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

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

For the quarterly period ended June 30, 2017
 
or

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to

COMMISSION FILE NUMBER:  001-33865
 
Triple-S Management Corporation
 
Puerto Rico
 
66-0555678
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1441 F.D. Roosevelt Avenue
   
San Juan, Puerto Rico
 
00920
(Address of principal executive offices)
 
(Zip code)
 
(787) 749-4949
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   ☑ Yes   ☐ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☑ Yes   ☐   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
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 June 30, 2017
Common Stock Class A, $1.00 par value
 
950,968
Common Stock Class B, $1.00 par value
 
23,494,170
 
Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended June 30, 2017
 
Table of Contents

3
   
Item 1.
3
     
Item 2.
31
     
 
31
 
31
 
32
 
34
 
34
 
35
 
38
 
41
 
42
 
44
     
Item 3.
46
     
Item 4.
46
     
48
   
Item 1.
48
     
Item 1A.
48
     
Item 2.
49
     
Item 3.
49
     
Item 4.
49
     
Item 5.
49
     
Item 6.
49
     
50
 
2
Part I – Financial Information
 
Item 1.
Financial Statements

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

   
June 30,
2017
   
December 31,
2016
 
Assets
           
Investments and cash:
           
Securities available for sale, at fair value:
           
Fixed maturities
 
$
1,196,161
   
$
1,151,643
 
Equity securities
   
287,820
     
270,349
 
Securities held to maturity, at amortized cost:
               
Fixed maturities
   
2,835
     
2,836
 
Policy loans
   
8,716
     
8,564
 
Cash and cash equivalents
   
172,526
     
103,428
 
Total investments and cash
   
1,668,058
     
1,536,820
 
Premiums and other receivables, net
   
320,548
     
286,365
 
Deferred policy acquisition costs and value of business acquired
   
200,034
     
194,787
 
Property and equipment, net
   
69,083
     
66,369
 
Deferred tax asset
   
69,576
     
57,768
 
Goodwill
   
25,397
     
25,397
 
Other assets
   
52,672
     
51,493
 
Total assets
 
$
2,405,368
   
$
2,218,999
 
Liabilities and Stockholders' Equity
               
Claim liabilities
 
$
504,240
   
$
487,943
 
Liability for future policy benefits
   
331,427
     
321,232
 
Unearned premiums
   
175,561
     
79,310
 
Policyholder deposits
   
179,225
     
179,382
 
Liability to Federal Employees' Health Benefits and Federal Employees' Programs
   
40,363
     
34,370
 
Accounts payable and accrued liabilities
   
204,194
     
169,449
 
Deferred tax liability
   
22,203
     
18,850
 
Long-term borrowings
   
33,667
     
35,085
 
Liability for pension benefits
   
30,496
     
30,892
 
Total liabilities
   
1,521,376
     
1,356,513
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders' equity
               
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 950,968 at June 30, 2017and December 31, 2016, respectively
   
951
     
951
 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,494,170 and 23,321,163 shares at June 30, 2017 and December 31, 2016, respectively
   
23,494
     
23,321
 
Additional paid-in capital
   
65,589
     
65,592
 
Retained earnings
   
739,267
     
730,904
 
Accumulated other comprehensive income
   
55,369
     
42,395
 
Total Triple-S Management Corporation stockholders' equity
   
884,670
     
863,163
 
Non-controlling interest in consolidated subsidiary
   
(678
)
   
(677
)
Total stockholders' equity
   
883,992
     
862,486
 
Total liabilities and stockholders' equity
 
$
2,405,368
   
$
2,218,999
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Earnings (Unaudited)
(dollar amounts in thousands, except per share data)

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Revenues:
                       
Premiums earned, net
 
$
722,891
   
$
729,049
   
$
1,425,164
   
$
1,467,583
 
Administrative service fees
   
4,548
     
4,520
     
8,927
     
9,603
 
Net investment income
   
12,698
     
12,875
     
24,714
     
24,233
 
Other operating revenues
   
1,121
     
915
     
2,086
     
1,727
 
Total operating revenues
   
741,258
     
747,359
     
1,460,891
     
1,503,146
 
Net realized investment gains (losses):
                               
Total other-than-temporary impairment losses on securities
   
-
     
(1,434
)
   
-
     
(1,434
)
Net realized gains, excluding other-than-temporary impairment losses on securities
   
4,054
     
2,954
     
4,390
     
3,012
 
Net realized investment gains on sale of securities
   
4,054
     
1,520
     
4,390
     
1,578
 
Other income, net
   
587
     
3,859
     
3,112
     
4,734
 
Total revenues
   
745,899
     
752,738
     
1,468,393
     
1,509,458
 
Benefits and expenses:
                               
Claims incurred
   
611,297
     
622,087
     
1,232,160
     
1,248,781
 
Operating expenses
   
118,720
     
121,112
     
229,666
     
244,092
 
Total operating costs
   
730,017
     
743,199
     
1,461,826
     
1,492,873
 
Interest expense
   
1,721
     
1,954
     
3,407
     
3,836
 
Total benefits and expenses
   
731,738
     
745,153
     
1,465,233
     
1,496,709
 
Income before taxes
   
14,161
     
7,585
     
3,160
     
12,749
 
Income tax expense (benefit)
   
1,456
     
3,707
     
(5,202
)
   
5,416
 
Net income
   
12,705
     
3,878
     
8,362
     
7,333
 
Less: Net loss attributable to non-controlling interest
   
-
     
2
     
1
     
3
 
Net income attributable to Triple-S Management Corporation
 
$
12,705
   
$
3,880
   
$
8,363
   
$
7,336
 
Earnings per share attributable to Triple-S Management Corporation
                               
Basic net income per share
 
$
0.52
   
$
0.16
   
$
0.35
   
$
0.30
 
Diluted net income per share
 
$
0.52
   
$
0.16
   
$
0.34
   
$
0.30
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(dollar amounts in thousands)

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
12,705
   
$
3,878
   
$
8,362
   
$
7,333
 
Other comprehensive (loss) income, net of tax:
                               
Net unrealized change in fair value of available for sale securities, net of taxes
   
4,396
     
15,830
     
12,868
     
35,407
 
Defined benefit pension plan:
                               
Actuarial loss, net
   
53
     
507
     
106
     
1,229
 
Prior service credit, net
   
-
     
(62
)
   
-
     
(150
)
Total other comprehensive income, net of tax
   
4,449
     
16,275
     
12,974
     
36,486
 
Comprehensive income
   
17,154
     
20,153
     
21,336
     
43,819
 
Comprehensive income attributable to non-controlling interest
   
-
     
2
     
1
     
3
 
Comprehensive income attributable to Triple-S Management Corporation
 
$
17,154
   
$
20,155
   
$
21,337
   
$
43,822
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollar amounts in thousands)

   
2017
   
2016
 
Balance at January 1
 
$
863,163
   
$
847,526
 
Share-based compensation
   
170
     
2,649
 
Stock issued upon the exercise of stock options
   
-
     
55
 
Repurchase and retirement of common stock
   
-
     
(14,616
)
Comprehensive income
   
21,337
     
43,822
 
Total Triple-S Management Corporation stockholders' equity
   
884,670
     
879,436
 
Non-controlling interest in consolidated subsidiary
   
(678
)
   
(673
)
Balance at June 30
 
$
883,992
   
$
878,763
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)

   
Six months ended
June 30,
 
   
2017
   
2016
 
Cash flows from operating activities:
           
Net income
 
$
8,362
     
7,333
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
6,454
     
7,300
 
Net amortization of investments
   
4,787
     
3,981
 
Reductions to the allowance for doubtful receivables
   
(2,390
)
   
(313
)
Deferred tax (benefit) expense
   
(11,734
)
   
4,301
 
Net realized investment gain on sale of securities
   
(4,390
)
   
(1,578
)
Interest credited to policyholder deposits
   
2,144
     
2,436
 
Share-based compensation
   
170
     
2,313
 
(Increase) decrease in assets:
               
Premium and other receivables, net
   
(25,078
)
   
(63,589
)
Deferred policy acquisition costs and value of business acquired
   
(5,621
)
   
(3,562
)
Deferred taxes
   
(280
)
   
178
 
Other assets
   
(1,229
)
   
(31,425
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
16,297
     
(9,901
)
Liability for future policy benefits
   
10,195
     
19,961
 
Unearned premiums
   
96,251
     
1,791
 
Liability to Federal Employees' Health Benefits and Federal Employees' Programs
   
5,993
     
(2,141
)
Accounts payable and accrued liabilities
   
33,774
     
52,350
 
Net cash provided by (used in) operating activities
   
133,705
     
(10,565
)
(Continued)
 
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)

   
Six months ended
June 30,
 
   
2017
   
2016
 
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
88,141
   
$
163,150
 
Fixed maturities matured/called
   
8,938
     
14,301
 
Equity securities sold
   
21,499
     
32,252
 
Securities held to maturity:
               
Fixed maturities matured/called
   
703
     
700
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(141,116
)
   
(150,005
)
Equity securities
   
(20,424
)
   
(136,104
)
Securities held to maturity:
               
Fixed maturities
   
(703
)
   
(609
)
Increase in other investments
   
(731
)
   
(1,383
)
Net change in policy loans
   
(152
)
   
(400
)
Net capital expenditures
   
(8,704
)
   
(2,716
)
Net cash used in investing activities
   
(52,549
)
   
(80,814
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
(8,545
)
   
4,074
 
Repayments of long-term borrowings
   
(1,212
)
   
(820
)
Repurchase and retirement of common stock
   
-
     
(14,560
)
Proceeds from policyholder deposits
   
8,166
     
7,942
 
Surrenders of policyholder deposits
   
(10,467
)
   
(6,935
)
Net cash used in financing activities
   
(12,058
)
   
(10,299
)
Net increase (decrease) in cash and cash equivalents
   
69,098
     
(101,678
)
Cash and cash equivalents:
               
Beginning of period
   
103,428
     
197,818
 
End of period
 
$
172,526
   
$
96,140
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(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 U.S. (GAAP) for complete financial statements.  These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included.  The results of operations for the three months and six months ended June 30, 2017 are not necessarily indicative of the results for the full year ending December 31, 2017.

(2)
Recent Accounting Standards

On May 10, 2017, the Financial Accounting Standard Board (FASB) issued guidance to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation , to a change in the terms and conditions of a share-based payment award.  The amendments in this update affect any entity that changes the terms or conditions of a share-based payment award.  This guidance indicates an entity should account for the effects of a modification unless the following criteria are met: (1) t he fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity or liability instrument is the same as the classification of the original award immediately before the original award is modified. For all companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.

On March 10, 2017, the FASB issued guidance to improve the presentation of defined benefit costs in the income statement.  In particular, the guidance requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  Additionally, this guidance allows only the service cost component to be eligible for capitalization, when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset).  For public companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Since we do not present a subtotal of income from operations, the adoption of this guidance should not have a material impact on the presentation of the Company’s consolidated result of operations.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
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.  We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.

Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the three months and six months ended June 30, 2017 that could have a material impact on the Corporation’s financial position, operating results or financial statements disclosures.

