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, 2020

or

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

For the transition period from                           to                        

COMMISSION FILE NUMBER:  001-33865

TRIPLE-S MANAGEMENT CORPORATION

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

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

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

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

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

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

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

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

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

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

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

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

Title of each class
Outstanding at June 30, 2020
   
Common Stock Class B, $1.00 par value
23,437,565



Triple-S Management Corporation

FORM 10-Q

For the Quarter Ended June 30, 2020
 
Table of Contents
 

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Table of Contents

Part I -  Financial Information

Item 1.  Financial Statements
Triple-S Management Corporation
Condensed Consolidated Interim Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)

 
 
June 30,
2020
   
December 31,
2019
 
Assets
           
Investments and cash:
           
Fixed maturities available for sale, at fair value
 
$
1,292,751
   
$
1,242,883
 
Fixed maturities held to maturity, at amortized cost
   
1,860
     
1,860
 
Equity investments, at fair value
   
344,604
     
287,525
 
Other invested assets, at net asset value
   
105,525
     
100,508
 
Policy loans
   
10,958
     
10,861
 
Cash and cash equivalents
   
141,071
     
109,837
 
Total investments and cash
   
1,896,769
     
1,753,474
 
Premiums and other receivables, net
   
547,209
     
567,692
 
Deferred policy acquisition costs and value of business acquired
   
238,636
     
234,885
 
Property and equipment, net
   
126,685
     
88,588
 
Deferred tax asset
   
76,010
     
77,294
 
Goodwill
   
28,614
     
28,599
 
Other assets
   
107,507
     
68,294
 
Total assets
 
$
3,021,430
   
$
2,818,826
 
Liabilities and Stockholders’ Equity
               
Claim liabilities
 
$
725,214
   
$
709,258
 
Liability for future policy benefits
   
396,205
     
386,017
 
Unearned premiums
   
89,456
     
93,301
 
Policyholder deposits
   
200,499
     
189,120
 
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
59,184
     
47,781
 
Accounts payable and accrued liabilities
   
456,607
     
325,761
 
Deferred tax liability
   
10,999
     
10,257
 
Short-term borrowings
   
15,000
     
54,000
 
Long-term borrowings
   
54,940
     
25,694
 
Liability for pension benefits
   
33,791
     
34,465
 
Total liabilities
   
2,041,895
     
1,875,654
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders’ equity
               
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,437,565 and 23,799,633 shares at June 30, 2020 and December 31, 2019, respectively
   
23,438
     
23,800
 
Additional paid-in capital
   
52,372
     
60,504
 
Retained earnings
   
847,486
     
830,198
 
Accumulated other comprehensive income
   
56,949
     
29,363
 
Total Triple-S Management Corporation stockholders’ equity
   
980,245
     
943,865
 
Non-controlling interest in consolidated subsidiary
   
(710
)
   
(693
)
Total stockholders’ equity
   
979,535
     
943,172
 
Total liabilities and stockholders’ equity
 
$
3,021,430
   
$
2,818,826
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

3

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

 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Revenues:
                       
Premiums earned, net
 
$
858,535
   
$
859,493
   
$
1,734,432
   
$
1,627,495
 
Administrative service fees
   
2,809
     
2,456
     
5,003
     
5,088
 
Net investment income
   
13,815
     
15,062
     
28,126
     
30,438
 
Other operating revenues
   
303
     
1,591
     
4,342
     
3,168
 
Total operating revenues
   
875,462
     
878,602
     
1,771,903
     
1,666,189
 
Net realized investment (losses) gains
   
(221
)
   
2,364
     
(687
)
   
3,679
 
Net unrealized investment gains (losses) on equity investments
   
28,338
     
3,323
     
(28,468
)
   
22,992
 
Other income, net
   
801
     
1,705
     
4,406
     
2,874
 
Total revenues
   
904,380
     
885,994
     
1,747,154
     
1,695,734
 
Benefits and expenses:
                               
Claims incurred
   
653,087
     
706,304
     
1,367,609
     
1,329,494
 
Operating expenses
   
178,659
     
134,084
     
340,860
     
266,747
 
Total operating costs
   
831,746
     
840,388
     
1,708,469
     
1,596,241
 
Interest expense
   
1,864
     
1,831
     
3,717
     
3,619
 
Total benefits and expenses
   
833,610
     
842,219
     
1,712,186
     
1,599,860
 
Income before taxes
   
70,770
     
43,775
     
34,968
     
95,874
 
Income tax expense
   
27,181
     
12,849
     
17,531
     
30,165
 
Net income
   
43,589
     
30,926
     
17,437
     
65,709
 
Net loss attributable to non-controlling interest
   
(10
)
   
