduce our operating results and/or net realized capital losses in the event we are required to sell some of those investments.
Lowering interest rates on high quality short-term debt securities and thereby materially reducing our net investment income and operating results.
Making it more difficult to value certain of our investment securities, for example if trading becomes less frequent, which could lead to significant period-to-period changes in our estimates of the fair values of those securities and cause period-to-period volatility in our operating results and shareholders’ equity.
Reducing our ability to issue other securities.

We evaluate our investment securities for other-than-temporary impairment on a quarterly basis.  This review is subjective and requires a high degree of judgment.  It also requires us to make certain assessments about the potential recovery of the assets we hold.  For the purpose of determining gross realized gains and losses, the cost of investment securities is based upon specific identification.

We believe our cash balances, investment securities, operating cash flows, and funds available under credit agreement, taken together, provide adequate resources to fund ongoing operating and regulatory requirements.  However, continuing adverse securities and credit market conditions could significantly affect the availability of credit.

For additional information, see “Item 7A.   Quantitative and Qualitative Disclosures About Market Risk” for an analysis of our exposure to interest and equity price risks and the procedures in place to manage these risks.  Our investment portfolios may lose money in future periods, which could have a material adverse effect on our financial condition.

Notwithstanding, the Insurance Code of Puerto Rico requires insurers to invest an amount equal to no less than half of the insurer’s required capital in Puerto Rico Securities.  Since February 2014, the credit ratings of bonds issued by the Government of Puerto Rico and most of Puerto Rico public corporations have been downgraded to below-investment grade, which makes it difficult to comply with this requirement.  We therefore requested and obtained a waiver authorization from the Commissioner of Insurance to fulfill the requirement by investing in mortgage securities issued by Ginnie Mae, backed by mortgages issued in Puerto Rico for 2019, and have requested an extension of this waiver for 2020.  These securities are of high credit quality due to the Ginnie Mae guarantee.

If we fail to comply with the Insurance Code requirements, any investments exceeding regulatory limitations would be treated as non-admitted assets for purposes of measuring statutory surplus and risk-based capital and may adversely affect our financial condition and results of operations.

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.

Our principal lines of business are concentrated in Puerto Rico, which is currently in the midst of a severe fiscal and economic crisis.  Puerto Rico’s gross national product (“GNP”) has contracted in real terms since fiscal year 2006.  However, the latest Puerto Rico Planning Board estimates, released in June 2019, project Puerto Rico’s GNP to increase by 2% and 3.6% for fiscal years 2019 and 2020, respectively.  The government of Puerto Rico’s Fiscal Plan (as hereinafter defined), estimates an 4.7% contraction in real GNP during fiscal year 2018.  It also projects that disaster relief funding will have a short-term stimulative effect on Puerto Rico’s economy, which, combined with the estimated effects of the proposed measures and reforms, the plan estimates will result in variable GNP growth from fiscal years 2019 through 2022, followed by GNP contraction in fiscal year 2023 as disaster relief funding decreases. The Fiscal Plan, however, does not account for the impact, if any, of the recent earthquakes.

Furthermore, Puerto Rico’s population has been in decline over the past decade. The most recent estimates by the U.S. Census Bureau indicate the population has dropped by 14.3%, or approximately 530,000 people, from April 1, 2010 to July 1, 2019.


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The weakness of Puerto Rico’s economy has also adversely affected employment. Total average annual employment, as measured by the Puerto Rico Department of Labor and Human Resources (the “DLHR”) has decreased approximately 20% since 2007. The reduction in total employment began in the fourth quarter of fiscal year 2007, when total employment was 1,244,425, and continued consistently until the first half of fiscal year 2015, after which it mostly stabilized.  According to the most recent date from DLHR, dated December 2019, Puerto Rico’s average total employment during calendar year 2019 was approximately 987,000, a slight increase from average total employment of approximately 986,000 during calendar year 2018.  The DLHR also reports an average unemployment rate of approximately 8.2% in year 2019, a 1% decrease from an average unemployment rate of approximately 9.2% in calendar year 2018.

In response to Puerto Rico’s fiscal and financial challenges, the U.S. Congress enacted PROMESA in June 2016. The Commonwealth of Puerto Rico and several of its instrumentalities are currently in the process of restructuring their debts through the mechanisms provided by PROMESA. On February 9, 2020, the Oversight Board announced it had reached an agreement with certain creditors on a new framework for a plan of adjustment for the Commonwealth of Puerto Rico and certain of its instrumentalities. While the Puerto Rico government does not support the agreement in its current form and the agreement may suffer significant changes before confirmation, it provides a preliminary framework for the Commonwealth of Puerto Rico to exit bankruptcy.

Pursuant to PROMESA, the Oversight Board has certified fiscal plans for the government of Puerto Rico and several of its instrumentalities.  The most recent fiscal plan was certified by the Oversight Board on May 9, 2019 (the “Fiscal Plan”).  The Fiscal Plan outlines a number of structural reforms and fiscal measures that the Oversight Board deems necessary to improve the Government of Puerto Rico’s fiscal balance and economic condition.

We have significant direct exposure to the government through our contract with ASES, which administers the Medicaid program in Puerto Rico, and certain other business relationships with the government of Puerto Rico and its instrumentalities. As a result, we may be adversely affected by the liquidity problems of such entities, or by a reduction in the size of the government or privatization of public corporations.  Moreover, it is uncertain whether the reductions in public corporations’ health plan contributions to employees contemplated in Act 26 will be implemented, how they will be implemented, and what effect such reductions will have in our business.

On the other hand, as part of the Further Consolidated Appropriations Act of 2020, Puerto Rico’s Medicaid program will receive up to approximately $5.342 billion in funding through September 30, 2021.  This action has brought temporary financial stability to Puerto Rico’s Medicaid program, and funding conditions related to compliance with program management standards have further promoted stability and predictability. The government of Puerto Rico and the health care industry are lobbying Congress to address Puerto Rico’s Medicaid spending cliff permanently: however, there are no guarantees that these efforts will succeed.  If our efforts are not successful, ASES may not be able to fulfill its payment obligations to us under our agreement for the provision of health coverage to Vital participants, which would adversely affect our financial results.

Furthermore, our insureds’ financial capacity is affected by, among other things, the general economic conditions in Puerto Rico and other adverse conditions affecting Puerto Rico consumers and businesses. The effects of the prolonged recession are reflected as a decrease in insured customers in our commercial line of business and premiums earned, net.  Moreover, the measures taken to address the fiscal crisis and those that may have to be taken in the near future, will likely affect many of our insureds, which could result in a lower amount of insureds, insureds moving to lower premium plans, among others. The foregoing could also result in decreased demand for our insurance products or migration to less profitable products.

If global or local economic conditions worsen or the government of Puerto Rico is unable to manage its fiscal and economic challenges, including consummating an orderly restructuring of its debt obligations while continuing to provide essential services, the conditions described above could continue or worsen in ways that are unpredictable and outside of our control.  While PROMESA provides the government with tools to restructure Puerto Rico’s debt obligations and that of its instrumentalities, these restructuring tools are new and untested.  Furthermore, the Fiscal Plan’s projections indicate the possibility of significant creditor losses. Both of these factors may make any debt restructuring process a lengthy and highly adversarial process.


