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Section 1: 10-Q (10-Q)


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

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

For the quarterly period ended March 31, 2020

or

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

For the transition period from                           to                        

COMMISSION FILE NUMBER:  001-33865

TRIPLE-S MANAGEMENT CORPORATION

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

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

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

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

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

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

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

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

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

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

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

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

Title of each class
Outstanding at March 31, 2020
   
Common Stock Class B, $1.00 par value
23,806,013




Table of Contents
Triple-S Management Corporation

FORM 10-Q

For the Quarter Ended March 31, 2020

Table of Contents

3
 
 
 
Item 1.
3
 
 
 
 
Item 2.
28
 
 
 
 
28
 
28
 
29
 
31
 
32
 
33
 
34
 
36
 
37
 
38
 
 
 
 
Item 3.
39
 
 
 
 
Item 4.
39
 
 
 
40
 
 
 
Item 1.
40
 
 
 
 
Item 1A.
40
 
 
 
 
Item 2.
41
 
 
 
 
Item 3.
41
 
 
 
 
Item 4.
41
 
 
 
 
Item 5.
41
 
 
 
 
Item 6.
42
 
 
 
43

2

Table of Contents

Part I -  Financial Information

Item 1.  Financial Statements

Triple-S Management Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)


 
 
March 31,
2020
   
December 31,
2019
 
 
           
Assets
           
Investments and cash:
           
Fixed maturities available for sale, at fair value
 
$
1,251,031
   
$
1,242,883
 
Fixed maturities held to maturity, at amortized cost
   
1,859
     
1,860
 
Equity investments, at fair value
   
299,016
     
287,525
 
Other invested assets, at net asset value
   
103,118
     
100,508
 
Policy loans
   
11,102
     
10,861
 
Cash and cash equivalents
   
104,580
     
109,837
 
Total investments and cash
   
1,770,706
     
1,753,474
 
Premiums and other receivables, net
   
644,984
     
567,692
 
Deferred policy acquisition costs and value of business acquired
   
237,171
     
234,885
 
Property and equipment, net
   
89,367
     
88,588
 
Deferred tax asset
   
81,337
     
77,294
 
Goodwill
   
28,614
     
28,599
 
Other assets
   
136,015
     
68,294
 
Total assets
 
$
2,988,194
   
$
2,818,826
 
Liabilities and Stockholders’ Equity
               
Claim liabilities
 
$
730,818
   
$
709,258
 
Liability for future policy benefits
   
392,923
     
386,017
 
Unearned premiums
   
90,259
     
93,301
 
Policyholder deposits
   
196,905
     
189,120
 
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
55,260
     
47,781
 
Accounts payable and accrued liabilities
   
452,823
     
325,761
 
Deferred tax liability
   
6,031
     
10,257
 
Short-term borrowings
   
78,000
     
54,000
 
Long-term borrowings
   
24,897
     
25,694
 
Liability for pension benefits
   
34,128
     
34,465
 
Total liabilities
   
2,062,044
     
1,875,654
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders’ equity
               
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,806,013 and 23,799,633 shares at March 31, 2020 and December 31, 2019, respectively
   
23,806
     
23,800
 
Additional paid-in capital
   
53,762
     
60,504
 
Retained earnings
   
803,887
     
830,198
 
Accumulated other comprehensive income
   
45,395
     
29,363
 
Total Triple-S Management Corporation stockholders’ equity
   
926,850
     
943,865
 
Non-controlling interest in consolidated subsidiary
   
(700
)
   
(693
)
Total stockholders’ equity
   
926,150
     
943,172
 
Total liabilities and stockholders’ equity
 
$
2,988,194
   
$
2,818,826
 

See accompanying notes to unaudited condensed consolidated financial statements.