(3)
Investment in Securities

The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at June 30, 2017 and December 31, 2016, were as follows:

   
June 30, 2017
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
                       
Fixed maturities:
                       
Obligations of government-sponsored enterprises
 
$
40,358
   
$
29
   
$
(4
)
 
$
40,383
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
79,932
     
180
     
(115
)
   
79,997
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
11,719
     
445
     
(3
)
   
12,161
 
Municipal securities
   
682,576
     
34,459
     
(393
)
   
716,642
 
Corporate bonds
   
278,417
     
15,626
     
(89
)
   
293,954
 
Residential mortgage-backed securities
   
11,877
     
35
     
(3
)
   
11,909
 
Collateralized mortgage obligations
   
41,129
     
97
     
(111
)
   
41,115
 
Total fixed maturities
   
1,146,008
     
50,871
     
(718
)
   
1,196,161
 
Equity securities:
                               
Mutual funds
   
214,923
     
43,446
     
(6
)
   
258,363
 
Alternative investments
   
29,336
     
368
     
(247
)
   
29,457
 
Total equity maturites
   
244,259
     
43,814
     
(253
)
   
287,820
 
Total
 
$
1,390,267
   
$
94,685
   
$
(971
)
 
$
1,483,981
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)

   
December 31, 2016
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
                       
Fixed maturities:
                       
Obligations of government-sponsored enterprises
 
$
41,442
   
$
87
   
$
(15
)
 
$
41,514
 
U.S. Treasury securities and obligations of U.S.government instrumentalities
   
85,652
     
157
     
(9
)
   
85,800
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
17,930
     
2,189
     
(68
)
   
20,051
 
Municipal securities
   
650,175
     
34,187
     
(559
)
   
683,803
 
Corporate bonds
   
263,351
     
12,182
     
(661
)
   
274,872
 
Residential mortgage-backed securities
   
684
     
34
     
-
     
718
 
Collateralized mortgage obligations
   
45,069
     
58
     
(242
)
   
44,885
 
Total fixed maturities
   
1,104,303
     
48,894
     
(1,554
)
   
1,151,643
 
Equity securities - Mutual funds
   
240,699
     
30,101
     
(451
)
   
270,349
 
Total
 
$
1,345,002
   
$
78,995
   
$
(2,005
)
 
$
1,421,992
 

   
June 30, 2017
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
                       
U.S. Treasury securities and obligations of U.S.government instrumentalities
 
$
618
   
$
166
   
$
-
   
$
784
 
Residential mortgage-backed securities
   
191
     
2
     
-
     
193
 
Certificates of deposit
   
2,026
     
-
     
-
     
2,026
 
Total
 
$
2,835
   
$
168
   
$
-
   
$
3,003
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)

   
December 31, 2016
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
                       
U.S. Treasury securities and obligations of U.S.government instrumentalities
 
$
619
   
$
158
   
$
-
   
$
777
 
Residential mortgage-backed securities
   
191
     
18
     
-
     
209
 
Certificates of deposit
   
2,026
     
-
     
-
     
2,026
 
Total
 
$
2,836
   
$
176
   
$
-
   
$
3,012
 

Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2017 and December 31, 2016 were as follows:

   
June 30, 2017
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Securities available for sale:
                                                     
Fixed maturities
                                                     
Obligations of government-sponsored enterprises
 
$
6,495
   
$
(4
)
   
2
   
$
-
   
$
-
     
-
   
$
6,495
   
$
(4
)
   
2
 
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
   
41,408
     
(115
)
   
5
     
-
     
-
     
-
     
41,408
     
(115
)
   
5
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
7,939
     
(3
)
   
5
     
-
     
-
     
-
     
7,939
     
(3
)
   
5
 
Municipal securities
   
90,575
     
(393
)
   
12
     
-
     
-
     
-
     
90,575
     
(393
)
   
12
 
Corporate bonds
   
32,355
     
(89
)
   
10
     
-
     
-
     
-
     
32,355
     
(89
)
   
10
 
Residential mortgage-backed securities
   
2,017
     
(3
)
   
1
     
-
     
-
     
-
     
2,017
     
(3
)
   
1
 
Collateralized mortgage obligations
   
25,454
     
(108
)
   
6
     
564
     
(3
)
   
1
     
26,018
     
(111
)
   
7
 
Total fixed maturities
   
206,243
     
(715
)
   
41
     
564
     
(3
)
   
1
     
206,807
     
(718
)
   
42
 
Equity securities
                                                                       
Mutual funds
   
1,994
     
(6
)
   
1
     
-
     
-
     
-
     
1,994
     
(6
)
   
1
 
Alternative investments
   
4,983
     
(129
)
   
7
     
2,431
     
(118
)
   
1
     
7,414
     
(247
)
   
8
 
Total equity securities
   
6,977
     
(135
)
   
8
     
2,431
     
(118
)
   
1
     
9,408
     
(253
)
   
9
 
Total for securities available for sale
 
$
213,220
   
$
(850
)
   
49
   
$
2,995
   
$
(121
)
   
2
   
$
216,215
   
$
(971
)
   
51
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)

   
December 31, 2016
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Securities available for sale:
                                                     
Fixed maturities
                                                     
Obligations of government-sponsored enterprises
 
$
9,483
   
$
(15
)
   
1
   
$
-
   
$
-
     
-
   
$
9,483
   
$
(15
)
   
1
 
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
   
12,937
     
(9
)
   
1
     
-
     
-
     
-
     
12,937
     
(9
)
   
1
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
7,758
     
(68
)
   
5
     
-
     
-
     
-
     
7,758
     
(68
)
   
5
 
Municipal securities
   
84,252
     
(559
)
   
13
     
-
     
-
     
-
     
84,252
     
(559
)
   
13
 
Corporate bonds
   
105,054
     
(661
)
   
22
     
-
     
-
     
-
     
105,054
     
(661
)
   
22
 
Collateralized mortgage obligations
   
32,120
     
(239
)
   
8
     
784
     
(3
)
   
1
     
32,904
     
(242
)
   
9
 
Total fixed maturities
   
251,604
     
(1,551
)
   
50
     
784
     
(3
)
   
1
     
252,388
     
(1,554
)
   
51
 
Equity securities-Mutual funds
   
22,615
     
(451
)
   
4
     
-
     
-
     
-
     
22,615
     
(451
)
   
4
 
Total for securities available for sale
 
$
274,219
   
$
(2,002
)
   
54
   
$
784
   
$
(3
)
   
1
   
$
275,003
   
$
(2,005
)
   
55
 
 
The Corporation reviews the investment portfolios under the Corporation’s impairment review policy.  Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material other-than-temporary impairments may be recorded in future periods.  The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.

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

Obligations of the Commonwealth of Puerto Rico and its Instrumentalities : Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $7,939 and a gross unrealized loss of $3, and (2) senior lien bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $4,222 and a gross unrealized gain of $445.  As of June 30, 2017, investments in escrow bonds are not considered other-than-temporarily impaired based on the length of time the funds have been in a loss position, the decline in estimated fair value is principally attributable to changes in interest rates, and the fact that these bonds are backed by US Government securities, and therefore have an implicit AA+/Aaa rating. 

There was no impairment on Cofina positions during the three months and six months ended June 30, 2017 and 2016.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)

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 more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.

Residential Mortgage-Backed Securities and Collateralized Mortgage Obligations : The unrealized losses on investments in residential mortgage-backed securities collateralized mortgage obligations (“CMOs”) were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities, other than private CMOs, are guaranteed by a U.S. government-sponsored enterprise. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Corporation owns. The Corporation does not consider these investments other-than-temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality; the Corporation does not intend to sell the investments and it is more likely than not that the Corporation will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows.

Mutual Funds and Alternative Investments:   As of June 30, 2017, investments in mutual funds and alternative investments with unrealized losses are not considered other-than-temporarily impaired based on market conditions and the length of time the funds have been in a loss position.  There were no impairments on mutual funds and alternative investments during the three months and six months ended June 30, 2017.  During the three and six months ended June 30, 2016, we recorded an other-than-temporary impairment related to these mutual funds amounting to $1,434.

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

   
June 30, 2017
 
   
Amortized
cost
   
Estimated
fair value
 
Securities available for sale:
           
Due in one year or less
 
$
71,618
   
$
71,772
 
Due after one year through five years
   
324,426
     
327,707
 
Due after five years through ten years
   
131,235
     
137,195
 
Due after ten years
   
565,723
     
606,463
 
Residential mortgage-backed securities
   
11,877
     
11,909
 
Collateralized mortgage obligations
   
41,129
     
41,115
 
   
$
1,146,008
   
$
1,196,161
 
Securities held to maturity:
               
Due in one year or less
 
$
2,026
   
$
2,026
 
Due after ten years
   
618
     
784
 
Residential mortgage-backed securities
   
191
     
193
 
   
$
2,835
   
$
3,003
 

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.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Information regarding realized and unrealized gains and losses from investments is as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Realized gains (losses):
                       
Fixed maturity securities:
                       
Securities available for sale:
                       
Gross gains from sales
 
$
384
   
$
912
   
$
401
   
$
1,873
 
Gross losses from sales
   
(517
)
   
(103
)
   
(636
)
   
(1,462
)
Total fixed maturity securities
   
(133
)
   
809
     
(235
)
   
411
 
Equity securities:
                               
Securities available for sale:
                               
Gross gains from sales
   
4,189
     
2,525
     
4,627
     
3,112
 
Gross losses from sales
   
(2
)
   
(380
)
   
(2
)
   
(511
)
Gross losses from other-than-temporary impairments
   
-
     
(1,434
)
   
-
     
(1,434
)
Total equity securities
   
4,187
     
711
     
4,625
     
1,167
 
Net realized gains on securities available for sale
 
$
4,054
   
$
1,520
   
$
4,390
   
$
1,578
 
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Changes in net unrealized gains (losses):
                       
Recognized in accumulated other comprehensive income:
                       
Fixed maturities – available for sale
 
$
3,252
   
$
18,739
   
$
2,813
   
$
41,328
 
Equity securities – available for sale
   
2,768
     
2,908
     
13,911
     
9,677
 
   
$
6,020
   
$
21,647
   
$
16,724
   
$
51,005
 
Not recognized in the consolidated financial statements:
                               
Fixed maturities – held to maturity
 
$
(10
)
 
$
27
   
$
(8
)
 
$
63
 

The change in deferred tax liability on unrealized gains recognized in accumulated other comprehensive income during the six months ended June 30, 2017 and 2016 was $3,931 and $ 15,598 , respectively.
 
As of June 30, 2017 and December 31, 2016, no individual investment in securities exceeded 10% of stockholders’ equity.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(4)
Premiums and Other Receivables, Net
 
Premiums and other receivables, net were as follows:

   
June 30,
2017
   
December 31,
2016
 
Premium
 
$
107,058
   
$
91,528
 
Self-funded group receivables
   
51,646
     
57,728
 
FEHBP
   
15,582
     
14,321
 
Agent balances
   
40,340
     
25,495
 
Accrued interest
   
13,839
     
13,668
 
Reinsurance recoverable
   
55,772
     
58,295
 
Unsettled sales
   
6,715
     
-
 
Other
   
62,859
     
62,637
 
     
353,811
     
323,672
 
Less allowance for doubtful receivables:
               
Premium
   
23,949
     
27,320
 
Other
   
9,314
     
9,987
 
     
33,263
     
37,307
 
Total premium and other receivables, net
 
$
320,548
   
$
286,365
 

As of June 30, 2017 and December 31, 2016, the Company had premiums and other receivables of $63,565 and $57,750, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of June 30, 2017 and December 31, 2016 were $14,853 and $18,812, respectively.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(5)
Fair Value Measurements
 
Our condensed consolidated balance sheets include the following financial instruments: securities available for sale, policy loans, policyholder deposits, and long-term borrowings.  We consider the carrying amounts of policy loans, policyholder deposits, and long-term borrowings to approximate their fair value due to the short period of time between the origination of these instruments and the expected realization or payment. Certain assets are 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 2016 Form 10-K.
 