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The success of our business depends on developing and maintaining effective information systems.

Our business and operations may be affected if we do not maintain and upgrade our information systems and the integrity of our proprietary information.  We are materially dependent on our information systems, including Internet-enabled products and information, for all aspects of our business operations.  Monitoring utilization and other factors, supporting our managed care management techniques, processing provider claims and providing data to our regulators, and our ability to compete depends on adopting technology on a timely and cost-effective basis.  Malfunctions in our information systems, fraud, error, communication and energy disruptions, security breaches or the failure to maintain effective and up-to-date information systems could disrupt our business operations, alienate customers, contribute to customer and provider disputes, result in regulatory violations, possible liability, increase administrative expenses or lead to other adverse consequences any of which could have a material adverse effect on our results of operations or financial condition.  The use of member data by all of our businesses is regulated at federal and local levels.  These laws and rules change frequently, and developments require adjustments or modifications to our technology infrastructure.

Our information systems and applications require an ongoing commitment of significant resources to maintain, upgrade and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, compliance with legal requirements, and changing operational needs. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties' failure to perform adequately.  If we are unable to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our business, financial condition and results of operations.  If the information we rely upon to run our business were found to be inaccurate or unreliable or if we fail to maintain our information systems and data integrity effectively we could suffer from, among other things, operational disruptions, such as the inability to pay claims or to make claims payments on a timely basis, have problems in determining medical cost estimates and establishing appropriate pricing and reserves, loss of members, and difficulty in attracting new members, regulatory violations and resulting possible liability and limitations on our operations, increases in operating expenses or suffer other adverse consequences.  See “Item 1A   Risk Factors–Risks Relating to the Regulation of Our Industry – As a Medicare Advantage program participant, we are subject to complex regulations.  If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties, and our Medicare Advantage contracts may be terminated or our operations may be required to change in a manner that has a material impact on our business.” See also “Item 1A. Risk Factors–Risks Relating to the Regulation of Our Industry – We may be subject to government audits, regulatory proceedings or investigative actions, which may find that our policies, procedures, practices or contracts are not compliant with, or are in violation of, applicable healthcare regulations.”

Our business requires the secure transmission of confidential information over public networks.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security system and patient data stored in our information systems. Anyone who circumvents our security measures could misappropriate our confidential information or cause interruptions in services or operations.  The internet is a public network and data is sent over this network from many sources.  In the past, computer viruses or software programs that disable or impair computers have been distributed and have rapidly spread over the internet.  Computer viruses could be introduced into our systems, or those of our providers or regulators, which could disrupt our operations, or make our systems inaccessible to our providers or regulators.

We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches.  Because of the confidential health information we store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and loss.  We are taking all needed security measures to prevent security breaches, and ensure our business operations won’t be adversely affected by potential security breaches.


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We face risks related to litigation.

We are subject to a variety of legal actions that affect any business, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims and intellectual property-related litigation.  In addition, because of the nature of our business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of our products and services, claims relating to the denial of benefits or coverage, medical malpractice actions, allegations of anti-competitive and unfair business activities, provider disputes, broker and agent disputes, and claims by regulatory actions by agencies for non-compliance, among others.  We may also be subject to an increase in litigation in our Property and Casualty segment in connection with insureds’ Hurricanes Irma and Maria claims.  See “Risks Related to Our Business―Large scale natural disasters may have a material adverse effect on our business, financial condition and results of operations.”   Legal proceedings are inherently unpredictable and we cannot ascertain their outcome. We have insurance to cover liabilities relating to litigation; however, insurance coverage may not be sufficient to cover any such liability or our insurers could deny or dispute coverage.  Results of regulatory actions could require us to change our business practices and may affect our profitability.  Substantial liability relating to legal or regulatory actions could adversely affect our cash flow, results of operations, and financial conditions.  See “Item 3. Legal Proceedings.”

Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations.

Puerto Rico has historically been at a relatively high risk of natural disasters such as hurricanes and earthquakes.  If Puerto Rico were to experience a large-scale natural disaster, claims incurred by our Managed Care, Life, and Property and Casualty segments would likely increase and our properties may incur substantial damage, which could have a material adverse effect on our business, financial condition and results of operations.  Puerto Rico has recently experienced consecutive large-scale natural disasters, such as Hurricane Maria in September 2017, and a series of earthquakes affecting certain areas in the south of the island in January 2020.  If the severity of any such natural disaster exceeds what our catastrophe reinsurance protection, as in the case of Hurricane Maria in September 2017, we may potentially incur material losses.  Furthermore, unforeseen major public health issues following these catastrophic events, such as pandemics and epidemics, like mosquito-borne epidemics (Dengue, Zika, etc.), conditions for which vaccines may not exist, are not effective, or have not been widely administered, could have a material adverse effect on our business, financial condition, and results of operations.

Claims in our Property and Casualty segment increased in 2017 and 2018 as the result of the losses caused by Hurricanes Irma and Maria in Puerto Rico.  The Puerto Rico Insurance Code requires the Company to resolve claims within a period of 90 days.  Due to the substantial increase in the volume of claims following a catastrophic event, there is a business risk that not all claims will be resolved within the timeframe stipulated in the Puerto Rico Insurance Code, which may result in penalties imposed by the Commissioner of Insurance of Puerto Rico.  We, along with various other property and casualty insurers, have in fact been fined by the Commissioner of Insurance for failing to pay claims within the 90-day period.  Although we are challenging those fines, which total approximately $1.0 million, based on our interpretation of the insurance code that the extraordinary circumstances following the 2017 hurricanes justified any delay, there can be no assurances that we will prevail.  Furthermore, there is a risk of an increase in the volume of litigations by insureds who are not satisfied with the insurance payout or adjustments.  In fact, lawsuits against our Property and Casualty segment increased in 2018 and 2019.  As of December 31, 2019, our Property and Casualty subsidiary had been served in a total of 388 cases relating to Hurricanes Maria and Irma. Of those, 314 remianed open, and 74 had been closed, as of December 31, 2019.  Although after a review of all cases served and filed but not served, we have determined that our reserves as of December 31, 2019 are adequate, there is a risk that litigation results in payments and expenses that materially exceed our reserved amount.  See Note 24, Contingencies, of the Notes to Consolidated Financial Statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.


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Present and future covenants in our secured term loans and note purchase agreements may restrict our operations and adversely affect our ability to pursue desirable business opportunities.

The secured term loans contain financial and non-financial covenants that restrict, among other things, the granting of certain liens, limitations on acquisitions and limitations on changes in control. These non-financial covenants could restrict our operations.  In addition, if we fail to make any required payment under our secured term loans or to comply with any of the non-financial covenants included therein, we would be in default and the lenders or holders of our debt, as the case may be, could cause all of our outstanding debt obligations under our secured term loans to become immediately due and payable, together with accrued and unpaid interest and, cease to make further extensions of credit.  If the indebtedness under our secured term loans is accelerated, we may be unable to repay or re-finance the amounts due and our business may be materially adversely affected.