(5
)
   
(17
)
   
(8
)
Net income attributable to Triple-S Management Corporation
 
$
43,599
   
$
30,931
   
$
17,454
   
$
65,717
 
Earnings per share attributable to Triple-S Management Corporation
                               
Basic net income per share
 
$
1.88
   
$
1.35
   
$
0.75
   
$
2.88
 
Diluted net income per share
 
$
1.87
   
$
1.35
   
$
0.75
   
$
2.87
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

4

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

Three months ended
June 30,
Six months ended
June 30,
 
2020
2019
2020
2019
Net income
$43,589
$30,926
$17,437
$65,709
Other comprehensive income, net of tax:
 
 
   
Net unrealized change in fair value of available for sale securities, net of taxes
11,401
14,929
27,280
28,370
Defined benefit pension plan:
 
 
   
Actuarial loss, net
153
56
306
112
Total other comprehensive income, net of tax
11,554
14,985
27,586
28,482
Comprehensive income
55,143
45,911
45,023
94,191
Comprehensive loss attributable to non-controlling interest
(10)
(5)
(17)
(8)
Comprehensive income attributable to Triple-S Management Corporation
$55,153
$45,916
$45,040
$94,199

See accompanying notes to unaudited condensed consolidated interim financial statements.

5


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

 
 
Class A
Common
Stock
   
Class B
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Triple-S
Management
Corporation
Stockholders’
Equity
   
Non-controlling
Interest in
Consolidated
Subsidiary
   
Total
Stockholders’
Equity
 
Balance, December 31, 2019
 
$
-
   
$
23,800
   
$
60,504
   
$
830,198
   
$
29,363
   
$
943,865
   
$
(693
)
 
$
943,172
 
Share-based compensation
   
-
     
590
     
1,769
     
-
     
-
     
2,359
     
-
     
2,359
 
Repurchase and retirement of common stock
   
-
     
(584
)
   
(8,511
)
   
-
     
-
     
(9,095
)
   
-
     
(9,095
)
Comprehensive (loss) income
   
-
     
-
     
-
     
(26,145
)
   
16,032
     
(10,113
)
   
(7
)
   
(10,120
)
Cummulative effect adjustment due to implementation of ASU 2016-13
   
-
     
-
     
-
     
(166
)
   
-
     
(166
)
   
-
     
(166
)
Balance, March 31, 2020
 
$
-
   
$
23,806
   
$
53,762
   
$
803,887
   
$
45,395
   
$
926,850
   
$
(700
)
 
$
926,150
 
Share-based compensation
   
-
     
7
     
4,228
     
-
     
-
     
4,235
     
-
     
4,235
 
Repurchase and retirement of common stock
   
-
     
(375
)
   
(5,618
)
   
-
     
-
     
(5,993
)
   
-
     
(5,993
)
Comprehensive income (loss)
   
-
     
-
     
-
     
43,599
     
11,554
     
55,153
     
(10
)
   
55,143
 
Balance, June 30, 2020
 
$
-
   
$
23,438
   
$
52,372
   
$
847,486
   
$
56,949
   
$
980,245
   
$
(710
)
 
$
979,535
 
                                                                 
Balance, December 31, 2018
 
$
951
   
$
21,980
   
$
34,021
   
$
761,970
   
$
3,062
   
$
821,984
   
$
(676
)
 
$
821,308
 
Share-based compensation
   
-
     
177
     
1,409
     
-
     
-
     
1,586
     
-
     
1,586
 
Repurchase and retirement of common stock
   
-
     
(1
)
   
(15
)
   
-
     
-
     
(16
)
   
-
     
(16
)
Comprehensive income (loss)
   
-
     
-
     
-
     
34,786
     
13,497
     
48,283
     
(3
)
   
48,280
 
Balance, March 31, 2019
 
$
951
   
$
22,156
   
$
35,415
   
$
796,756
   
$
16,559
   
$
871,837
   
$
(679
)
 
$
871,158
 
Share-based compensation
   
-
     
44
     
4,276
     
-
     
-
     
4,320
     
-
     
4,320
 
Comprehensive income (loss)
   
-
     
-
     
-
     
30,931
     
14,985
     
45,916
     
(5
)
   
45,911
 
Balance, June 30, 2019
 
$
951
   
$
22,200
   
$
39,691
   
$
827,687
   
$
31,544
   
$
922,073
   
$
(684
)
 
$
921,389
 
 

 
See accompanying notes to unaudited condensed consolidated interim financial statements.