The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
 
   
June 30, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
40,383
   
$
-
   
$
40,383
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
79,997
     
-
     
-
     
79,997
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
12,161
     
-
     
12,161
 
Municipal securities
   
-
     
716,642
     
-
     
716,642
 
Corporate bonds
   
-
     
293,954
     
-
     
293,954
 
Residential agency mortgage-backed securities
   
-
     
11,909
     
-
     
11,909
 
Collateralized mortgage obligations
   
-
     
41,115
     
-
     
41,115
 
Total fixed maturities
   
79,997
     
1,116,164
     
-
     
1,196,161
 
Equity securities - Mutual funds
   
173,957
     
84,406
     
-
     
258,363
 
Alternative investments - measured at net asset value
   
-
     
-
     
-
     
29,457
 
Total
 
$
253,954
   
$
1,200,570
   
$
-
   
$
1,483,981
 

Certain investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy.  The fair value amount presented in this table is intended to facilitate the reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
 
   
December 31, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
41,514
   
$
-
   
$
41,514
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
85,800
     
-
     
-
     
85,800
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
20,051
     
-
     
20,051
 
Municipal securities
   
-
     
683,803
     
-
     
683,803
 
Corporate bonds
   
-
     
274,872
     
-
     
274,872
 
Residential agency mortgage-backed securities
   
-
     
718
     
-
     
718
 
Collateralized mortgage obligations
   
-
     
44,885
     
-
     
44,885
 
Total fixed maturities
   
85,800
     
1,065,843
     
-
     
1,151,643
 
Equity securities - Mutual funds
   
166,595
     
76,222
     
27,532
     
270,349
 
Total
 
$
252,395
   
$
1,142,065
   
$
27,532
   
$
1,421,992
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
There were no transfers in and/or out of Level 3 and between Levels 1 and 2 during the three months and six months ended June 30, 2017 and 2016.  Level 3 securities are partnerships measured at fair value using the net asset value affected by changes in the fair market value of the investments held in these partnerships.
 
The alternative investments represent investments in partnerships which invest in several equity 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 of the Company’s ownership interest in the partnerships. Total unfunded capital commitments for these positions as of June 30, 2017 amounted to $118,668.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on our condensed consolidated balance sheets are as follows:
 
   
June 30, 2017
 
   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
8,716
   
$
-
   
$
8,716
   
$
-
   
$
8,716
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
179,225
   
$
-
   
$
179,225
   
$
-
   
$
179,225
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
33,968
     
-
     
33,968
     
-
     
33,968
 
Total long-term borrowings
   
33,968
     
-
     
33,968
     
-
     
33,968
 
Total liabilities
 
$
213,193
   
$
-
   
$
213,193
   
$
-
   
$
213,193
 
 
   
December 31, 2016
 
   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
8,564
   
$
-
   
$
8,564
   
$
-
   
$
8,564
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
179,382
   
$
-
   
$
179,382
   
$
-
   
$
179,382
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
11,187
     
-
     
11,187
     
-
     
11,187
 
6.6% senior unsecured notes payable
   
24,000
     
-
     
24,000
     
-
     
24,000
 
Total long-term borrowings
   
35,187
     
-
     
35,187
     
-
     
35,187
 
Total liabilities
 
$
214,569
   
$
-
   
$
214,569
   
$
-
   
$
214,569
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(6)
Claim Liabilities
 
A reconciliation of the beginning and ending balances of claim liabilities is as follows:

   
Three months ended
June 30, 2017
   
Six months ended
June 30, 2017
 
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
                                     
Claim liabilities at beginning of year
 
$
393,525
   
$
136,779
   
$
530,304
   
$
349,047
   
$
138,896
   
$
487,943
 
Reinsurance recoverable on claim liabilities
   
-
     
(35,898
)
   
(35,898
)
   
-
     
(38,998
)
   
(38,998
)
Net claim liabilities at beginning of year
   
393,525
     
100,881
     
494,406
     
349,047
     
99,898
     
448,945
 
Claims incurred
                                               
Current period insured events
   
580,608
     
26,282
     
606,890
     
1,183,241
     
54,508
     
1,237,749
 
Prior period insured events
   
(1,355
)
   
(1,196
)
   
(2,551
)
   
(16,695
)
   
(2,529
)
   
(19,224
)
Total
   
579,253
     
25,086
     
604,339
     
1,166,546
     
51,979
     
1,218,525
 
Payments of losses and loss-adjustment expenses
                                               
Current period insured events
   
576,135
     
14,944
     
591,079
     
926,585
     
22,917
     
949,502
 
Prior period insured events
   
25,208
     
11,586
     
36,794
     
217,573
     
29,523
     
247,096
 
Total
   
601,343
     
26,530
     
627,873
     
1,144,158
     
52,440
     
1,196,598
 
Net claim liabilities at end of year
   
371,435
     
99,437
     
470,872
     
371,435
     
99,437
     
470,872
 
Reinsurance recoverable on claim liabilities
   
-
     
33,368
     
33,368
     
-
     
33,368
     
33,368
 
Claim liabilities at end of year
 
$
371,435
   
$
132,805
   
$
504,240
   
$
371,435
   
$
132,805
   
$
504,240
 

   
Three months ended
June 30, 2016
   
Six months ended
June 30, 2016
 
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
                                     
Claim liabilities at beginning of year
 
$
381,448
   
$
143,618
   
$
525,066
   
$
348,297
   
$
143,468
   
$
491,765
 
Reinsurance recoverable on claim liabilities
   
-
     
(39,871
)
   
(39,871
)
   
-
     
(40,714
)
   
(40,714
)
Net claim liabilities at beginning of year
   
381,448
     
103,747
     
485,195
     
348,297
     
102,754
     
451,051
 
Claims incurred
                                               
Current period insured events
   
596,909
     
25,950
     
622,859
     
1,192,499
     
51,840
     
1,244,339
 
Prior period insured events
   
(6,728
)
   
(686
)
   
(7,414
)
   
(6,028
)
   
(2,934
)
   
(8,962
)
Total
   
590,181
     
25,264
     
615,445
     
1,186,471
     
48,906
     
1,235,377
 
Payments of losses and loss-adjustment expenses
                                               
Current period insured events
   
583,381
     
16,557
     
599,938
     
948,420
     
21,653
     
970,073
 
Prior period insured events
   
46,743
     
10,204
     
56,947
     
244,843
     
27,757
     
272,600
 
Total
   
630,124
     
26,761
     
656,885
     
1,193,263
     
49,410
     
1,242,673
 
Net claim liabilities at end of year
   
341,505
     
102,250
     
443,755
     
341,505
     
102,250
     
443,755
 
Reinsurance recoverable on claim liabilities
   
-
     
38,109
     
38,109
     
-
     
38,109
     
38,109
 
Claim liabilities at end of year
 
$
341,505
   
$
140,359
   
$
481,864
   
$
341,505
   
$
140,359
   
$
481,864
 
 
*
Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations.
 
As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
The favorable developments in the claims incurred and loss-adjustment expenses for prior period insured events for the three months and six months ended June 30, 2017 and 2016 are due primarily to better than expected utilization trends.  Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements.
 
The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $6,945 and $13,635 during the three months and six months ended June 30, 2017, respectively.  The change in the liability for future policy benefits during the three months and six months ended June 30, 2016 amounted to $6,642 and $13,404, respectively.
 
The following is information about total incurred but not reported (IBNR) liabilities plus expected development on reported claims included in the liability for unpaid claims adjustment expenses for the Managed Care segment as of June 30, 2017.

Incurred
Year
 
Total of IBNR Liabilities Plus Expected
Development on Reported Claims
 
2015
   
68,022
 
2016
   
46,181
 
2017
   
256,656
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(7)
Long-Term Borrowings
 
A summary of the borrowings entered by the Company is as follows:

   
June 30,
   
December 31,
 
   
2017
   
2016
 
 
           
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%.
 
$
-
   
$
24,000
 
Secured loan payable of $11,187, payable in monthly installments of $137 through October 1, 2023, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 2.00% at June 30, 2017.)
   
10,367
     
11,187
 
Secured loan payable of $20,150, payable in monthly installments of $84 through January 1, 2024, plus interest at a rate reset periodically of 275 basis points over selected LIBOR maturity (which was 3.90% at June 30, 2017.)
   
19,730
     
-
 
Secured loan payable of $4,116, payable in monthly installments of $49 through January 1, 2024, plus interest at a rate reset periodically of 325 basis points over selected LIBOR maturity (which was 4.40% at June 30, 2017.)
   
3,871
     
-
 
                 
Total borrowings
   
33,968
     
35,187
 
                 
Less: unamortized debt issuance costs
   
301
     
102
 
   
$
33,667
   
$
35,085
 

On December 28, 2016, TSM entered into a $35,500 credit agreement with a commercial bank in Puerto Rico. The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11,187, (ii) Term Loan B in the principal amount of $20,150 and (iii) Term Loan C in the principal amount of $4,116.  Term Loan A was used to refinance the outstanding balance of the previous $41,000 secured loan payable with the same commercial bank in Puerto Rico.  Proceeds from Term Loans B and C were received on January 11, 2017 and were used to prepay the outstanding principal amount plus accrued interest of the 6.6% Senior Unsecured Notes due January 2021 ($24,000), and fund a portion of a debt service reserve for the Loan (approximately $200).  Interest payable commenced on January 1, 2017, in the case of Term Loan A, and on February 1, 2017, in the case of Term Loan B and Term Loan C.  The Credit Agreement includes certain financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business.
 
On March 11, 2016 Triple-S Salud, Inc. (TSS) entered into a $30,000 revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit had an interest rate of LIBOR plus 220 basis points and contained certain financial and non-financial covenants that are customary for this type of facility. This revolving loan agreement matured on March 11, 2017, and was not renewed.
 
On April 18, 2017, Triple-S Advantage, Inc. (TSA) entered into a $10,000 revolving loan agreement with a commercial bank in Puerto Rico. This line of credit has an interest rate of 30-day LIBOR plus 25 basis points, matures on April 17, 2018, and includes certain financial and non-financial covenants that are customary for this type of facility.  As of June 30, 2017, there is no outstanding balance in this line of credit.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(8)
Pension Plan
 
The components of net periodic benefit cost for the three months and six months ended June 30 were as follows:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Components of net periodic benefit cost:
                       
Service cost
 
$
-
   
$
878
   
$
-
   
$
2,128
 
Interest cost
   
1,798
     
1,939
     
3,596
     
4,701
 
Expected return on assets
   
(2,199
)
   
(2,054
)
   
(4,398
)
   
(4,980
)
Amortization of prior service benefit
   
-
     
(102
)
   
-
     
(246
)
Amortization of actuarial loss
   
86
     
831
     
172
     
2,014
 
Settlement loss
   
631
     
-
     
631
     
-
 
Net periodic benefit cost
 
$
316
   
$
1,492
   
$
1
   
$
3,617
 

Effective January 31, 2017, the Company froze the pay and service components of amounts used to calculate pension benefits for active employees who participated in the pension plan. Therefore, as of the Effective Date, active employees in the pension plan will not accrue additional benefits for future service and eligible compensation received.
 