We may incur additional indebtedness in the future.  Our debt service obligations may require us to use a portion of our cash flow to pay interest and principal on debt instead of for other corporate purposes, including funding future expansion.  If our cash flow and capital resources are insufficient to service our debt obligations, we may be forced to seek extraordinary dividends from our subsidiaries, sell assets, seek additional equity or debt capital or restructure our debt.  However, these measures might be prohibited by applicable regulatory requirements, unsuccessful or inadequate in permitting us to meet scheduled debt service obligations. We may also incur future debt obligations that might subject us to restrictive covenants that could affect our financial and operational flexibility.

Our breach or failure to comply with any of these covenants could result in a default under our secured term loan and the acceleration of amounts due thereunder.  Indebtedness could also limit our ability to pursue desirable business opportunities, and may affect our ability to maintain an investment grade rating for our indebtedness.

If we do not effectively manage the growth of our operations and our acquisitions, we may not be able to achieve our profitability targets.

Our growth strategy includes expanding our healthcare delivery business, enhancing our market share in Puerto Rico, entering new geographic markets, introducing new insurance products and programs, further developing our relationships with independent agencies or brokers and pursuing acquisition opportunities.  Our growth strategy exposes us to additional risks, including our ability to:

identify profitable growth opportunities in current and additional markets;
transact successful acquisitions, capital investments and other growth initiatives;
determine the correct value of assets and investments;
implement adequate pricing and operational structure, including underwriting and claim management processes;
design attractive and profitable insurance and health products and services;
recruit required personnel for expanded operations, including officers, agents, brokers, medical providers, and other key personnel;
obtain regulatory permission required to operate in other jurisdictions or lines of business;
comply with regulatory requirements;
integrate acquired business to our operations, including integration of information technology, management and personnel, and administrative systems;
acquire business and regulatory knowledge and expertise in new lines of business;
create the expected return over time; and
implement new, or modify existing internal monitoring and control systems.


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Additionally, our management and other key personnel may expend considerable time and effort which may distract them from their core activities. We may face risk associated to unknown or unidentified liabilities resulting from our investments or acquisitions. We may also be subject to changes in trade protection laws, policies and measures, and other regulatory requirements affecting our business, including the Foreign Corrupt Practices Act and laws prohibiting corrupt payments.

If our goodwill or intangible assets become impaired, it may adversely affect our financial condition and future results of operations.

As of December 31, 2019, we had approximately $28.6 million and $1.9 million of goodwill and intangible assets recorded on our balance sheet, primarily related to the TSA acquisition, that represent 1.1% of our total consolidated assets and 3.2% of our consolidated stockholders’ equity.  In an effort to expand the health clinics reporting unit, the Company purchased various health clinics across different municipalities in Puerto Rico, resulting in a recognition of goodwill of approximately $3.2 million in 2019.  The fair values initially assigned to the assets acquired and liabilities assumed are preliminary and are subject to refinement for up to one year after the closing date of the acquisition as new information becomes available.  If we make additional acquisitions it is likely that we will record additional goodwill and intangible assets on our consolidated balance sheet.

In accordance with applicable accounting standards, we periodically evaluate our goodwill and other intangible assets to determine the recoverability of their carrying values.  Goodwill and other intangible assets with indefinite lives are tested for impairment at least annually.  Impairment testing requires us to make assumptions and judgments regarding the estimated fair value of our reporting units, including goodwill and other intangible assets (with indefinite lives).  Estimated fair values developed based on our assumptions and judgments might be significantly different if other reasonable assumptions and estimates were to be used.  If estimated fair values are less than the carrying values of the equity and other intangible assets with indefinite lives in future impairment tests, or if significant impairment indicators are noted relative to other intangible assets subject to amortization, we may be required to record significant impairment losses against future income.  Factors that may be considered a change in circumstances, indicating that the carrying value of the goodwill or amortizable intangible assets may not be recoverable, include reduced future cash flow estimates and slower growth rates than the industry.

Any future evaluations requiring an impairment of our goodwill and other intangible assets could adversely affect our results of operations and stockholders' equity in the period in which the impairment occurs.  A material decrease in stockholders' equity could, in turn, negatively impact our debt ratings or potentially impact our compliance with existing debt covenants.

In addition, the estimated value of our reporting units may be impacted as a result of the implementation of various Health Care Reform regulations.  Such regulations could have significant effects on our future operations, which in turn could unfavorably affect our ability to support the carrying value of certain goodwill and other intangible assets and result in significant impairment charges in future periods.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting EstimatesGoodwill and Other Intangible Assets”.

The effectiveness of our Company’s strategy, talent management and alignment of talent to our business needs and risks to our brand and reputation present overarching risks our Company.

Effectiveness of our enterprise strategy, talent management and alignment of talent to our business needs and risks to our brand and reputation present overarching risks to our Company.  There can be no assurance regarding the effectiveness of our enterprise strategy, our ability to manage and align our talent to our business needs or our ability to avoid harm to our brand and reputation.  In addition, there can be no assurance that U.S. government fiscal policy, the implementation of the ACA, repeal or other changes to the ACA or additional changes to the U.S. health care system will not require us to revise the ways in which we conduct business, put us at risk of loss of business or materially adversely affect our business, cash flows, financial position or operating results.


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Risks Relating to Taxation

If we are considered to be a controlled foreign corporation under the related person insurance income rules or a passive foreign investment company for United States federal income tax purposes, U.S. persons that own our shares of Class B common stock could be subject to adverse tax consequences.

We do not expect that we will be considered a controlled foreign corporation under the related person insurance income rules (a “RPII CFC”) for U.S. federal income tax purposes.  However, because RPII CFC status depends in part upon the correlation between an insurance company’s shareholders and such company’s insurance customers and the extent of such company’s insurance business outside its country of incorporation, there can be no assurance that we will not be a RPII CFC in any taxable year.  We do not intend to monitor whether we generate RPII or becomes a RPII CFC.

Based on our current business assets and operations, we do not expect that we will be considered a ‘‘passive foreign investment company’’ (a “PFIC”) for U.S. federal income tax purposes.  However, because PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, less than 25 percent owned equity investments) in each year, which may be uncertain and may vary substantially over time, there can be no assurance that we will not be considered a PFIC for any taxable year.  Our belief that it is not a PFIC is based, in part, on the fact that the PFIC rules include provisions intended to provide an exception for bona fide insurance companies predominately engaged in an insurance business.  However, the scope of this exception is not entirely clear and there are no administrative pronouncements, judicial decisions or Treasury regulations that provide guidance as to the application of the PFIC rules to insurance companies.

If we were a RPII CFC in any taxable year or if the Company was treated as a PFIC for any taxable year, certain adverse consequences could apply to certain U.S. persons that own our shares of Class B common stock.

Legislative and other measures that may be taken by local and federal government taxing authorities could materially increase our tax burden.