6
Triple-S Management Corporation
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)

 
 
Six months ended
June 30,
 
 
 
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
17,437
   
$
65,709
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
7,744
     
7,045
 
Net amortization of investments
   
1,270
     
847
 
Additions to the allowance for doubtful receivables
   
5,658
     
246
 
Deferred tax (benefit) expense
   
(4,976
)
   
16,592
 
Net realized investment losses (gains) on sale of securities
   
687
     
(3,679
)
Net unrealized losses (gains) on equity investments
   
28,468
     
(22,992
)
Interest credited to policyholder deposits
   
3,160
     
2,811
 
Share-based compensation
   
6,594
     
5,907
 
Loss on disposition of property and equipment
   
154
     
-
 
Decrease (increase) in assets:
               
Premium and other receivables, net
   
22,359
     
18,674
 
Deferred policy acquisition costs and value of business acquired
   
(5,588
)
   
(12,475
)
Deferred taxes
   
(91
)
   
69
 
Other assets
   
(35,348
)
   
(4,767
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
15,956
     
(71,362
)
Liability for future policy benefits
   
10,188
     
13,164
 
Unearned premiums
   
(3,845
)
   
(521
)
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
11,403
     
4,239
 
Accounts payable and accrued liabilities
   
89,052
     
6,798
 
Net cash provided by operating activities
   
170,282
     
26,305
 

(Continued)
7

Triple-S Management Corporation
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)
 
 
Six months ended
June 30,
 
 
 
2020
   
2019
 
 
           
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
66,316
   
$
315,495
 
Fixed maturities matured/called
   
18,752
     
14,420
 
Securities held to maturity:
               
Fixed maturities matured/called
   
339
     
1,178
 
Equity investments sold
   
72,775
     
70,054
 
Other invested assets sold
   
11,814
     
2,096
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(91,930
)
   
(291,533
)
Securities held to maturity:
               
Fixed maturities
   
(340
)
   
(539
)
Equity investments
   
(160,104
)
   
(67,560
)
Other invested assets
   
(20,799
)
   
(15,424
)
Increase in other investments
   
(2,400
)
   
(2,692
)
Net change in policy loans
   
(97
)
   
(771
)
Net capital expenditures
   
(45,927
)
   
(10,659
)
Capital contribution on equity method investees
   
(4,933
)
   
-
 
Net cash (used in) provided by investing activities
   
(156,534
)
   
14,065
 
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
34,024
     
13,189
 
Repayments of short-term borrowings
   
(39,000
)
   
-
 
Proceeds from long-term borrowings
   
30,841
     
-
 
Repayments of long-term borrowings
   
(1,618
)
   
(1,613
)
Repurchase and retirement of common stock
   
(14,982
)
   
(1
)
Proceeds from policyholder deposits
   
16,421
     
8,204
 
Surrenders of policyholder deposits
   
(8,200
)
   
(11,421
)
Net cash provided by financing activities
   
17,486
     
8,358
 
Net increase in cash and cash equivalents
   
31,234
     
48,728
 
Cash and cash equivalents:
               
Beginning of period
   
109,837
     
117,544
 
End of period
 
$
141,071
   
$
166,272
 

See accompanying notes to unaudited condensed consolidated interim financial statements.
8

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


(1)
Basis of Presentation


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


In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included.  The results of operations for the three months and six months ended June 30, 2020 are not necessarily indicative of the results for the full year ending December 31, 2020.

(2)
Significant Accounting Policies

Investments
 

Fixed maturities

 

Investment in debt securities at June 30, 2020 and December 31, 2019 consists mainly of obligations of government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, municipal securities, corporate bonds, residential mortgage-backed securities, and collateralized mortgage obligations.  The Company classifies its debt securities in one of two categories: available-for-sale or held-to-maturity.  Securities classified as held-to-maturity are those securities in which the Company has the ability and intent to hold until maturity.  All other securities not included in held-to-maturity are classified as available-for-sale.