Employer Contributions:   The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 2016 that it expected to contribute $4,000 to the pension program in 2017.  As of June 30, 2017, the Corporation has not made contributions to the pension program.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(9)
Comprehensive Income
 
The accumulated balances for each classification of other comprehensive income, net of tax, are as follows:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
           
Net Unrealized Gain on Securities Beginning Balance
 
$
70,843
   
$
82,055
   
$
62,371
   
$
62,478
 
Other comprehensive income before reclassifications
   
7,639
     
18,193
     
16,380
     
37,817
 
Amounts reclassified from accumulated other comprehensive income
   
(3,243
)
   
(2,363
)
   
(3,512
)
   
(2,410
)
Net current period change
   
4,396
     
15,830
     
12,868
     
35,407
 
Ending Balance
   
75,239
     
97,885
     
75,239
     
97,885
 
Liability for Pension Benefits Beginning Balance
   
(19,923
)
   
(36,221
)
   
(19,976
)
   
(36,855
)
Amounts reclassified from accumulated other comprehensive income
   
53
     
445
     
106
     
1,079
 
Ending Balance
   
(19,870
)
   
(35,776
)
   
(19,870
)
   
(35,776
)
Accumulated Other Comprehensive Income Beginning Balance
   
50,920
     
45,834
     
42,395
     
25,623
 
Other comprehensive income before reclassifications
   
7,639
     
18,193
     
16,380
     
37,817
 
Amounts reclassified from accumulated other comprehensive income
   
(3,190
)
   
(1,918
)
   
(3,406
)
   
(1,331
)
Net current period change
   
4,449
     
16,275
     
12,974
     
36,486
 
Ending Balance
 
$
55,369
   
$
62,109
   
$
55,369
   
$
62,109
 

(10)
Share-Based Compensation
 
Share-based compensation expense recorded during the three months and six months ended June 30, 2017 was $1,613 and $170, respectively. Share-based compensation expense recorded during the three months and six months ended June 30, 2016 was $1,228 and $2,313, respectively. The lower expense during the six months ended June 30, 2017 results from a decrease in the 2014 and 2015 grants expected performance shares payouts. There was no cash received from stock option exercises during the six months ended June 30, 2017 and 2016.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(11)
Net Income Available to Stockholders and Net Income per Share
 
The following table sets forth the computation of basic and diluted earnings per share:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Numerator for earnings per share:
                       
Net income attributable to TSM available to stockholders
 
$
12,705
   
$
3,880
   
$
8,363
   
$
7,336
 
Denominator for basic earnings per share:
                               
Weighted average of common shares
   
24,246,591
     
24,624,070
     
24,195,211
     
24,609,749
 
Effect of dilutive securities
   
36,687
     
45,364
     
50,220
     
58,892
 
Denominator for diluted earnings per share
   
24,283,278
     
24,669,434
     
24,245,431
     
24,668,641
 
Basic net income per share attributable to TSM
 
$
0.52
   
$
0.16
   
$
0.35
   
$
0.30
 
Diluted net income per share attributable to TSM
 
$
0.52
   
$
0.16
   
$
0.34
   
$
0.30
 

(12)
Contingencies
 
The following information supplements and amends, as applicable, the disclosures in Note 24 to the Consolidated Financial Statements of the Company’s 2016 Annual Report on Form 10-K.  Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company's compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.
 
We are involved in various legal actions arising in the ordinary course of business. We are also defendants in various other litigations and proceedings, some of which are described below.  Where the Company believes that a loss is both probable and estimable, such amounts have been recorded.  Although we believe our estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.  The outcome of legal proceedings is inherently uncertain and pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any.  Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material effect on the consolidated financial condition, operating results and/or cash flows of the Company.
 
Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have rights to acquire shares of the Company on favorable terms pursuant to agreements previously entered by our predecessor managed care subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS), with physicians or dentists who joined our provider network to sell such new provider shares of SSS at a future date (Share Acquisition Agreements) or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
ASES Audits
 
On July 2, 2014, ASES notified TSS that the results of an audit conducted in connection with the government health plan contract for several periods between October 2005 and September 2013, reflected an overpayment of premiums made to TSS pursuant to prior contracts with ASES in the amount of $7,900. The alleged overpayments were related to duplicated payments or payments made for deceased members, and ASES requested the reimbursement of the alleged overpayment. On January 16, 2015, TSS filed an injunction against ASES under the case Triple-S Salud, Inc. v. Administración de Seguros de Salud de Puerto Rico. TSS contends that ASES’ request for reimbursement has no merits on several grounds, including a 2011 settlement between both parties covering the majority of the amount claimed by ASES, and that ASES, under the terms of the contracts, was responsible for certifying the membership. TSS also amended its claim to include the Puerto Rico Health Department (PRHD), as it asserts the PRHD is an indispensable party for the resolution of this matter and to seek the payment of approximately $5,000, since the premiums paid to TSS should have been higher than what ASES actually paid given the additional risk assumed by TSS. The case was assigned to a Special Commissioner, who on March 17, 2017 issued a report recommending the court to dismiss the complaint in favor of TSS. On May 26, 2017, the court issued a partial judgement dismissing the complaint in favor of TSS with respect to the alleged overpayments for the period between October 2005 and September 2010, which represented approximately $7,400 of the total alleged claim. After this partial dismissal, the only remaining claim pending to be adjudicated is for the alleged overpayments for the 2011-2013 period, which amounts to approximately $500. On July 27, 2017, ASES appealed the court’s partial judgement. TSS will oppose ASES’ appeal and will continue to conduct a vigorous defense of this matter.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(13)
Segment Information
 
The operations of the Corporation are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Corporation evaluates performance based primarily on the operating revenues and operating income of each segment.  Operating revenues include premiums earned, net, administrative service fees, net investment income, and revenues derived from other segments.  Operating costs include claims incurred and operating expenses.  The Corporation calculates operating income or loss as operating revenues less operating costs.
 
The following tables summarize the operations by reportable segment:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Operating revenues:
                       
Managed Care:
                       
Premiums earned, net
 
$
661,365
   
$
668,932
   
$
1,301,512
   
$
1,347,312
 
Administrative service fees
   
4,548
     
4,520
     
8,927
     
9,603
 
Intersegment premiums/service fees
   
1,631
     
1,652
     
3,165
     
3,137
 
Net investment income
   
4,146
     
4,107
     
8,038
     
7,587
 
Total managed care
   
671,690
     
679,211
     
1,321,642
     
1,367,639
 
Life Insurance:
                               
Premiums earned, net
   
39,858
     
38,591
     
80,156
     
77,557
 
Intersegment premiums
   
111
     
202
     
302
     
339
 
Net investment income
   
6,330
     
6,412
     
12,417
     
12,326
 
Total life insurance
   
46,299
     
45,205
     
92,875
     
90,222
 
Property and Casualty Insurance:
                               
Premiums earned, net
   
21,668
     
21,526
     
43,216
     
42,714
 
Intersegment premiums
   
154
     
154
     
307
     
307
 
Net investment income
   
2,134
     
2,325
     
4,058
     
4,254
 
Total property and casualty insurance
   
23,956
     
24,005
     
47,581
     
47,275
 
Other segments: *
                               
Intersegment service revenues
   
2,259
     
2,617
     
3,845
     
5,162
 
Operating revenues from external sources
   
1,154
     
959
     
2,154
     
1,815
 
Total other segments
   
3,413
     
3,576
     
5,999
     
6,977
 
Total business segments
   
745,358
     
751,997
     
1,468,097
     
1,512,113
 
TSM operating revenues from external sources
   
55
     
1
     
133
     
5
 
Elimination of intersegment premiums/service fees
   
(1,896
)
   
(2,008
)
   
(3,494
)
   
(3,783
)
Elimination of intersegment service revenues
   
(2,259
)
   
2,518
     
(3,845
)
   
(27
)
Other intersegment eliminations
   
-
     
(5,149
)
   
-
     
(5,162
)
Consolidated operating revenues
 
$
741,258
   
$
747,359
   
$
1,460,891
   
$
1,503,146
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Operating income (loss):
                       
Managed care
 
$
2,920
   
$
(3,780
)
 
$
(15,662
)
 
$
(4,421
)
Life insurance
   
4,990
     
5,054
     
8,925
     
10,652
 
Property and casualty insurance
   
3,775
     
3,388
     
5,842
     
5,499
 
Other segments *
   
1
     
(182
)
   
144
     
(361
)
Total business segments
   
11,686
     
4,480
     
(751
)
   
11,369
 
TSM operating revenues from external sources
   
55
     
1
     
133
     
5
 
TSM unallocated operating expenses
   
(2,900
)
   
(2,707
)
   
(5,117
)
   
(5,874
)
Elimination of TSM intersegment charges
   
2,400
     
2,386
     
4,800
     
4,773
 
Consolidated operating income (loss)
   
11,241
     
4,160
     
(935
)
   
10,273
 
Consolidated net realized investment gains
   
4,054
     
1,520
     
4,390
     
1,578
 
Consolidated interest expense
   
(1,721
)
   
(1,954
)
   
(3,407
)
   
(3,836
)
Consolidated other income, net
   
587
     
3,859
     
3,112
     
4,734
 
Consolidated income before taxes
 
$
14,161
   
$
7,585
   
$
3,160
   
$
12,749
 
                                 
Depreciation and amortization expense:
                               
Managed care
 
$
2,649
   
$
2,839
   
$
4,888
   
$
5,773
 
Life insurance
   
318
     
249
     
598
     
504
 
Property and casualty insurance
   
138
     
150
     
252
     
311
 
Other segments*
   
163
     
166
     
323
     
319
 
Total business segments
   
3,268
     
3,404
     
6,061
     
6,907
 
TSM depreciation expense
   
196
     
196
     
393
     
393
 
Consolidated depreciation and amortization expense
 
$
3,464
   
$
3,600
   
$
6,454
   
$
7,300
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
June 30,
2017
   
December 31,
2016
 
Assets:
           
Managed care
 
$
1,156,585
   
$
1,013,872
 
Life insurance
   
841,401
     
816,920
 
Property and casualty insurance
   
377,020
     
349,159
 
Other segments *
   
27,031
     
26,034
 
Total business segments
   
2,402,037
     
2,205,985
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
9,889
     
17,033
 
Property and equipment, net
   
22,130
     
22,380
 
Other assets
   
20,842
     
21,646
 
     
52,861
     
61,059
 
Elimination entries-intersegment receivables and others
   
(49,530
)
   
(48,045
)
Consolidated total assets
 
$
2,405,368
   
$
2,218,999
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(14)
Subsequent Events
 
The Company evaluated subsequent events through the date the financial statements were issued.  No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standards Codification.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries.  The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and six months ended June 30, 2017.  Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2016 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months and six months ended June 30, 2017 included in this Quarterly Report on Form 10-Q.
 
Cautionary Statement Regarding Forward-Looking Information
 
This Quarterly Report on Form 10-Q and other of our publicly available documents may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations.  These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control.  These statements may address, among other things, future financial results, strategy for growth, and market position.  It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.  The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form.  We are not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise.  Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.
 
Overview
 
We are one of the most significant players in the managed care industry in Puerto Rico and have over 55 years of experience in this industry.  We offer a broad portfolio of managed care and related products in the Commercial, Medicaid and Medicare Advantage markets.  In the Commercial market we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement.  We also participate in the Government of Puerto Rico Health Insurance Plan (a government of Puerto Rico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid), by administering the provision of health benefits in designated service regions in Puerto Rico.  See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016 under the sub-caption “ We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business. ”
 
We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands and Anguilla.  As of June 30, 2017, we served approximately 1,006,000 members across all regions of Puerto Rico.  For the six months ended June 30, 2017 and 2016, our managed care segment represented approximately 92% of our total consolidated premiums earned.  We also have significant positions in the life insurance and property and casualty insurance markets.
 