In December 2018, the governor of Puerto Rico signed into law Act 257 of 2018, better known as the Puerto Rico Tax Reform, to amend the Internal Revenue Code for a New Puerto Rico.  Approved changes include a reduction from a 39% to a 37.5% maximum corporate tax rate; an increase from 80% to 90% on the amount of net operating loss carryover deduction available to be claimed against current year net income; an increase in the amounts of withholding at source for services rendered from 7% to 10%; a limitation in the amount of net operating losses generated by a corporate shareholder allowed to be netted against net income distributed from a flow-through investment, not permitted for taxable years beginning after December 31, 2018; and a revised large taxpayer definition to include flow-through entities and extend the determination of audited financial statement requirements at the group level.  The law also adds requirements for the deductibility of expenses.  All of these changes are effective for taxable years beginning January 1, 2019.  We do not expect the tax reform to adversely impact our tax burden.  We will continue to monitor and analyze the impact of the legislation, as any increase in the amount of taxes we pay and the taxation of the customers we serve may have a material adverse effect to our financial condition, results of operations and cash flows.

On December 22, 2017 the US Government enacted PL 115-97, as the Tax Cut and Jobs Act (“TCJA”). The TCJA incorporates a series of changes in tax rates at the federal level applicable for taxable years beginning after December 31, 2017 and before January 1, 2026. United States federal corporate income tax rate is reduced from a 35% maximum to a 21% flat rate. While special tax rates on capital gains and qualified dividends remain the same under the TCJA, changes in tax rate at the federal level are expected to have minimal impact on our business, as we are currently taxed only for passive income earned on investments, which continue to be subject to withholding at source at its gross level.


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Risks Relating to the Regulation of Our Industry

Changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations.

Our business is subject to substantial federal and local regulation and frequent changes to the applicable legislative and regulatory schemes, including general business regulations and laws relating to taxation, privacy, data protection, pricing, insurance, Medicare and health care fraud and abuse laws.  Please refer to “Item 1.   Business – Regulation”.  Changes in these laws, enactment of new laws or regulations, changes in interpretation of these laws or changes in enforcement of these laws and regulations may materially impact our business.  Such changes include without limitation:

initiatives to provide greater access to coverage for uninsured and under-insured populations without adequate funding to health plan or to be funded through taxes or other negative financial levy on health plans;
payments to health plans that are tied to the achievement of certain quality performance measures and medical loss ratio requirements;
specific legislative or regulatory changes to the Medicare or Medicaid programs, including changes in the bidding process or other means to materially reduce premiums;
local government regulatory changes;
increased government enforcement actions, or changes in the interpretation or application, of fraud and abuse and health information privacy laws; and
regulations that increase the operational burden on health plans, or that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health plans.

Regulations promulgated by the Commissioner of Insurance and CMS and other agencies, among other things, influence how our insurance subsidiaries conduct business, and place limitations on investments and dividends.  Possible penalties for violations of such regulations include fines, orders to cease and desist and possible suspension or termination of licenses.  The regulatory powers of the Commissioner of Insurance are mainly designed to protect policyholders, not shareholders.  While we cannot predict the terms of future regulation, the enactment of new legislation could affect the cost or demand for insurance policies, limit our ability to obtain rates or premiums, when needed, otherwise restrict our operations, limit the expansion of our business, expose us to expanded liability or impose additional compliance requirements.  In addition, we may incur additional operating expenses in order to comply with new legislation.

Future regulatory actions by the Commissioner of Insurance or other governmental agencies, including federal authorities, could have a material adverse effect on the profitability or marketability of our business, financial condition and results of operations, which in turn could impact the value of our business model and result in potential impairments of our goodwill and other intangible assets.

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.

The ACA provides comprehensive changes to the U.S. health care system.  One key piece of the legislation imposes an annual insurance industry assessment, with increasing annual amounts based on premium growth, commonly known as the HIP fee.  Such assessment may not be deductible for income tax purposes.  If the cost of the federal premium tax is not included in the calculation of our rates, or if we are unable to otherwise adjust our business model to address this tax, our results of operations, financial position and liquidity may be materially adversely affected.  We expect to pay a HIP fee of $65.5 million for 2020. However, in December 2019, as part of the Further Consolidated Appropriations Act of 2020, the HIP fee was permanently repealed for calendar years beginning after December 31, 2020.


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Also, health plans serving the individual market are subject to the guaranteed issue provisions under which the plans are required to issue coverage to individuals without regard to their health status of pre-existing conditions, which could lead to adverse selection by consumers.  On July 16, 2014, the Department of Health and Human Services sent a letter or the Commissioner of Insurance of Puerto Rico notifying that guarantee issue provisions under ACA are not applicable to U.S. territories. However, on July 22, 2013, similar guarantee issue and other market reforms provisions were enacted in Puerto Rico as part of amendments made to the Health Insurance Code of Puerto Rico. Although the Puerto Rico legislature is considering additional legislation to provide insurance companies more flexibility to comply with the additional requirements enacted in 2013, it is uncertain whether such legislation will in fact be enacted or the effect of any such additional legislation may have on our business.  If we are unable to adapt our premium structure to address the guaranteed issue requirement, our results of operations, financial position and liquidity may be materially adversely affected.

In the years since its enactment, there have been, and continue to be, significant developments in, and continued legislative activity around, attempts to repeal or repeal and replace the ACA. For example, on October 12, 2017, President Trump signed an executive order requiring the implementation of regulations that would exempt certain association plans from complying with ACA requirements, easing restrictions on certain short-term health plans and health reimbursement arrangements and limiting hospital and insurance company consolidation while promoting competition and choice. In August 2018 the Administration adopted a final rule to support short term, limited duration scope policies, and additional activity related to the individual market is anticipated through state waivers.  While Congress is no longer actively seeking to repeal and replace the ACA, additional changes are expected this year, largely through Administrative Actions.

The Further Consolidated Appropriations Act of 2020 provides for up to approximately $5.342 billion in Medicaid funding to Puerto Rico through September 30, 2021.  Although we believe this legislation, together with the ACA, may provide us with significant opportunities to grow our business, the implementation of enacted reforms, as well as future regulations and legislative changes, may have a material adverse effect on our results of operations, financial position or liquidity.  If we fail to effectively implement our operational and strategic initiatives with respect to the implementation of health care reform, or do not do so as effectively as our competitors, our business may be materially adversely affected.

As a Medicare Advantage program participant, we are subject to complex regulations.  If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties, and our Medicare Advantage contracts may be terminated or our operations may be required to change in a manner that has a material impact on our business.

The laws and regulations governing Medicare Advantage program participants are complex, subject to interpretation and frequent change and can expose us to penalties for non-compliance.  If we fail to comply with these laws and regulations, we could be subject to criminal fines, civil penalties or other sanctions, including the termination of our Medicare Advantage contracts.  In addition, maintaining compliance with such laws and regulations as they change may, in some cases, entail substantial direct costs.

Under CMS regulations to implement certain ACA requirements that became effective on June 1, 2012, CMS has the authority not to renew our contracts beginning in 2015 based solely on the Star Ratings of our Medicare Advantage plans if their respective ratings do not achieve three or more stars (out of 5.0 stars) for three consecutive contract years.  See the subcaption “Federal Regulation” in Item 1 of this Annual Report on Form 10-K for detailed information of the Stars Ratings.  In the final call letter to Medicare Advantage organizations dated April 6, 2015, CMS stated that it would not delay contract terminations based on a plan’s Star Ratings.