3

Table of Contents

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


 
 
Three months ended
March 31,
 
 
 
2020
   
2019
 
Revenues:
           
Premiums earned, net
 
$
875,897
   
$
768,002
 
Administrative service fees
   
2,194
     
2,632
 
Net investment income
   
14,311
     
15,376
 
Other operating revenues
   
4,039
     
1,577
 
Total operating revenues
   
896,441
     
787,587
 
Net realized investment (losses) gains
   
(466
)
   
1,315
 
Net unrealized investment (losses) gains on equity investments
   
(56,806
)
   
19,669
 
Other income, net
   
3,605
     
1,169
 
Total revenues
   
842,774
     
809,740
 
Benefits and expenses:
               
Claims incurred
   
714,522
     
623,190
 
Operating expenses
   
162,201
     
132,663
 
Total operating costs
   
876,723
     
755,853
 
Interest expense
   
1,853
     
1,788
 
Total benefits and expenses
   
878,576
     
757,641
 
(Loss) income before taxes
   
(35,802
)
   
52,099
 
Income tax (benefit) expense
   
(9,650
)
   
17,316
 
Net (loss) income
   
(26,152
)
   
34,783
 
Less: Net loss attributable to non-controlling interest
   
7
     
3
 
Net (loss) income attributable to Triple-S Management Corporation
 
$
(26,145
)
 
$
34,786
 
Earnings per share attributable to Triple-S Management Corporation
               
Basic net (loss) income per share
 
$
(1.12
)
 
$
1.53
 
Diluted net (loss) income per share
 
$
(1.12
)
 
$
1.52
 

See accompanying notes to unaudited condensed consolidated financial statements.

4

Table of Contents

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


 
 
Three months ended
March 31,
 
 
 
2020
   
2019
 
Net (loss) income
 
$
(26,152
)
 
$
34,783
 
Other comprehensive income, net of tax:
               
Net unrealized change in fair value of available for sale securities, net of taxes
   
15,879
     
13,441
 
Defined benefit pension plan:
               
Actuarial gain, net
   
153
     
56
 
Total other comprehensive income, net of tax
   
16,032
     
13,497
 
Comprehensive (loss) income
   
(10,120
)
   
48,280
 
Comprehensive loss attributable to non-controlling interest
   
7
     
3
 
Comprehensive (loss) income attributable to Triple-S Management Corporation
 
$
(10,113
)
 
$
48,283
 

See accompanying notes to unaudited condensed consolidated financial statements.

5

Table of Contents


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


 
 
Class A
Common
Stock
   
Class B
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Triple-S
Management
Corporation
Stockholders’
Equity
   
Non-controlling
Interest in
Consolidated
Subsidiary
   
Total
Stockholders’
Equity
 
                                                 
Balance, December 31, 2019
 
$
-
   
$
23,800
   
$
60,504
   
$
830,198
   
$
29,363
   
$
943,865
   
$
(693
)
 
$
943,172
 
Share-based compensation
   
-
     
590
     
1,769
     
-
     
-
     
2,359
     
-
     
2,359
 
Repurchase and retirement of common stock
   
-
     
(584
)
   
(8,511
)
   
-
     
-
     
(9,095
)
   
-
     
(9,095
)
Comprehensive (loss) income
   
-
     
-
     
-
     
(26,145
)
   
16,032
     
(10,113
)
   
(7
)
   
(10,120
)
Cummulative effect adjustment due to implementation of ASU 2016-13
   
-
     
-
     
-
     
(166
)
   
-
     
(166
)
   
-
     
(166
)
Balance, March 31, 2020
 
$
-
   
$
23,806
   
$
53,762
   
$
803,887
   
$
45,395
   
$
926,850
   
$
(700
)
 
$
926,150
 

 
Class A
Common
Stock
   
Class B
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Triple-S
Management
Corporation
Stockholders’
Equity
   
Non-controlling
Interest in
Consolidated
Subsidiary
   
Total
Stockholders’
Equity
 
                                                 
Balance, December 31, 2018
 
$
951
   
$
21,980
   
$
34,021
   
$
761,970
   
$
3,062
   
$
821,984
   
$
(676
)
 
$
821,308
 
Share-based compensation
   
-
     
177
     
1,409
     
-
     
-
     
1,586
     
-
     
1,586
 
Repurchase and retirement of common stock
   
-
     
(1
)
   
(15
)
   
-
     
-
     
(16
)
   
-
     
(16
)
Comprehensive income (loss)
   
-
     
-
     
-
     
34,786
     
13,497
     
48,283
     
(3
)
   
48,280
 
Balance, March 31, 2019
 
$
951
   
$
22,156
   
$
35,415
   
$
796,756
   
$
16,559
   
$
871,837
   
$
(679
)
 
$
871,158
 

 
See accompanying notes to unaudited condensed consolidated financial statements.
 