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS) , Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB).  TSS, TSA and TSB are Blue Cross Blue Shield Association (BCBSA) licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands, and Anguilla.
 
We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc., and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP).
 
Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results.  Except as otherwise indicated, the numbers for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations.  These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income.  See note 13 of the Condensed Consolidated Financial Statements included in Quarterly Report on Form 10-Q.
 
Our revenues primarily consist of premiums earned, net and administrative service fees.  These revenues are derived from the sale of managed care products in the Commercial market to employer groups, individuals and government-sponsored programs, principally Medicare and the Government of Puerto Rico Health Insurance Plan.  Premiums are derived from insurance contracts and administrative service fees are derived from self-funded contracts, under which we provide a range of services, including claims administration, billing and membership services, among others.  Revenues also include premiums earned from the sale of property and casualty and life insurance contracts, and investment income and revenues derived from other segments.  Substantially all of our earnings are generated in Puerto Rico.
 
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders.  Each segment’s results of operations depend to a significant extent on their ability to accurately predict and effectively manage claims.  A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period.  Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses.
 
We use operating income as a measure of performance of the underwriting and investment functions of our segments.  We also use the loss ratio and the operating expense ratio as measures of performance.  The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100.  The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.
 
Recent Developments
 
Puerto Rico Economy

During the past decade, Puerto Rico has been facing economic and fiscal challenges and its economy has been contracting.  In response to the Commonwealth of Puerto Rico (the “Commonwealth”) fiscal and economic crisis, on June 30, 2016, the U.S. Congress enacted the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which, among other things, established a Federally-appointed oversight board (the “Oversight Board”) comprised of seven members with ample powers over the finances of the Commonwealth and its instrumentalities.  PROMESA also established a temporary stay on litigation to enforce rights or remedies related to financial liabilities of the Commonwealth, its instrumentalities and municipalities, which expired on May 1, 2017.  Finally, PROMESA established two separate mechanisms to restructure the debts of the Commonwealth, its public corporations and municipalities. The first mechanism permits modifications of financial indebtedness with the consent of a supermajority of affected financial creditors. The second mechanism, known as Title III, is a court-supervised debt-adjustment process, which is modeled after Chapter 9 of the U.S. Bankruptcy Code.
 
On February 28, 2017, the Governor of Puerto Rico submitted a 10-year fiscal plan to the Oversight Board, for its review and approval.  After certain revisions, a final plan was approved by the Oversight Board on March 13, 2017, which includes spending reductions of $25.7 billion. The plan implies larger concessions from bondholders since there would be approximately $8 billion available for debt service payments over the next 10 years, compared to around $35 billion that is owed over that period.  The plan also proposes (i) certain significant changes to the Commonwealth’s healthcare delivery model in order to reduce expenses and (ii) the elimination of subsidies to the municipalities, many of which have contracts for the provision of healthcare or other insurance products with our subsidiaries. The Oversight Board also required and approved fiscal plans for several government instrumentalities, including the Puerto Rico Aqueduct and Sewer Authority, the Puerto Rico Electric Power Authority (“PREPA”), and the Puerto Rico Highways and Transportation Authority (“PRHTA”), among others.
 
On May 3, 2017, after not reaching an agreement with its creditors, the Oversight Board filed an order seeking the protection of the provisions of Title III of PROMESA for the Commonwealth. Subsequently, the Oversight Board filed Title III petitions with respect to the Puerto Rico Sales Tax Financing Corporation (“COFINA” by its Spanish acronym), which issued the sales and use tax-backed bonds, the Employee Retirement System, PRHTA and PREPA. While the proceedings under Title III of PROMESA are ongoing, all enforcement and collection actions against the Commonwealth and these instrumentalities by its creditors are stayed. As a result of this court-supervised debt-adjustment process, the principal and interest payments due on general obligation, sales and use tax-backed bonds, and bonds from these government instrumentalities will likely be restructured and such restructuring could lead to significant additional losses on such holdings. Further, on May 30, 2017, pursuant to a court order under COFINA’s Title III proceeding, funds held by the trustee of the COFINA bonds have not been applied for the payment of such bonds pending the resolution of various legal disputes. On June 6, 2017, S&P downgraded COFINA to “D”. Although as of the date hereof, these entities are the only instrumentalities for which the Oversight Board has sought the restructuring authority provided by PROMESA, in the future, the Oversight Board may use the restructuring mechanisms of PROMESA for other instrumentalities of the Commonwealth, including it municipalities.
 
Although the Oversight Board has not sought the protection of Title III of PROMESA for the Puerto Rico Health Insurance Administration (“ASES” by its Spanish acronym), the instrumentality responsible for the administration of the Government’s health plan, ASES may be affected by the Commonwealth’s fiscal plan and the proceedings commenced for the Commonwealth under Title III of PROMESA because its state-based funding is solely dependent on appropriations from the Government’s general fund.  Notwithstanding the Government’s statement in recent legislation that its public policy includes guaranteeing the continuity of public services in essential areas such as health, security, education, social work and development, among others, it is uncertain how the Commonwealth’s Title III proceeding will affect ASES and the contracts administered by it.
 
If the liquidity of the Government of Puerto Rico, its agencies, municipalities and public corporations becomes significantly affected as a result of their inability to raise funding in the market or generate enough revenues, we may face credit losses in our premium and fees receivables from these and other government related entities.  As of June 30, 2017, the Company had premiums and other receivables of $63.6 million from the Government of Puerto Rico, including its agencies, municipalities and public corporations with a related allowance for doubtful receivables of $14.9 million.  We also hold several positions categorized as Obligations of the Commonwealth of Puerto Rico, including one COFINA bond, which are susceptible to the aforementioned recent developments in the economy, see note 3 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Legislation

On July 23, 2017, the Commonwealth enacted Act 47-2017 (“Act 47”), which, among other things, imposes restrictions on utilization review (“UR”) processes related to hospitalizations and the ability of  managed care organizations (“MCO”s), 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 joint and severally liable in those cases in which the patient suffers damages as a direct or indirect result of such intervention. Act 47 orders the Puerto Rico Patient's Advocate Office and the Puerto Rico Health Insurance Administration (“ASES”), to adopt the necessary regulations to ensure compliance with the provisions of Act 47 within 60 days of its enactment. Act 47 specifically orders ASES to regulate UR according to the United States’ national standards. We are closely monitoring how Act 47 and its regulations will impact the Company.
 
Puerto Rico Government Health Reform Program
 
On June 30, 2017, TSS agreed to extend its contract with ASES for the provision of health services in the Metro North and West regions of the Puerto Rico Government’s health insurance program, which expired on June 30, 2017, for a three-month period beginning July 1, 2017 and ending September 30, 2017.  This extension is intended to ensure the continuity of services while the parties conclude negotiations for the renewal of the contract through the remainder of the Puerto Rico Government’s 2017-2018 fiscal year, which ends June 30, 2018.  Under the contract extension, ASES will increase its payment to TSS from a rate of $165.93 to $183.38 per member per month (PMPM) for the Metro North region and from $138.37 to $148.99 PMPM for the West region.  The new rates reflect cost and utilization trends for the 2016-2017 fiscal year and are subject to CMS approval, which is expected to occur during the 90 day extension period.  ASES will continue to pay current PMPM rates until CMS approves new PMPM rates, at which time ASES will pay the cumulative difference between both rates.  Upon reaching an agreement on outstanding terms of the contract renewal, the new rates will also apply for the remainder of the 2017-2018 fiscal year. See Item 1A.   Risk 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 business .’’ included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Recent Accounting Standards
 
For a description of recent accounting standards, see note 2 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
 
Managed Care Membership
 
   
As of June 30,
 
   
2017
   
2016
 
Managed care enrollment:
           
Commercial 1
   
498,393
     
528,902
 
Medicare
   
121,240
     
116,215
 
Medicaid
   
386,070
     
402,661
 
Total
   
1,005,703
     
1,047,778
 
Managed care enrollment by funding arrangement:
               
Fully-insured
   
839,299
     
868,157
 
Self-insured
   
166,404
     
179,621
 
Total
   
1,005,703
     
1,047,778
 

(1)
Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, Federal government employees and local government employees.
 
Consolidated Operating Results

The following table sets forth the Corporation’s consolidated operating results.  Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.

    
Three months ended
June 30,
   
Six months ended
June 30,
 
(dollar amounts in millions)
 
2017
   
2016
   
2017
   
2016
 
Revenues:
                       
Premiums earned, net
 
$
722.9
   
$
729.1
   
$
1,425.2
   
$
1,467.6
 
Administrative service fees
   
4.5
     
4.5
     
8.9
     
9.6
 
Net investment income
   
12.7
     
12.9
     
24.7
     
24.2
 
Other operating revenues
   
1.1
     
0.9
     
2.1
     
1.7
 
Total operating revenues
   
741.2
     
747.4
     
1,460.9
     
1,503.1
 
Net realized investment gains
   
4.1
     
1.5
     
4.4
     
1.6
 
Other income, net
   
0.6
     
3.8
     
3.1
     
4.7
 
Total revenues
   
745.9
     
752.7
     
1,468.4
     
1,509.4
 
Benefits and expenses:
                               
Claims incurred
   
611.3
     
622.1
     
1,232.2
     
1,248.8
 
Operating expenses
   
118.7
     
121.1
     
229.6
     
244.1
 
Total operating expenses
   
730.0
     
743.2
     
1,461.8
     
1,492.9
 
Interest expense
   
1.7
     
1.9
     
3.4
     
3.8
 
Total benefits and expenses
   
731.7
     
745.1
     
1,465.2
     
1,496.7
 
Income before taxes
   
14.2
     
7.6
     
3.2
     
12.7
 
Income tax expense (benefit)
   
1.5
     
3.7
     
(5.2
)
   
5.4
 
Net income attributable to TSM
   
12.7
     
3.9
     
8.4
     
7.3
 

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
 
Operating Revenues
 
Consolidated premiums earned, net for the three months ended June 30, 2017 decreased by $6.2 million, or 0.9%, to $722.9 million when compared to the three months ended June 30, 2016.  This decrease primarily reflects lower premiums in the Managed Care segment by $7.6 million mainly due to lower Medicare risk score revenue adjustments and lower membership in the segment’s Medicaid and Commercial businesses. These decreases were partially offset by higher Life Insurance premiums, and by the Medicaid profit sharing accrual recorded during the three months ended June 30, 2016.
 
Net Realized Investment Gains
 
Consolidated net realized investment gains are the result of sales of debt and equity securities classified as available for sale, following our asset/liability management and tax planning strategies.  The net realized gains for the period ending June 30, 2016 were partially offset by $1.4 million other-than-temporary impairments related to certain equity investments.
 
Other Income, Net
 
The $3.2 million decrease in consolidated other income reflects the collection of interest charged for late payment related to the current Medicaid contract during the three months ended June 30, 2016.
 
Claims Incurred
 
Consolidated claims incurred decreased by $10.8 million, or 1.7%, to $611.3 million during the three months ended June 30, 2017, mostly due to lower claims in the Managed Care segment.  The decrease in Managed Care claims primarily reflects lower claims incurred in the segment’s Commercial and Medicaid businesses primarily driven by lower enrollment, better claim experience in the Commercial business, offset in part by higher pharmacy claims trends in the Medicare and Medicaid businesses, and enhanced benefits in the Medicare 2017 offerings.  The consolidated loss ratio decreased by 70 basis points to 84.6%.
 