Historically, TSA plans have received annual Star Ratings higher than three stars.  CMS provides an increase to the rebate share in the bid from 50% to 65% when a program reaches 3.5 STARS, and to 70% when a plan reaches 4.5 STARS.  Also, a 5% quality bonus is provided to plans with Star Ratings of 4.0 or more.  As of December 31, 2019, TSA’s HMO plan achieved 4.0 overall on a 5.0 star rating system and TSA’s PPO plan achieved an overall rating of 3.5 stars on a 5.0-star rating system effective for product offerings in the year 2021.


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The Company is subject, and will likely continue to be subject, to audits from CMS in connection with the Medicare Advantage contracts.  A CMS audit may review the effectiveness of multiple matters, including the performance of the benefit administration, coverage determinations, claims processing and payment, process of appeals and grievances, dismissals, oversight of agents and brokers, and enrollment process.  CMS may impose civil monetary penalties as a result of their findings or require changes to our business practices that may adversely affect our profitability.  CMS may also prevent us from subscribing new members or terminate any of our Medicare Advantage contracts if it determines that any of these plans have failed to substantially carry out the contract or is carrying out the contract in a manner that is inconsistent with the efficient or effective administration of the Medicare Advantage program.  Compliance with CMS requirements may require us to divert resources that may affect the results of our operations and financial condition.  Any termination or non-renewal of our Medicare Advantage plans would have a material adverse effect on our business and financial results.

We may be subject to government audits, regulatory proceedings or investigative actions, which may find that our policies, procedures, practices or contracts are not compliant with, or are in violation of, applicable healthcare regulations.

Federal, Puerto Rico, and Costa Rica government authorities, including but not limited to the Commissioner of Insurance, ASES, CMS, the OIG, the Office of the Civil Rights of HHS, the U.S. Department of Justice, the U.S. Department of Labor, and the OPM, regularly make inquiries and conduct audits concerning our compliance with applicable insurance and other laws and regulations.  In addition, CMS has the right to require Medicare Advantage plan sponsors such as ourselves to self-disclose instances of noncompliance, enter into a corrective action plan,  and/or hire an independent auditor to work in accordance with CMS specifications to validate if the deficiencies that were found during a CMS full or partial program audit have been corrected and provide CMS with a copy of their audit findings.  If, in the future, we were required by CMS to hire an independent auditor, such audit would entail direct costs to us, in addition to potential penalties in the event of negative audit findings.  We may also become the subject of non-routine regulatory or other investigations or proceedings brought by these or other authorities, and our compliance with and interpretation of applicable laws and regulations may be challenged.  In addition, our regulatory compliance may also be challenged by private citizens under the “whistleblower provisions” of applicable laws.  The defense of any such challenge could result in substantial cost, diversion of resources, and a possible material adverse effect on our business.

An adverse action could result in one or more of the following:
recoupment of amounts we have been paid pursuant to our government contracts;
mandated changes in our business practices;
imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key employees;
additional reporting requirements and oversight and mandated corrective action or remediation plans;
loss or non-renewal of our government contracts or loss of our ability to participate in Medicare or other federal or local governmental payor programs;
damage to our reputation;
increased difficulty in marketing our products and services;
inability to obtain approval for future services or geographic expansions;
loss of one or more of our licenses to act as an insurance company, preferred provider or managed care organization or other licensed entity or to otherwise provide a service; and
suspension of ability to subscribe members.

Our failure to maintain an effective corporate compliance program may increase our exposure to civil damages and penalties, criminal sanctions and administrative remedies, such as program exclusion, resulting from an adverse review.  Any adverse review, audit or investigation could reduce our revenue and profitability and otherwise adversely affect our operating results.


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Effective prevention, detection and control systems are critical to maintain regulatory compliance and prevent fraud and failure of these systems could adversely affect the Company.

Failure to prevent, detect or control systems related to regulatory compliance or the failure of employees to comply with our internal policies, including data systems security or unethical conduct by managers and employees, could adversely affect our reputation and also expose us to litigation and other proceedings, fines and penalties.  Federal and state governments have made investigating and prosecuting health care and other insurance fraud and abuse a priority.  Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of members, billing for unnecessary medical services, improper marketing, and violations of patient privacy rights.  The regulations and contractual requirements applicable to the Company are complex and subject to change.  In addition, ongoing vigorous law enforcement, a highly technical regulatory scheme and the Dodd-Frank legislation and related regulations being adopted that enhance regulators’ enforcement powers and whistleblower incentives and protections, mean that its compliance efforts in this area will continue to require significant resources.

In addition, provider or member fraud that is not prevented or detected could impact our medical costs or those of our self-insured customers.  Further, during an economic downturn, our segments, including our Life and Property and Casualty segments may see increased fraudulent claims volume which may lead to additional costs because of an increase in disputed claims and litigation.

If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or if we fail to address emerging security threats, including cybersecurity threats, or detect and prevent privacy and security incidents, including those related to cybersecurity, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected.

The collection, maintenance, protection, use, transmission, disclosure and disposal of sensitive personal information are regulated at the federal, state, international and industry levels and requirements are imposed on us by contracts with customers.  HIPAA regulations also provide access rights and other rights for health plan beneficiaries with respect to their health information.  These regulations include standards for certain electronic transactions, including encounter and claims information, health plan eligibility and payment information.  Health plans are also subject to beneficiary notification and remediation obligations in the event of an authorized use or disclosure of personal health information.  HIPAA also requires business associates as well as covered entities to comply with certain privacy and security requirements.  Even though we provide for appropriate protections through our contracts with our third-party service providers and in certain cases assess their security controls, we still have limited oversight or control over their actions and practices.

Our facilities and systems and those of our third-party service providers may be vulnerable to privacy and security incidents; security attacks and breaches; acts of vandalism or theft; computer viruses; coordinated attacks by activist entities; emerging cybersecurity risks; misplaced or lost data; programming and/or human errors; or other similar events. Emerging and advanced security threats, including coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations.

Compliance with multiple and/or new privacy and security laws, regulations and requirements may result in increased operating costs, and may constrain our ability to manage our business model. In addition, HHS has expanded its HIPAA audit program to assess compliance efforts not only by covered entities, but also business associates.  Although we are not aware of HHS plans to audit any of our covered entities or business associates, an audit resulting in findings or allegations of non-compliance could have a material adverse effect on our results of operations, financial position and cash flows.  We are also subject to stricter breach notification requirements than those imposed on covered entities by virtue of HIPAA in terms of having to provide ASES with notice of a breach within twenty-four (24) hours.  These and other regulatory aspects make compliance with applicable health information laws more difficult.  For these reasons, our total compliance costs may increase in the future.


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Non-compliance or findings of non-compliance with applicable laws, regulations or requirements, or the occurrence of any privacy or security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive personal information, whether by us or by one of our third-party service providers, could have a material adverse effect on our reputation and business, including mandatory disclosure to the media, significant increases in the cost of managing and remediating privacy or security incidents and material fines, penalties and litigation awards, among other consequences, any of which could have a material and adverse effect on our results of operations, financial position and cash flows.

The revised rate calculation system for Medicare Advantage, the payment system for the Medicare Part D and changes in the methodology and payment policies used by CMS to establish rates could reduce our profitability and the benefits we offer our beneficiaries.