.



6

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


 
 
Three months ended
March 31,
 
 
 
2020
   
2019
 
Cash flows from operating activities:
           
Net (loss) income
 
$
(26,152
)
 
$
34,783
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Depreciation and amortization
   
3,907
     
3,505
 
Net amortization of investments
   
676
     
316
 
Additions to the allowance for doubtful receivables
   
949
     
9,236
 
Deferred tax (benefit) expense
   
(12,268
)
   
14,932
 
Net realized investment losses (gains) on sale of securities
   
466
     
(1,315
)
Net unrealized losses (gains) on equity investments
   
56,806
     
(19,669
)
Interest credited to policyholder deposits
   
1,561
     
1,386
 
Share-based compensation
   
2,359
     
1,586
 
(Increase) decrease  in assets:
               
Premium and other receivables, net
   
(58,059
)
   
(41,002
)
Deferred policy acquisition costs and value of business acquired
   
(2,737
)
   
(4,503
)
Deferred taxes
   
(88
)
   
27
 
Other assets
   
(62,034
)
   
(2,023
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
21,560
     
(58,825
)
Liability for future policy benefits
   
6,906
     
6,231
 
Unearned premiums
   
(3,042
)
   
(2,279
)
Liability to Federal Employees' Health Benefits and Federal Employees' Programs
   
7,479
     
3,937
 
Accounts payable and accrued liabilities
   
68,229
     
(16,223
)
Net cash provided by (used in) operating activities
   
6,518
     
(69,900
)
7

Table of Contents

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

 
 
Three months ended
March 31,
 
 
 
2020
   
2019
 
 
           
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
43,425
   
$
164,997
 
Fixed maturities matured/called
   
11,099
     
12,267
 
Securities held to maturity:
               
Fixed maturities matured/called
   
81
     
1,154
 
Equity investments sold
   
21,107
     
23,123
 
Other invested assets sold
   
8,524
     
373
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(42,822
)
   
(166,626
)
Securities held to maturity:
               
Fixed maturities
   
(80
)
   
(539
)
Equity investments
   
(102,733
)
   
(9,139
)
Other invested assets
   
(10,438
)
   
(8,546
)
Increase in other investments
   
(4,086
)
   
(535
)
Net change in policy loans
   
(241
)
   
(309
)
Net capital expenditures
   
(4,587
)
   
(2,968
)
Capital contribution on equity method investees
   
(4,933
)
   
-
 
Net cash (used in) provided by investing activities
   
(85,684
)
   
13,252
 
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
53,485
     
36,682
 
Net change in short-term borrowings
   
24,000
     
-
 
Repayments of long-term borrowings
   
(810
)
   
(808
)
Repurchase and retirement of common stock
   
(8,989
)
   
(1
)
Proceeds from policyholder deposits
   
10,296
     
3,607
 
Surrenders of policyholder deposits
   
(4,073
)
   
(4,560
)
Net cash provided by financing activities
   
73,909
     
34,920
 
Net decrease in cash and cash equivalents
   
(5,257
)
   
(21,728
)
Cash and cash equivalents:
               
Beginning of period
   
109,837
     
117,544
 
End of period
 
$
104,580
   
$
95,816
 

See accompanying notes to unaudited condensed consolidated financial statements.
8

Table of Contents

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

(1)
Basis of Presentation


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


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

(2)
Significant Accounting Policies

Investments
 

Fixed maturities

 

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

 

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

 

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

 

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

9

Table of Contents

 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the Company will write off any previously recognized allowance for credit losses and will decrease the amortized cost basis of the security. If the allowance has been fully written off and the fair value is less than its amortized cost basis, the amortized cost basis is written down and an impairment loss is recognized in the Company’s consolidated statements of earnings. As of March 31, 2020, no allowance for credit losses was recorded in the consolidated financial statements.

 

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

 

To determine whether an impairment is credit or non-credit related, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.  Evidence considered in this assessment includes the reasons for the impairment, the severity of the impairment, market conditions, changes in the security’s rating, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

 

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

 

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

 

Equity investments

 

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

 

Other invested assets

 

Other invested assets at March 31, 2020 and December 31, 2019 consist mainly of alternative investments in partnerships that invest in several private debt and private equity funds.  Portfolios are diversified by vintage year, stage, geography, business sectors and number of investments. These investments are not redeemable with the funds. Distributions from each fund are received as the underlying investments of the funds are liquidated. It is estimated that the underlying assets of the funds will be liquidated in the next 5 to 12 years. The fair values of the investments in this class have been estimated using the net asset value (NAV) of the Company’s ownership interest in the partnerships. Total unfunded capital commitments for these positions as of March 31, 2020 amounted to $67,588.  The remaining average commitments period is approximately three years.
 