Operating Expenses
 
Consolidated operating expenses during the three months ended June 30, 2017 decreased by $2.4 million, or 2.0%, to $118.7 million. The lower operating expenses are mostly the result of the decrease in the Health Insurance Providers Fee (HIP fee) of $10.7 million due to the 2017 tax holiday, offset by increase in general operating expenses totaling approximately $8.1 million.  For the three months ended June 30, 2017, the consolidated operating expense ratio decreased 20 basis points to 16.3%.
 
Income Taxes
 
Consolidated income tax expense decreased by $2.2 million, to an expense of $1.5 million for the three months ended June 30, 2017.  The year over year change primarily results from the prior year reassessment done by the Property and Casualty segment of the tax rate used to measure several temporary differences, which increased the deferred tax rate from 20% to 39%, resulting in an increase to the 2016 deferred tax expense of $2.6 million.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
 
Operating Revenues
 
Consolidated premiums earned, net for the six months ended June 30, 2017 decreased by $42.4 million, or 2.9%, to $1,425.2 million when compared to the six months ended June 30, 2016.  This decrease primarily reflects lower premiums in the Managed Care segment by $45.7 million mainly due to lower membership in the segment’s Medicaid and Commercial businesses.
 
Net Realized Investment Gains
 
Consolidated net realized investment gains are the result of sales of debt and equity securities classified as available for sale, following our asset/liability management and tax planning strategies.  The net realized gains for the period ended June 30, 2016 were partially offset by $1.4 million other-than-temporary impairments related to certain equity investments.
 
Other Income, Net
 
The $1.6 million decrease in consolidated other income reflects the collection of interest charged for late payment related to the current Medicaid contract during the six months ended June 30, 2016.
 
Claims Incurred
 
Consolidated claims incurred decreased by $16.6 million, or 1.3%, to $1,232.2 million during the six months ended June 30, 2017, mostly due to lower claims in the Managed Care segment.  The decrease in Managed Care claims primarily reflects lower claims incurred in the segment’s Commercial and Medicaid businesses primarily driven by lower enrollment, better claim experience in the Commercial business, offset in part by higher pharmacy claims trends in the Medicare and Medicaid businesses, and enhanced benefits in the Medicare 2017 offerings.  The consolidated loss ratio increased by 140 basis points to 86.5%.
 
Operating Expenses
 
Consolidated operating expenses during the six months ended June 30, 2017 decreased by $14.5 million, or 5.9%, to $229.6 million as compared to the operating expenses during the six months ended June 30, 2016.  The lower operating expenses and expense ratio are mostly the result of the decrease in the HIP Fee of $21.6 million due to the 2017 moratorium offset by increase in general operating expenses totaling approximately $6.7 million.  For the six months ended June 30, 2017, the consolidated operating expense ratio decreased 50 basis points to 16.0%.
 
Income Taxes
 
Consolidated income taxes decreased by $10.6 million, to a net benefit of $5.2 million for the six months ended June 30, 2017.  The year over year change in income taxes primarily results from a loss before taxes incurred in the 2017 period in the Managed Care segment.
 
Managed Care Operating Results

   
Three months ended
June 30,
   
Six months ended
June 30,
 
(dollar amounts in millions)
 
2017
   
2016
   
2017
   
2016
 
Operating revenues:
                       
Medical premiums earned, net:
                       
Commercial
 
$
203.3
   
$
215.0
   
$
408.4
   
$
430.5
 
Medicare
   
266.6
     
273.1
     
524.3
     
534.0
 
Medicaid
   
191.8
     
181.2
     
369.5
     
383.4
 
Medical premiums earned, net
   
661.7
     
669.3
     
1,302.2
     
1,347.9
 
Administrative service fees
   
5.8
     
5.8
     
11.4
     
12.1
 
Net investment income
   
4.1
     
4.1
     
8.0
     
7.6
 
Total operating revenues
   
671.6
     
679.2
     
1,321.6
     
1,367.6
 
Medical operating costs:
                               
Medical claims incurred
   
579.2
     
590.2
     
1,166.5
     
1,186.5
 
Medical operating expenses
   
89.5
     
92.8
     
170.8
     
185.5
 
Total medical operating costs
   
668.7
     
683.0
     
1,337.3
     
1,372.0
 
Medical operating income (loss)
 
$
2.9
   
$
(3.8
)
 
$
(15.7
)
 
$
(4.4
)
Additional data:
                               
Member months enrollment:
                               
Commercial:
                               
Fully-insured
   
1,001,638
     
1,063,422
     
2,014,843
     
2,159,704
 
Self-funded
   
501,500
     
540,221
     
1,008,667
     
1,083,247
 
Total Commercial member months
   
1,503,138
     
1,603,643
     
3,023,510
     
3,242,951
 
                                 
Medicare member months
   
363,257
     
351,108
     
726,984
     
715,535
 
                                 
Medicaid member months
   
1,169,090
     
1,206,345
     
2,342,363
     
2,428,237
 
Total member months
   
3,035,485
     
3,161,096
     
6,092,857
     
6,386,723
 
Medical loss ratio
   
87.5
%
   
88.2
%
   
89.6
%
   
88.0
%
Operating expense ratio
   
13.4
%
   
13.7
%
   
13.0
%
   
13.6
%

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
 
Medical Operating Revenues

Medical premiums earned for the three months ended June 30, 2017 decreased by $7.6 million, or 1.1%, to $661.7 million when compared to the medical premiums earned during the three months ended June 30, 2016.  This decrease is principally the result of the following:

•
Premiums earned by the Commercial business decreased by $11.7 million, or 5.4%, to $203.3 million.  This fluctuation primarily reflects lower fully-insured member enrollment during the quarter of approximately 61,800 member months and $3.6 million related to the suspension of the HIP fee pass-through; offset by an increase in average premium rates of approximately 5%.

•
Premiums earned by the Medicare business decreased by $6.5 million, or 2.4%, to $266.6 million , primarily reflecting a lower risk score revenue adjustment in 2017 by $17.5 million, lower average premium rates due to a reduction in the 2017 Medicare reimbursement rates; offset in part by an increase in member month enrollment of approximately 12,000 lives.
 
•
Premiums earned by the Medicaid business amounted to $191.8 million, $10.6 million, or 5.8% higher than the same period last year.  Increase primarily reflects the $14.6 million profit sharing accrual that decreased premiums during the 2016 period and the $11.6 million premium collection related to our compliance with the contract’s incentive metrics. These increases were partially offset by lower fully-insured member months enrollment by approximately 37,000 lives, the 4% decrease in the average premium rates that went into effect July 1, 2016, and $2.6 million related to the suspension of the HIP fee pass-through as a result of the 2017 moratorium.

Medical Claims Incurred

Medical claims incurred during the three months ended June 30, 2017 decreased by $11.0 million, or 1.9%, to $579.2 million when compared to the three months ended June 30, 2016.  The medical loss ratio (MLR) of the segment decreased 70 basis points during the 2017 period, to 87.5%.  This fluctuation is primarily attributed to the net effect of the following:

•
The medical claims incurred of the Commercial business decreased by $28.2 million, or 14.7%, during the 2017 period mostly driven by lower enrollment. The MLR, at 80.6%, was 860 basis point lower than the same quarter last year.  Adjusting for the effect of prior period reserve developments, the Commercial MLR would have been 83.1%, 450 basis points lower than the adjusted MLR for last year primarily reflecting claim trends that are lower than our premium trends following the continuity of our underwriting discipline.

•
The medical claims incurred of the Medicare business increased by $5.9 million, or 2.5%, during the 2017 period and its MLR increased by 430 basis points, to 90.9%.  Adjusting for the effect of prior period reserve developments in 2017 and 2016 and moving the risk score revenue adjustments to their corresponding period, the Medicare MLR would have been approximately 94.3% this quarter, about 300 basis points higher than last year, primarily reflecting higher trends in Part B drugs, pharmacy benefits and the improvement of benefits in 2017 products taking advantage of the HIP fee moratorium.

•
The medical claims incurred in the Medicaid business increased by $11.3 million, or 7.0%, during the 2017 period and its MLR increased by 100 basis points, to 90.3%.    Adjusting for the effect of prior period reserve developments in 2017 and 2016, as well as for the impact of the profit sharing accrual and this year’s quality incentive premiums, the Medicaid MLR would have been approximately 96.0% this quarter, about 580 basis points higher than last year.  The higher MLR primarily reflects increased pharmacy and outpatient claim trends and the lower premium rates that went into effect July 1, 2016.

Medical Operating Expenses

Medical operating expenses for the three months ended June 30, 2017 decreased by $3.3 million, or 3.6%, to $89.5 million when compared to the three months ended June 30, 2016.  The operating expense ratio decreased by 30 basis points to 13.4% in 2017.  The lower operating expenses and expense ratio are mostly the result of the decrease in the HIP Fee of $10.7 million due to the 2017 moratorium offset by increase in personnel costs, general operating expenses of totaling approximately $6.9 million.
 
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Medical Operating Revenues

Medical premiums earned for the six months ended June 30, 2017 decreased by $45.7 million, or 3.4%, to $1,302.2 million when compared to the medical premiums earned during the six months ended June 30, 2016.  This decrease is principally the result of the following:

•
Premiums earned by the Commercial business decreased by $22.1 million, or 5.1%, to $408.4 million.  This fluctuation primarily reflects lower fully-insured enrollment during the year of approximately 144,900 member months and $7.2 million related to the suspension of the HIP fee pass-through; offset by an increase in average premium rates of approximately 5%.

•
Premiums earned by the Medicaid business decreased by $13.9 million, or 3.6% to $369.5 million.  Decrease primarily reflects lower fully-insured member months enrollment by approximately 85,900 lives, and the 4.0% decrease in average premium rates that went into effect July 1, 2016.  Also contributing to the lower premiums during this period was a $5.3 million related to the suspension of the HIP fee pass-through as a result of the 2017 moratorium.  Decreases are partially offset by the impact of the profit sharing accrual in the 2016 period that decreased premiums by $10.6 million and by the $11.6 million premium collection related to our compliance with the contract’s quality incentive metrics.

•
Premiums earned by the Medicare business decreased by $9.7 million, or 1.8%, to $524.3 million .  Decrease primarily reflects lower risk score revenue by $20.9 million as well as lower average premium rates due to a reduction in the 2017 Medicare reimbursement rates.  These decreases were partially offset by an increase in member month enrollment of approximately 11,000 lives.

Medical Claims Incurred

Medical claims incurred during the six months ended June 30, 2017 decreased by $20.0 million, or 1.7%, to $1,166.5 million when compared to the six months ended June 30, 2016.  The MLR of the segment increased 160 basis points during the 2017 period, to 89.6%.  This fluctuation is primarily attributed to the net effect of the following:

•
The medical claims incurred of the Commercial business decreased by $35.8 million, or 9.6%, during the 2017 period mostly driven by lower enrollment. The MLR, at 82.1%, was 390 basis point lower than the same period last year.  Adjusting for the effect of prior period reserve developments, the Commercial MLR would have been 82.8%, 390 basis points lower than the adjusted MLR for last year primarily reflecting claim trends that are lower than our premium trends following the continuity of our underwriting discipline.