Medicare Advantage managed care plans are paid based off a CMS-calculated “benchmark” amount, and plans submit competitive bids that reflect the costs they expect to incur in providing the base Medicare benefits.  A Medicare Advantage plan’s actual payment rate is based on a complex statutory formula that takes into account a number of factors, including the relationship between the plan’s bid and the benchmark.  Medicare generally will rebate a portion of the amount by which the benchmark amount exceeded the accepted bid for certain plans. For plans achieving star rating of at least 3.5 stars, the portion of the savings retained by the plan is higher.  For plans achieving star ratings of at least 4 stars, the starting benchmark amount from which the savings is computed is also higher (a “quality bonus”).  If the bid is greater than the benchmark, the plan will be required to charge a premium to enrollees equal to the difference between the bid and the benchmark, which could affect our ability to attract enrollees.  CMS reviews the methodology and assumptions used in bidding with respect to medical and administrative costs, profitability and other factors.  CMS could challenge such methodology or assumptions or seek to cap or limit plan profitability.  CMS also could administratively seek to implement certain methodological changes to the Medicare Advantage rate calculations that could result in functionally lower payment rates, and may have a material adverse effect on our revenue, financial position, results of operations or cash flow.

We also face the risk of reduced or insufficient government funding and we may need to terminate our Medicare Advantage contracts with respect to unprofitable markets.  In addition, as a result of the competitive bidding process, our ability to participate in the Medicare Advantage program is affected by the pricing and design of our competitors’ bids.  Moreover, we may in the future be required to reduce benefits or charge our members an additional premium in order to maintain our current level of profitability, either of which could make our health plans less attractive to members and adversely affect our membership.

On January 6, 2020 and February 5, 2020, CMS released Part I and Part II, respectively, of its draft Advance Notice as well as additional Proposed Rules for Medicare Advantage reimbursement in 2021.  This draft notices contains important provisions that sustain the Puerto Rico MA program, including the zero claims adjustment.  The call letter will be finalized in early April.

CMS’s risk adjustment payment system and other Medicare Advantage funding pressures make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.

CMS has implemented a risk adjustment payment system for Medicare Advantage plans to improve the accuracy of payments and establish incentives for such plans to enroll and treat less healthy Medicare beneficiaries.  The risk adjusted premiums we receive are based on claims and encounter data that we submit to CMS within prescribed deadlines.  We develop our estimates for risk-adjusted premiums utilizing historical experience, or other data, and predictive models as sufficient member risk score data becomes available over the course of each CMS plan year. We recognize periodic changes to risk-adjusted premiums as revenue when the amounts are determinable and collection is reasonably assured, which are possible as additional diagnosis code information is reported to CMS, when the ultimate adjustment settlements are received from CMS, or we receive notification of such settlement amounts.  CMS adjusts premiums on two separate occasions on a retrospective basis.  The first retrospective adjustment for a given plan year generally occurs during the third quarter of that year.  This initial settlement represents the update of risk scores for the current plan year based on the severity of claims incurred in the prior plan year.  CMS then issues a final retrospective risk adjusted premium settlement for that plan year in the following year.  The data provided to CMS to determine members’ risk scores is subject to audit by CMS even after the annual settlements occur, which may result in the refund of premiums to CMS.  The result of these audits could materially reduce premium revenue in the year in which CMS determines a refund is required and could be material to our result of operations, financial position and cash flows.


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CMS is making significant changes to the manner in which it determines risk adjustment payments, including possible retroactive recoveries.  CMS introduced a new model for 2020 and continues to shift towards encounter based risk scores (EDS).  As a result of the risk adjustment process and CMS’s ability to modify the manner in which it applies such risk adjustments, it is difficult to predict with certainty our future revenue or profitability.  In addition, our own risk scores for any period may result in favorable or unfavorable adjustment to payment from CMS and our Medicare payment revenue.

Finally, we generally rely on providers, including certain network providers who are not our employees, to appropriately document all medical data, including the diagnosis codes submitted with claims, as the basis for our risk scores under the program.  Thus, our ability to meet our premium revenue estimates depends largely on the success of third party efforts to collect and properly reflect medical data, including diagnosis codes that must be submitted with claims.  There is no assurance that our providers will be successful in accurately collecting such medical data and diagnosis codes and, to the extent their efforts are not successful, such failure may have a material adverse effect on our premium revenues.

ASES’s risk adjustment payment system and payment structure, and its dependence on scarce or unavailable data, make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.

ASES has implemented a risk adjustment payment system for the Vital Program plan to reflect the differences in morbidity of enrolled members and differences in the regional cost of care.  The risk adjusted payment transfers are based on claims and encounter data that is submitted to ASES.  The risk adjustment factors are based on a prospective model, whereby the data for the prior year is used to establish the risk adjustment payments for the current year. For example, the risk scores are assigned to each member for the contract year ending October 31, 2019 using claims data for those members during the year ending October 31, 2018. We have been unable to develop reliable estimates for risk-adjusted premiums because of the lack of available data from prior periods which are the basis for risk scores. We have recognized an estimated risk-adjusted transfer payment for 2019 using the risk adjustment data provided by our actuaries. We were notified in December 2019 of the risk adjustment transfer payment for the period November 1, 2018 to April 30, 2019, but the final transfer payment for the first contract year will not be known until later in 2020 and may result in an unfavorable adjustment. ASES has not provided a timeline for the communication of the risk transfer payments.

Furthermore, the premium rates for the second contract year, which represents the period November 1, 2019 to June 30, 2020, will be adjusted by a morbidity factor which will reflect the change in the overall morbidity of the population from the base period (July 1, 2016 to June 30, 2017) and the contract year. This adjustment may result in unfavorable adjustment to payments from ASES and our Medicaid premium revenue.

ASES has additionally implemented a payment structure for the program that assigns members to one of 37 rate cells based on their age, gender, eligibility category and health conditions. Members assigned to High Cost High Needs (HCHN) rate cells receive premium payments that are much higher than those assigned based only on age and gender. If our enrollees are not assigned to the adequate rate cell, the premium we receive may not be sufficient to cover for their utilization, particularly in the case of HCHN members.

Finally, ASES may recover premiums paid for non-eligible participants.  However, we are dependent on ASES, which is in turn dependent on the local Medicaid office, for eligibility data.  Historically, ASES has not received updated eligibility data from the local Medicaid office in a timely manner.  Therefore, if we are not provided with timely eligibility data and we bill ASES for non-eligible members, ASES could attempt to recoup premiums from us, which could have a significant impact in our consolidated premiums and profitability.


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If during the open enrollment season our Medicare Advantage members enroll in another Medicare Advantage plan, they will be automatically disenrolled from our plan, possibly without our immediate knowledge.

Pursuant to the MMA, members enrolled in one insurer’s Medicare Advantage program will be automatically disenrolled from that program if they enroll in another insurer’s Medicare Advantage program.  If our members enroll in another insurer’s Medicare Advantage program, we may not discover that such member has been disenrolled from our program until such time as we fail to receive reimbursement from CMS in respect of such member, which may occur sometime after the disenrollment.  As a result, we may discover that a member has disenrolled from our program after we have already provided services to such individual.  Our profitability would be reduced as a result of such failure to receive payment from CMS if we had made related payments to providers and were unable to recoup such payments from them.