10

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Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


Health Insurance Providers Fee
 

The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act mandates an annual Health Insurance Providers Fee (HIP Fee).  The annual HIP Fee becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk each applicable calendar year. The initial estimated annual fee is accrued as of January 1, with a corresponding deferred cost that is amortized over 12 months on a straight-line basis. The fee payment is due on September 30 of each year.  The deferred cost is included within the other asset line item and the accrued fee is included within the accounts payable and accrued liabilities line item in the accompanying condensed consolidated balance sheets. The fee is presented within operating expenses in the accompanying condensed consolidated statements of earnings. The HIP Fee was waived for all health insurance providers during the year ended December 31, 2019. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Further Consolidated Appropriations Act of 2020, signed into law on December 20, 2019, repealed the HIP Fee effective calendar years beginning after December 31, 2020. As of March 31, 2020, the HIP Fee deferred cost amounted to $48,974 and the accrued HIP Fee amounted to $65,300. As of December 31, 2019, no balance was deferred or accrued for the HIP Fee.
 
Recently Adopted Accounting Standards
 

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

 

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

 
11

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Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)



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

 

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

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

 

Other than the accounting pronouncements disclosed above, there were no other new accounting pronouncements issued during the three months ended March 31, 2020 that could have a material impact on the Company’s financial position, operating results or financials statement disclosures.

12

Table of Contents

 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


(3)
Investment in Securities


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

 
 
March 31, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Fixed maturities available for sale
                       
Obligations of government-sponsored enterprises
 
$
17,203
   
$
931
   
$
-
   
$
18,134
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
102,441
     
9,532
     
-
     
111,973
 
Municipal securities
   
578,130
     
39,639
     
(111
)
   
617,658
 
Corporate bonds
   
187,162
     
21,876
     
(115
)
   
208,923
 
Residential mortgage-backed securities
   
268,192
     
17,068
     
-
     
285,260
 
Collateralized mortgage obligations
   
8,307
     
776
     
-
     
9,083
 
Total fixed maturities available for sale
 
$
1,161,435
   
$
89,822
   
$
(226
)
 
$
1,251,031
 

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

 
 
March 31, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Fixed maturities held to maturity
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
615
   
$
225
   
$
-
   
$
840
 
Residential mortgage-backed securities
   
164
     
6
     
-
     
170
 
Certificates of deposit
   
1,080
     
-
     
-
     
1,080
 
Total
 
$
1,859
   
$
231
   
$
-
   
$
2,090
 

13

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Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


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

 
March 31, 2020
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Other invested assets - Alternative investments
 
$
99,617
   
$
4,166
   
$
(665
)
 
$
103,118
 

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

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

 
March 31, 2020
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
Fixed maturities available for sale
                                                     
Municipal securities
 
$
22,885
   
$
(111
)
   
3
   
$
-
   
$
-
     
-
   
$
22,885
   
$
(111
)
   
3
 
Corporate bonds
   
10,948
     
(115
)
   
4
     
-
     
-
     
-
     
10,948
     
(115
)
   
4
 
Total fixed maturities
 
$
33,833
   
$
(226
)
   
7
   
$
-
   
$
-
     
-
   
$
33,833
   
$
(226
)
   
7
 
Other invested assets - Alternative investments
 
$
29,487
   
$
(605
)
   
9
   
$
6,184
   
$
(60
)
   
2
   
$
35,671
   
$
(665
)
   
11
 

14

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Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


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


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


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


 Corporate Bonds:  The unrealized losses of these bonds were principally caused by fluctuations in interest rates and general market conditions.  All corporate bonds with an unrealized loss have investment grade ratings.  Because the decline in estimated fair value is principally attributable to changes in interest rates; because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company expects to collect all contractual cash flows, these investments are not considered credit impaired.