•
The medical claims incurred in the Medicaid business increased by $3.0 million, or 0.9%, during the 2017 period and its MLR increased by 420 basis points, to 93.9%.  Adjusting for the effect of prior period reserve developments in 2017 and 2016, as well as for the impact of the profit sharing accrual and this year’s quality incentive premiums, the Medicaid MLR would have been approximately 95.4% this quarter, about 620 basis points higher than last year.  The higher MLR primarily reflects increased pharmacy and outpatient claim trends and the lower premium rates that went into effect July 1, 2016.

•
The medical claims incurred of the Medicare business increased by $12.9 million, or 2.7%, during the 2017 period and its MLR increased by 410 basis points, to 92.4%.  Adjusting for the effect of prior period reserve developments in 2017 and 2016 and moving the risk score revenue adjustments to their corresponding period, the Medicare MLR would have been approximately 94.1% this quarter, about 210 basis points higher than last year, primarily reflecting higher trends in Part B drugs, pharmacy benefits and the improvement of benefits in 2017 products taking advantage of the HIP fee moratorium.
 
Medical Operating Expenses

Medical operating expenses for the six months ended June 30, 2017 decreased by $14.7 million, or 7.9%, to $170.8 million when compared to the six months ended June 30, 2016.  The operating expense ratio decreased by 60 basis points to 13.0% in 2017.  The lower operating expenses and expense ratio are mostly the result of the decrease in the HIP Fee of $21.6 million due to the 2017 moratorium offset by increase in general operating expenses of totaling approximately $6.7 million.

Life Insurance Operating Results

   
Three months ended
June 30,
   
Six months ended
June 30,
 
(dollar amounts in millions)
 
2017
   
2016
   
2017
   
2016
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums earned
 
$
41.8
   
$
39.7
   
$
83.6
   
$
79.5
 
Assumed earned premiums
   
0.5
     
1.2
     
1.4
     
2.7
 
Ceded premiums earned
   
(2.3
)
   
(2.1
)
   
(4.5
)
   
(4.3
)
Premiums earned, net
   
40.0
     
38.8
     
80.5
     
77.9
 
Net investment income
   
6.3
     
6.4
     
12.4
     
12.3
 
Total operating revenues
   
46.3
     
45.2
     
92.9
     
90.2
 
Operating costs:
                               
Policy benefits and claims incurred
   
21.9
     
21.9
     
45.6
     
43.4
 
Underwriting and other expenses
   
19.4
     
18.2
     
38.4
     
36.2
 
Total operating costs
   
41.3
     
40.1
     
84.0
     
79.6
 
Operating income
 
$
5.0
   
$
5.1
   
$
8.9
   
$
10.6
 
Additional data:
                               
Loss ratio
   
54.8
%
   
56.4
%
   
56.6
%
   
55.7
%
Operating expense ratio
   
48.5
%
   
46.9
%
   
47.7
%
   
46.5
%

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Operating Revenues

Premiums earned, net increased by $1.2 million, or 3.1% to $40.0 million as the result of premium growth in the segment’s Individual Life and Cancer lines of business, as well as growth in the Costa Rica operations.

Policy Benefits and Claims Incurred
 
Policy benefits and claims incurred remained at $21.9 million, the same as the 2016 period, despite the higher volume of business during the year.  The loss ratio for the period decreased to 54.8% in 2017, or 160 basis points, reflecting the higher volume of premiums during this quarter.

Underwriting and Other Expenses

Increase in underwriting and other expenses of $1.2 million, or 6.6%, to $19.4 million mostly reflects higher commissions following the segment’s premium growth.   In addition, the segment has incurred in higher development and marketing expenses related to the expansion of the Costa Rica operations.  As a result, the segment’s operating expense ratio increased to 48.5%, or 160 basis points.
 
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Operating Revenues

Premiums earned, net increased by $2.6 million, or 3.3% to $80.5 million as the result of premium growth in the segment’s Individual Life and Cancer lines of business, as well as growth in the Costa Rica operations.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred increased by $2.2 million, or 5.1% to $45.6 million, mostly as the result of the higher volume of business during the year, particularly in the Cancer and Individual Life lines of business.  The loss ratio for the period increased to 56.6% in 2017, or 90 basis points, reflecting the higher volume in the Cancer line of business, which has a higher loss ratio, as well as to a higher claims experience in this particular line of business.

Underwriting and Other Expenses

Increase in underwriting and other expenses of $2.2 million, or 6.1%, to $38.4 million mostly reflects higher commissions following the segment’s premium growth mentioned above.   In addition, the segment has incurred in higher development and marketing expenses related to the expansion of the Costa Rica operations.  As a result, the segment’s operating expense ratio increased to 47.7%, or 120 basis points.

Property and Casualty Insurance Operating Results
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Dollar amounts in millions)
 
2017
   
2016
   
2017
   
2016
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums written
 
$
46.4
   
$
40.9
   
$
73.8
   
$
68.5
 
Premiums ceded
   
(16.6
)
   
(13.1
)
   
(26.7
)
   
(23.5
)
Change in unearned premiums
   
(8.0
)
   
(6.1
)
   
(3.6
)
   
(2.0
)
Premiums earned, net
   
21.8
     
21.7
     
43.5
     
43.0
 
Net investment income
   
2.1
     
2.3
     
4.1
     
4.3
 
Total operating revenues
   
23.9
     
24.0
     
47.6
     
47.3
 
Operating costs:
                               
Claims incurred
   
10.9
     
10.8
     
21.5
     
20.6
 
Underwriting and other expenses
   
9.3
     
9.8
     
20.3
     
21.2
 
Total operating costs
   
20.2
     
20.6
     
41.8
     
41.8
 
Operating income
 
$
3.7
   
$
3.4
   
$
5.8
   
$
5.5
 
Additional data:
                               
Loss ratio
   
50.0
%
   
49.8
%
   
49.4
%
   
47.9
%
Operating expense ratio
   
42.7
%
   
45.2
%
   
46.7
%
   
49.3
%

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Operating Revenues

Total premiums written increased by $5.5 million, or 13.4%, to $46.4 million driven by higher sales of Commercial products, particularly Commercial property products, mainly as a result of the acquisition of a large account during the 2017 period.

The premiums ceded to reinsurers increased by $3.5 million, or 26.7%, mostly reflecting higher premiums written in Commercial insurance products during the three months ended June 30, 2017.

The change in unearned premiums presents an increase of $1.9 million mostly reflecting the segments higher premiums written in 2017.
 
Claims Incurred

Claims incurred increased by $0.1 million, or 0.9%, to $10.9 million during the three months ended June 30, 2017.  The loss ratio increased by 20 basis points, to 50.0% during this period.

Underwriting and Other Expenses

Underwriting and other operating expenses decreased by $0.5 million, or 5.1%, to $9.3 million mostly due to a lower net commission expense during the three months ended June 30, 2017 .  The operating expense ratio was 42.7%, 250 basis points lower than last year.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Operating Revenues

Total premiums written increased by $5.3 million, or 7.7%, to $73.8 million, driven by higher sales of Commercial property and Commercial liability products, mainly as a result of the acquisition of a large account, as well as to higher sales of Personal package products.

The premiums ceded to reinsurers increased by $3.2 million, or 13.6%, mostly reflecting higher premiums written in Commercial insurance products during the six months ended June 30, 2017.

The change in unearned premiums presents an increase of $1.6 million mostly reflecting the segments higher premiums written in 2017.

Claims Incurred

Claims incurred increased by $0.9 million, or 4.4%, to $21.5 million during the six months ended June 30, 2017.  The loss ratio increased by 150 basis points, to 49.4% during this period, primarily as a result of an unfavorable loss experience in the Commercial and Personal Auto lines of business.

Underwriting and Other Expenses

Underwriting and other operating expenses decreased by $0.9 million, or 4.2%, to $20.3 million mostly due to lower personnel costs .  The operating expense ratio was 46.7%, 260 basis points lower than last year.
 
Liquidity and Capital Resources
 
Cash Flows
 
A summary of our major sources and uses of cash for the periods indicated is presented in the following table:

   
Six months ended
June 30,
 
(dollar amounts in millions)
 
2017
   
2016
 
Sources (uses) of cash:
           
Cash provided by (used in) operating activities
 
$
133.7
   
$
(10.6
)
Net purchases of investment securities
   
(43.0
)
   
(76.3
)
Net capital expenditures
   
(8.7
)
   
(2.7
)
Proceeds from long-term borrowings
   
24.3
     
-
 
Payments of long-term borrowings
   
(25.5
)
   
(0.8
)
Proceeds from policyholder deposits
   
8.2
     
7.9
 
Surrenders of policyholder deposits
   
(10.5
)
   
(6.9
)
Repurchase and retirement of common stock
   
-
     
(14.6
)
Other
   
(9.4
)
   
2.3
 
Net increase (decrease) in cash and cash equivalents
 
$
69.1
   
$
(101.7
)

Cash flow from operating activities increased by $144.3 million for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, principally due to an increase in premium collections of $85.0 million, lower claims paid by $44.0 million , a decrease in cash paid to suppliers and employees of $9.2 million , and lower incomes tax paid by $5.7 million.   The higher premium collections follow the collection in advance of the July 2017 Medicare premiums from CMS.

During the six months ended June 30, 2017, we received the remaining $24.3 million from a loan with a commercial bank related with a credit agreement entered into in December 2016.  These proceeds were used to prepay the outstanding principal amount of $24.0 million of the 6.6% senior unsecured notes.  See note 7 to the unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q.

There were no repurchase and retirement of common stock during the six months ended June 30, 2017.

The fluctuation in the Other uses/sources of cash is attributed to changes in the amount of outstanding checks over bank balances.

Net capital expenditures increased by $6.0 million during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, principally due to initiatives related to information technology in the Managed Care segment.
 
Financing and Financing Capacity

We have several short-term facilities available to address timing differences between cash receipts and disbursements.  These short-term facilities are mostly in the form of arrangements to sell securities under repurchase agreements.  As of June 30, 2017, we had $60.0 million of available credit under these facilities.  There are no outstanding short-term borrowings under these facilities as of June 30, 2017.

On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes originally due December 2020 (the 6.6% notes).  These unsecured notes were paid in full on January 11, 2017.

On December 28, 2016, TSM entered into a $35.5 million credit agreement with a commercial bank in Puerto Rico. The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11.2 million, (ii) Term Loan B in the principal amount of $20.2 million and (iii) Term Loan C in the principal amount of $4.1 million. Term Loan A matures in October 2023 while the Term Loans B and C mature in January 2024.  Term Loan A was used to refinance the previous $41.0 million secured loan payable with the same commercial bank in Puerto Rico.  Proceeds from Term Loans B and C were received on January 11, 2017 and were used to prepay the outstanding principal amount plus accrued interest of the 6.6% senior unsecured notes due January 2021 ($24.0 million).  Pursuant to the credit agreement, interest is payable on the outstanding balance of the Loan at the following annual rate: (i) 1% over LIBOR for Term Loan A, (ii) 2.75% over LIBOR for Term Loan B, and (iii) 3.25% over LIBOR for Term Loan C.  The loan includes certain financial and non-financial covenants, which are customary for this type of facility, including but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control and dividends.  Failure to meet these covenants may trigger the accelerated payment of the outstanding balance.  As of June 30, 2017 we are in compliance with these covenants.

On March 11, 2016 TSS entered into a $30.0 million revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit had an interest rate of LIBOR plus 220 basis points and includes certain financial and non-financial covenants that are customary for this type of facility. This revolving loan agreement matured on March 11, 2017, and was not renewed.