If we are deemed to have violated the Insurance Holding Company System Regulatory Act, we may suffer adverse consequences.

We are subject to change of control statutes applicable to insurance companies.  These statutes regulate, among other things, the acquisition of control of an insurance company or its holding company.  Under these statutes, no person may make an offer to acquire or to sell the issued and outstanding voting stock of an insurance company, which constitutes 10% or more of its issued and outstanding stock, or of the total issued and outstanding stock of an insurance holding company, without the prior approval of the Commissioner of Insurance.  Our amended and restated articles of incorporation (the articles) prohibit any institutional investor from owning 10% or more of our voting power and any person that is not an institutional investor from owning 5% or more of our voting power.  We cannot, however, assure you that ownership of our securities will remain below these thresholds.  To the extent that a person, including an institutional investor, acquires shares in excess of these limits, our articles provide for the Company to take certain actions, including refusing to give effect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the articles.  If the Commissioner of Insurance determines that a change of control has occurred without the Commissioner’s prior approval, we could be subject to fines and penalties, and in some instances the Commissioner of Insurance would have the discretion to revoke our operating licenses.

We are also subject to change of control limitations pursuant to our BCBSA license agreements.  The BCBSA ownership limits restrict beneficial ownership of our voting capital stock to less than 10% for an institutional investor and less than 5% for a non-institutional investor, both as defined in our articles.  In addition, no person may beneficially own shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest, whether voting or non-voting, in our company.  This provision in our articles cannot be changed without the prior approval of the BCBSA and the vote of holders of at least 75% of our common stock.

Our insurance subsidiaries are subject to minimum capital requirements.  Our failure to meet these standards could expose us to regulatory actions.

Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance, among other things, impose minimum capital requirements to our insurance subsidiaries, thereby restricting the amount of earnings that can be distributed by our insurance subsidiaries to us.  Although our insurance subsidiaries are currently in compliance with these requirements, there can be no assurance that we will continue to comply in the future.  Failure to maintain required levels of capital or to otherwise comply with the reporting requirements of the Commissioner of Insurance could subject our insurance subsidiaries to corrective actions, including involuntary rehabilitation or liquidation processes, or require us to provide financial assistance, either through subordinated loans or capital infusions, to ensure they maintain their minimum statutory capital requirements.

We are also subject to minimum capital requirements pursuant to our BCBSA license agreements.  See “Risks Related to Our BusinessThe termination or modification of our license agreements to use the BCBS name and mark could have a material adverse effect on our business, financial condition and results of operations.”


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Puerto Rico insurance laws and regulations and provisions of our articles and bylaws could delay, deter or prevent a takeover attempt that shareholders might consider to be in their best interests and may make it more difficult to replace members of our board of directors and have the effect of entrenching management.

Puerto Rico insurance laws and the regulations promulgated thereunder, and our articles and bylaws may delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider to be in their best interests.  For instance, they may prevent our shareholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context.  Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

Our license agreements with the BCBSA require that our articles contain certain provisions, including ownership limitations. See “Risks Relating to the Regulation of Our IndustryIf we are deemed to have violated the insurance company change of control statutes in Puerto Rico, we may suffer adverse consequences.”

Our articles and bylaws have anti-takeover effects and may delay, defer or prevent a takeover attempt that our shareholders might consider to be in their best interests.  In particular, our articles and bylaws:

permit our board of directors to issue one or more series of preferred stock;
divide our board of directors into three classes serving staggered three-year terms;
limit the ability of shareholders to remove directors;
impose restrictions on shareholders’ ability to fill vacancies on our board of directors;
impose advance notice requirements for shareholder proposals and nominations of directors to be considered at meetings of shareholders; and
impose restrictions on shareholders’ ability to amend our articles and bylaws.

See also “Risks Relating to the Regulation of Our IndustryIf we are deemed to have violated the Insurance Holding Company System Regulatory Act, we may suffer adverse consequences.”

Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance may also delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider to be in their best interests.  For instance, the Commissioner of Insurance must review any merger, consolidation or new issuance of shares of capital stock of an insurer or its parent company and make a determination as to the fairness of the transaction.  Also, a director of an insurer must meet certain requirements imposed by Puerto Rico insurance laws.

These voting and other restrictions may operate to make it more difficult to replace members of our board of directors and may have the effect of entrenching management regardless of their performance.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

We own a seven story building located at 1441 F.D. Roosevelt Avenue, in San Juan, Puerto Rico, and two adjacent buildings, as well as the adjoining parking lot, which is mainly used by the Managed Care segment.  In addition, we own five floors of a fifteen-story building located at 1510 F.D. Roosevelt Avenue, in Guaynabo, Puerto Rico, which is mainly used by the Property and Casualty segment.  We also own land and a multi-segment customer service center in the municipalities of Mayagüez and Ponce, Puerto Rico.  Through a health clinic we own land and a two-story medical facility in the municipality of Bayamón, Puerto Rico.  These properties are subject to liens under our credit facilities. In connection with our entrance to the Costa Rican market, we acquired a two-story building located in the city of San José, Costa Rica, which is used by the Life segment.  In addition to the properties described above, we or our subsidiaries are parties to operating leases that are entered into in the ordinary course of business.  See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources”.

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We believe that our facilities are in good condition and that the facilities, together with capital improvements and additions currently underway, are adequate to meet our operating needs for the foreseeable future.  The need for expansion, upgrading and refurbishment of facilities is continually evaluated in order to keep facilities aligned with planned business growth and corporate strategy.
 

Item 3.
Legal Proceedings

Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, U.S. Virgin Islands, Costa Rica, British Virgin Islands, 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, U.S. Virgin Islands, Costa Rica, British Virgin Islands, 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.  For a description of our legal proceedings, see Note 24, Contingencies, of the Notes to Consolidated Financial Statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K. 

Item 4.
Mine Safety Disclosures

None.

Part II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class B common stock is listed on the NYSE under the trading symbol “GTS”.  The following table presents high and low sales prices of our Class B common stock for each quarter of the years ended December 31:

 
 
High
   
Low
 
2019
           
First quarter
 
$
26.46
   
$
15.93
 
Second quarter
   
26.51
     
19.42
 
Third quarter
   
27.64
     
13.10
 
Fourth quarter
   
20.25
     
12.66
 
2018
               
First quarter
 
$
28.66
   
$
22.75
 
Second quarter
   
44.01
     
25.65
 
Third quarter
   
40.44
     
18.65
 
Fourth quarter
   
22.16
     
15.45
 

On February 20, 2020 the closing price of our Class B common stock on the NYSE was $17.64.

We used to have Class A common stock that had no established public trading market.  During July 2019, our Board of Directors authorized and approved the conversion (“Conversion”) of our remaining issued and outstanding Class A shares into Class B common shares.  Effective August 7, 2019, all Class A holders of record received one Class B share for each Class A share held.  Upon the Conversion, all remaining outstanding Class A shares were automatically cancelled and extinguished, and we now maintain a single class of common shares.