Alternative investments:  As of March 31, 2020, alternative investments with unrealized losses are not considered credit impaired based on current market conditions.
15

Table of Contents

 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)



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

 
March 31, 2020
 
 
 
Amortized
cost
   
Estimated
fair value
 
Fixed maturities available for sale
           
Due in one year or less
 
$
15,634
   
$
15,898
 
Due after one year through five years
   
462,181
     
490,314
 
Due after five years through ten years
   
206,215
     
223,306
 
Due after ten years
   
200,906
     
227,170
 
Residential mortgage-backed securities
   
268,192
     
285,260
 
Collateralized mortgage obligations
   
8,307
     
9,083
 
 
 
$
1,161,435
   
$
1,251,031
 
Fixed maturities held to maturity
               
Due in one year or less
 
$
1,080
   
$
1,080
 
Due after ten years
   
615
     
840
 
Residential mortgage-backed securities
   
164
     
170
 
 
 
$
1,859
   
$
2,090
 


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


Investments with an amortized cost of $223,391 and $145,981 and a fair value of $242,176 and $152,916 at March 31, 2020 and December 31, 2019, respectively are pledged with the Federal Home Loan Bank of New York (“FHLBNY”) to secure short-term borrowings.

16

Table of Contents

 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


(4)
Realized and Unrealized Gains (Losses)


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

 
Three months ended
March 31,
 
 
 
2020
   
2019
 
 
           
Realized gains (losses)
           
Fixed maturity securities:
           
Securities available for sale:
           
Gross gains
 
$
774
   
$
872
 
Gross losses
   
(6
)
   
(318
)
Total debt securities
   
768
     
554
 
Equity investments:
               
Gross gains
   
930
     
1,302
 
Gross losses
   
(1,612
)
   
(637
)
Gross losses from impaired securities
   
(678
)
   
-
 
Total equity securities
   
(1,360
)
   
665
 
Other invested assets:
               
Gross gains
   
126
     
132
 
Gross losses
   
-
     
(36
)
Total other invested assets
   
126
     
96
 
Net realized investment (losses) gains
 
$
(466
)
 
$
1,315
 


The gross losses from impaired securities during the three months ended March 31, 2020 is related to an equity method investment held by the Company.

 
Three months ended
March 31,
 
 
 
2020
   
2019
 
 
           
Changes in net unrealized gains (losses):
           
Recognized in accumulated other comprehensive income:
           
Fixed maturities – available for sale
 
$
19,756
   
$
17,090
 
Other invested assets
   
568
     
573
 
 
 
$
20,324
   
$
17,663
 
Not recognized in the consolidated financial statements:
               
Fixed maturities – held to maturity
 
$
72
   
$
15
 


The change in deferred tax liability on unrealized gains recognized in accumulated other comprehensive income during the three months ended March 31, 2020 and 2019 was $4,065 and $3,534, respectively.


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

17

Table of Contents

 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


(5)
Premiums and Other Receivables, Net


Premiums and other receivables, net were as follows:

 
 
March 31,
2020
   
December 31,
2019
 
Premium
 
$
215,189
   
$
188,861
 
Self-funded group receivables
   
32,899
     
28,672
 
FEHBP
   
14,702
     
13,894
 
Agent balances
   
34,662
     
30,784
 
Accrued interest
   
9,981
     
11,307
 
Reinsurance recoverable
   
253,433
     
239,767
 
Other
   
133,892
     
110,952
 
 
   
694,758
     
624,237
 
Less allowance for doubtful receivables:
               
Premium
   
37,309
     
36,622
 
Other
   
12,465
     
19,923
 
 
   
49,774
     
56,545
 
Total premium and other receivables, net
 
$
644,984
   
$
567,692
 


As of March 31, 2020 and December 31, 2019, the Company had premiums and other receivables of $61,458 and $49,176, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of March 31, 2020 and December 31, 2019 were $19,374 and $22,091, respectively.
18

Table of Contents

 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)


(6)
Fair Value Measurements


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


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

 
 
March 31, 2020
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed maturity securities available for sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
18,134
   
$
-
   
$
18,134
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
111,973
     
-
     
-
     
111,973
 
Municipal securities
   
-
     
617,658
     
-
     
617,658
 
Corporate bonds
   
-
     
208,923
     
-
     
208,923
 
Residential agency mortgage-backed securities
   
-