On April 18, 2017, TSA entered into a $10.0 million revolving loan agreement with a commercial bank in Puerto Rico. This line of credit has an interest rate of 30-day LIBOR plus 25 basis points, and contains certain financial and non-financial covenants that are customary for this type of facility.  As of June 30, 2017, there is no outstanding balance in this line of credit.

We anticipate that we will have sufficient liquidity to support our currently expected needs.

Further details regarding the senior unsecured notes and the credit agreements are incorporated by reference to “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business.  We have exposure to market risk mostly in our investment activities.  For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices.  No material changes have occurred in our exposure to financial market risks since December 31, 2016.  A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the “disclosure controls and procedures” as of the end of this period (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Based on their evaluation as of June 30, 2017, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective because of the material weakness in our internal control over financial reporting described below.  Notwithstanding the material weakness in our internal control over financial reporting as of June 30, 2017, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.
 
Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of “internal control over financial reporting,” as defined under Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s chief executive officer and chief financial officer, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”), and includes those policies and procedures that:

·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

46
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, under the supervision and with the participation of the chief executive officer and chief financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017 based on criteria described in the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on May 14, 2013.  Based on that assessment and those criteria, management has concluded that the Company’s internal control over financial reporting was not effective as of June 30, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with GAAP due to the material weakness described below.

As the result of an inspection from the Public Company Accounting Oversight Board, our independent registered public accounting firm requested that we re-evaluate certain internal controls related to the review process of the Managed Care claims paid data input in our incurred but not reported (“IBNR”) actuarial model. As the result of this re-evaluation, management agreed that controls were not appropriately designed to validate that the claims paid information in the lag triangles used in the IBNR actuarial models is reviewed with enough precision to ascertain data is accurately presented by incurred date.  This deficiency was determined to be a material weakness as of June 30, 2017. Management has concluded that the Company’s consolidated financial statements as of and for the three months and six months ended June 30, 2017, included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Remediation Plan

The main factor contributing to the material weakness were changes in our actuarial department during 2016. As a consequence, the preventive control over the accuracy of the incurred date component of the Managed Care claims paid data within the claim lags ceased to be fully effective. Although we engage an external actuarial consulting firm to support our claims reserving process, we did not ask them to do detailed testing over the incurred date component in order to ascertain the preciseness of the lag triangles. Even though this control deficiency is considered a material weakness, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Management has designed a remediation plan to correct the material weakness described above and improve the design of internal controls. The remedial activities put in place include the following:

·
After hiring additional personnel in the actuarial department, effective 2017 we reinforced the review process over the accuracy of the claims paid data within the claim lags.

·
In addition we strengthened the claims paid reconciliation process to include the incurred date component within the claim lags on a monthly and historical basis.

We have completed the aforementioned activities as of the date of this amendment and believe that we have strengthened the Company’s internal control over financial reporting addressing the identified material weakness. However, control weaknesses are not be considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We will continue to monitor the effectiveness of these remediation measures and we will make any changes to the design of this plan and take such other actions that we deem appropriate given the circumstances.

Changes in Internal Controls Over Financial Reporting

Other than as described in the aforementioned remediation plan, no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended June 30, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Part II – Other Information

Item 1.
Legal Proceedings

For a description of legal proceedings that have experienced significant developments during this quarter, see note 13 to the unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q.

Item 1A.
  Risk Factors
 
For a description of our risk factors see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016 .

The following text updates the disclosure included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016, under the sub-caption “ The health care reform law and the implementation of that law could have a material adverse effect on our business, financial condition, cash flows, or results of operations. ”
 
On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Patient Protection and Affordable Care Act of 2010 as amended by the Health Care and Education Reconciliation Act of 2010 (ACA) to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Further, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. Following the passage of the Budget Resolution, on March 6, 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act (AHCA), which, if enacted, would amend or repeal significant portions of the ACA. Among other changes, the AHCA would sunset the annual insurance industry assessment as of December 31, 2017, essentially eliminate the individual and employer mandates by eliminating   penalties and providing retroactive relief for failing to maintain or provide minimum essential coverage, and permit insurers to charge individuals a 30% surcharge on premiums for failing to demonstrate continuous coverage. The AHCA would also make significant changes to Medicaid by, among other things, making the ACA Medicaid expansion optional for states, repealing the ACA requirement that state Medicaid plans provide the same essential health benefits that are required by plans available through the exchanges, implementing a per capita cap on federal payments to states beginning in fiscal year 2020, and changing certain eligibility requirements.  On May 4, 2017, the U.S. House of Representatives approved the AHCA to repeal portions of the ACA.

The U.S. Senate spent several months developing its alternative to the AHCA, culminating in several votes on various substitute amendments during the last week of July 2017.  None of the Senate substitutes, including a skinny package that would have repealed coverage mandates but maintained subsidies, were able to pass in the U.S. Senate.   While it is uncertain when or if the provisions in the AHCA will become law, or the extent to which any such changes may impact our business, it is clear that Congress is taking concrete steps to repeal and replace certain aspects of the ACA.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.
Defaults Upon Senior Securities

Not applicable.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

Not applicable.

Item 6.
Exhibits

Exhibits
Description
   
3(i)(c)
Articles of Incorporation of Triple-S Management Corporation, incorporated by reference to Exhibit 3(i)(c) to TSM’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-33865).
   
Amendment to Extend Contract for the Provision of Physical & Behavioral Health Services under the Government Health Plan Program
   
Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).
   
Certification of the Executive Vice President and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).
   
Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350.
   
Certification of the Executive Vice President and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.

All other exhibits for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

*
Filed herein.
 
SIGNATURES
 
Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
Triple-S Management Corporation
 
       
Registrant
 
           
Date:
August 9, 2017
 
By:
/s/ Roberto García-Rodríguez
 
       
Roberto García-Rodríguez
 
       
President and Chief Executive Officer
 
           
Date:
August 9, 2017
 
By:
/s/ Juan J. Román-Jiménez
 
       
Juan J. Román-Jiménez
 
       
Executive Vice President and Chief Financial Officer
 
 
 
50
Exhibit 10.1
 
AMENDMENT TO EXTEND CONTRACT FOR THE PROVISION OF PHYSICAL &
BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN
PROGRAM
 
WHEREAS , Administración de Seguros de Salud de Puerto Rico (“ASES”) and Triple-S Salud, Inc. (the “Contractor” and together with ASES, the “Parties”) have executed a Contract for the Provision of Physical Health and Behavioral Health Services Under the Government Health Plan within the Commonwealth of Puerto Rico for the Metro North and West Service Regions, (hereinafter referred to as the “Agreement”), pursuant to which ASES pays the Contractor a fixed monthly per capita amount for the rendering of services to beneficiaries of the Government Health Plan during the Commonwealth of Puerto Rico’s 2016-2017 fiscal year (the "Current PMPM Payments");
 
WHEREAS , pursuant to Article 21.6 of the Agreement, ASES exercised its option to renew the Agreement for a period of one year, beginning July 1, 2017 and ending June 30, 2018 (the "Renewal");
 
WHEREAS , Article 21.6 provides that “the terms of the renewal shall be negotiated, but any increase in PMPM Payment shall be subject to ASES’s determination that the proposed new amount is actuarially sound”;
 
WHEREAS , the Parties agreed on new PMPM Payments of $183.38 in the Metro North Service Region and $148.99 in the West Service Region (the “New PMPM Payments”) for the term of the Renewal, and ASES determined that such payments are actuarially sound;
 
WHEREAS , the Parties continue negotiating other terms of the Renewal and must obtain approval from the Centers for Medicare & Medicaid Services (“CMS”) of ASES’ actuarial certification of the New PMPM Payments before ASES can apply such payments to services rendered under the Renewal;
 
WHEREAS ,   the Parties have agreed to amend the Agreement to extend its term for a period of three (3) months and provide a mechanism to adjust payments to the Contractor to account for the difference between the Current PMPM Payment and the New PMPM Payment once CMS approves ASES’ actuarial certification; and
 
WHEREAS ,   all remaining provisions of the Agreement will remain in full force and effect during the Extension Period.
 
NOW THEREFORE , in consideration of the mutual covenants herein contained and other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the Parties have agreed to amend the Agreement as follows:
 
AGREED EXTENSION
 
FIRST : THE PARTIES HEREBY EXTEND the Agreement for one (1) additional term of three (3) months, to expire on September 30, 2017 (the "Extension Period");
 
SECOND : All provisions of the Agreement will remain in full force and effect during the Extension Period, including the terms of the physical and behavioral health services provided under the Agreement, with the exception of the Per Member Per Month (“PMPM”) Payments set forth in Section 22.1.1.1 of the Agreement, which are hereby amended to reflect the New PMPM Payments, provided that such rates will be subject to CMS approval of ASES’ actuarial certification (the “CMS Approval”);
 
THIRD : The Parties hereby acknowledge and accept that within 30 days of the CMS Approval, ASES will pay the cumulative difference between the New PMPM Payments and the Current PMPM Payments effectuated between July 1, 2017 and the date of CMS Approval, and will prospectively pay the New PMPM Payments until the expiration or earlier termination of the Extension Period;

FOURTH : The Parties further agree that in the event CMS does not approve the New PMPM Payments, the Parties will commit to engage their respective actuaries in a joint exercise to address any CMS objections until the CMS Approval is obtained, and upon such approval, the parties agree that the rates approved by CMS shall become the New PMPM Payments of the Extension Period and the Renewal for all intents and purposes.  Furthermore, if the Parties are unable to agree by July 31, 2017 on other terms of the Renewal that are still subject to negotiation as of the signing of this Extension Agreement, ASES shall grant the Contractor the right to not enter into the Renewal.

ACKNOWLEDGED BY THE PARTIES by their duly authorized representatives on this 30 th day of June, 2017.
 
 
Administración de Seguros de Salud de Puerto Rico (ASES)
 
 
 
/s/ Angela M. Ávila Marrero
 
Ms. Angela M. Ávila Marrero, Executive Director
 
 
 
Triple-S Salud, Inc.
 
 
 
/s/ Madeline Hernández Urquiza
 
Madeline Hernández Urquiza, President
 
 
2
Exhibit 31.1
 
CERTIFICATION

I, Roberto García-Rodríguez, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Triple-S Management Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
August 9, 2017
 
By:
/s/ Roberto García-Rodríguez
 
       
Roberto García-Rodríguez
 
       
President and Chief Executive Officer
 
 
 
Exhibit 31.2
 
CERTIFICATION

I, Juan J. Román-Jiménez, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Triple-S Management Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
August 9, 2017
 
By:
/s/ Juan J. Román-Jiménez
 
       
Juan J. Román-Jiménez
 
       
Executive Vice President and Chief Financial Officer
 
 
 
Exhibit 32.1
 
CERTIFICATION
 
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Triple-S Management Corporation (the Company) on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Roberto García-Rodríguez , President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
a)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
b)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:
August 9, 2017
 
By:
/s/ Roberto García-Rodríguez
 
       
Roberto García-Rodríguez
 
       
President and Chief Executive Officer
 

A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
Exhibit 32.2
 
CERTIFICATION
 
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Triple-S Management Corporation (the Company) on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Juan J. Román-Jiménez, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
a)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
b)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:
August 9, 2017
 
By:
/s/ Juan J. Román-Jiménez
 
       
Juan J. Román-Jiménez
 
       
Executive Vice President and Chief Financial Officer
 

A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.