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Holders
 
As of February 20, 2020, there were 23,519,074 shares of Class B common Stock outstanding.  The number of holders of our shares was approximately 3,800.
 
Dividends
 
Subject to the limitations under Puerto Rico corporation law and any preferential dividend rights of outstanding preferred stock, of which there is currently none outstanding, holders of common stock are entitled to receive their pro rata share of such dividends or other distributions as may be declared by our board of directors out of funds legally available therefore.
 
Our ability to pay dividends is dependent on cash dividends from our subsidiaries.  Our subsidiaries are subject to regulatory surplus requirements and additional regulatory requirements, which may restrict their ability to declare and pay dividends or distributions to us.  In addition, our secured term loan restricts our ability to pay dividends if a default thereunder has occurred and is continuing.  Please refer to “Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Restriction on Certain Payments by the Corporation’s Subsidiaries”.  Also, see Note 18, Stockholders’ Equity, of the Notes to Consolidated Financial Statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
 
During the year ended December 31, 2019, we issued 48,602 Class A shares of our common stock to the heirs of a former shareholder, as a result of a litigation settlement.  The issuance of these Class A shares entitled all Class B shareholders due to certain anti-dilution rights; therefore, all holders of Class B shares at the close of business on July 26, 2019 (record date) received a share dividend of 0.051107 Class B shares for every Class B share they owned as of that time.  On August 6, 2019, the Company paid the Class B share dividend which amounted to $24.7 million.  Cash of $11 thousand was paid to shareholders in lieu of fractional shares.
 
Other than as described above, we did not declare any cash dividends during the two most recent fiscal years and do not expect to pay any cash dividends in the near future.  We currently intend to retain future earnings, if any, to finance operations and expand our business.  The ultimate decision to pay any dividend, however, remains within the discretion of our board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual limitations and other considerations our board of directors deems relevant.
 
Securities Authorized for Issuance Under Equity Compensation Plan
 
See Note 21, Share-Based Compensation, of the Notes to Consolidated Financial Statements, included in “Item 8, Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
 
Performance Graph
 
The following graph compares the price performance of our Class B common stock for the period from January 1, 2015 through December 31, 2019, with the price performance over such period of (i) the Standard and Poor’s 500 Stock Index (the “S&P 500 Index”) and (ii) the Standard & Poor’s 500 Managed Health Care Index (the “S&P MHC Index”).  The comparison assumes an investment of $100 on January 1, 2015 in each of our Class B common stock, the S&P 500 Index, and the S&P MHC Index.  The performance graph is not necessarily indicative of future performance.
 
The comparisons shown in the graph are based on historical data and the Company cautions that the stock price in the graph below is not indicative of, and is not intended to forecast, the potential future performance of our Class B common stock.  Information used in the preparation of the graph was obtained from Bloomberg; a source we believe to be reliable, however, the Company is not responsible for any errors or omissions in such information.
 

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graphic

Ticker
Name
1/2/2015
12/31/2015
12/30/2016
12/29/2017
12/31/2018
12/31/2019
GTS US Equity
TRIPLE-S MANAGEMENT CORP
100.00
124.47
107.76
129.36
90.53
101.17
SPX Index
S&P 500 INDEX
100.00
111.57
122.21
145.94
136.84
176.35
S5MANH Index
S&P MHC Index
100.00
160.83
189.83
270.36
296.44
351.57

Recent Sales of Unregistered Securities
 
Not applicable.
 
Purchases of Equity Securities by the Issuer
 
The following table presents information related to our repurchases of common stock for the period indicated:

(Dollar amounts in millions, except per share data)
 
Total Number
of Shares
Purchased (1)(2)
   
Average
Price Paid
per Share
   
Total Number of
Shares Purchased as
Part of Publicly
Announced
Programs (2)
   
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs
 
                         
October 1, 2019 to October 31, 2019
   
-
   
$
-
     
-
   
$
9.8
 
November 1, 2019 to November 30, 2019
   
273,422
     
18.64
     
267,900
     
20.0
 
December 1, 2019 to December 31, 2019
   
259,981
     
19.21
     
259,981
     
15.0
 
                                 

(1) Represents shares repurchased and retired as the result of non-cash tax witholdings upon vesting of shares of participants under the Company’s equity compensation plans.  In November 2019, 5,522 shares were repurchased and retired as the result of non-cash tax witholdings upon vesting of shares.

(2)  In August 2017 the Company's Board of Directors authorized a $30.0 million Share Repurchase Program of its Class B common stock.  In October 2019 the Company’s Board of Directors authorized an expansion to this repurchase program, effective November 2019, increasing its remaining balance up to a total of $25.0 million.


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Item 6.
Selected Financial Data
 
Statement of Earnings Data
 
(Dollar amounts in millions, except per share data)

Years ended December 31,
 
2019
   
2018
   
2017
   
2016
   
2015
 
Premiums earned, net
 
$
3,252.9
   
$
2,938.6
   
$
2,826.9
   
$
2,890.6
   
$
2,783.2
 
Administrative service fees
   
9.9
     
14.7
     
16.5
     
17.9
     
44.7
 
Net investment income
   
62.0
     
61.9
     
51.6
     
48.9
     
45.2
 
Other operating revenues
   
8.6
     
5.8
     
3.7
     
3.5
     
3.7
 
Total operating revenues
   
3,333.4
     
3,021.0
     
2,898.7
     
2,960.9
     
2,876.8
 
Net realized investments gains
   
5.8
     
0.3
     
10.8
     
17.4
     
18.9
 
Net unrealized investment gains (losses) on equity investments
   
32.2
     
(36.5
)
   
-
     
-
     
-
 
Other income, net
   
4.2
     
11.3
     
6.6
     
6.5
     
7.0
 
Total revenues
   
3,375.6
     
2,996.1
     
2,916.1
     
2,984.8
     
2,902.7
 
Benefits and expenses:
                                       
Claims incurred
   
2,666.3
     
2,527.6
     
2,353.1
     
2,472.2
     
2,318.7
 
Operating expenses
   
569.4
     
554.7
     
477.2
     
493.9
     
518.7
 
Total operating costs
   
3,235.7
     
3,082.3
     
2,830.3
     
2,966.1
     
2,837.4
 
Interest expense
   
7.6
     
6.9
     
6.8
     
7.6
     
8.2
 
Total benefits and expenses
   
3,243.3
     
3,089.2
     
2,837.1
     
2,973.7
     
2,845.6
 
Income (loss) before taxes
   
132.3
     
(93.1
)
   
79.0
     
11.1
     
57.1
 
Income tax expense (benefit)
   
39.4
     
(29.8
)
   
24.5
     
(6.3
)
   
5.1
 
Net income (loss)
   
92.9
     
(63.3
)
   
54.5
     
17.4
     
52.0
 
Net loss attributable to non-controlling interest
   
-
     
-
     
-
     
-
     
(0.1
)
Net income (loss) attributable to TSM
 
$
92.9
   
$
(63.3
)
 
$
54.5
   
$
17.4
   
$
52.1
 
Basic net income (loss) per share (1):
 
$
3.98
   
$
(2.76
)
 
$
2.27
   
$
0.71
   
$