 

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

 

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

 

If a fixed maturity security is in an unrealized loss position and the Company does not have the intent to sell the fixed maturity security, or it is more likely than not that the Company will not have to sell the fixed maturity security before recovery of its amortized cost basis, the credit component of the impairment, if any, is recorded as an allowance for credit losses with an offsetting entry in the Company’s consolidated statements of earnings and the non-credit component of the impairment is recognized in other comprehensive income.  Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.
9

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


If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the Company will write off any previously recognized allowance for credit losses and will decrease the amortized cost basis of the security. If the allowance has been fully written off and the fair value is less than its amortized cost basis, the amortized cost basis is written down and an impairment loss is recognized in the Company’s consolidated statements of earnings. As of June 30, 2020, no allowance for credit losses was recorded in the condensed consolidated interim financial statements.

 

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

 

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

 

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

 

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

 

Equity investments

 

Investment in equity securities at June 30, 2020 and December 31, 2019 consists of mutual funds whose underlying assets are comprised of domestic equity securities, international equity securities and higher risk fixed income instruments. Equity investments are recorded at fair value.  The fair values of equity investments are mainly based on quoted market prices for those or similar investments at the reporting date.  For a specific equity investment, the fair value is estimated using the net asset value (NAV) of the Company’s ownership interest in the partnership.  Unrealized holding gains and losses on equity investments are included in earnings.  Realized gains and losses from the sale of equity investments are included in earnings and are determined on a specific identification basis.

 

Other invested assets

 

Other invested assets at June 30, 2020 and December 31, 2019 consist mainly of alternative investments in partnerships that invest in several private debt and private equity funds.  Portfolios are diversified by vintage year, stage, geography, business sectors and number of investments. These investments are not redeemable with the funds. Distributions from each fund are received as the underlying investments of the funds are liquidated. It is estimated that the underlying assets of the funds will be liquidated in the next 5 to 12 years. The fair value of the investments in this class have been estimated using the net asset value (NAV) of the Company’s ownership interest in the partnerships. Total unfunded capital commitments for these positions as of June 30, 2020 amounted to $58,071.  The remaining average commitments period is approximately three years. 
10

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

Health Insurance Providers Fee
 

The Patient Protection and Affordable Care Act (ACA) as amended by the Health Care and Education Reconciliation Act mandates an annual Health Insurance Providers Fee (HIP Fee).  The annual HIP Fee becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk each applicable calendar year. The initial estimated annual fee is accrued as of January 1, with a corresponding deferred cost that is amortized over 12 months on a straight-line basis. The fee payment is due on September 30 of each year.  The deferred cost is included within the other asset line item and the accrued fee is included within the accounts payable and accrued liabilities line item in the accompanying condensed consolidated balance sheets. The fee is presented within operating expenses in the accompanying condensed consolidated statements of earnings. The HIP Fee was waived for all health insurance providers during the year ended December 31, 2019. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Further Consolidated Appropriations Act of 2020, signed into law on December 20, 2019, repealed the HIP Fee effective calendar years beginning after December 31, 2020. As of June 30, 2020, the HIP Fee deferred cost amounted to $24,224 and the accrued HIP Fee amounted to $55,470. As of December 31, 2019, no balance was deferred or accrued for the HIP Fee. 

Recently Adopted Accounting Standards
 

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


On January 26, 2017, the FASB issued guidance to simplify the manner in which an entity is required to evaluate goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Instead, under the amendments in this guidance, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, this guidance removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.  For public companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. Upon adoption of this standard, if the carrying amount of any of the reporting units exceeds its fair value, the Company will be required to record an impairment charge for the difference up to the amount of the goodwill.
11

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


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

 

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

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

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


Other than the accounting pronouncements disclosed above, there were no other new accounting pronouncements issued during the three months and six months ended June 30, 2020 that could have a material impact on the Company’s financial position, operating results or financials statement disclosures.

(3)
Investment in Securities


The amortized cost for debt securities and cost for alternative investments, gross unrealized gains, gross unrealized losses, and estimated fair value for the Company’s investments in securities by major security type and class of security at June 30, 2020 and December 31, 2019, were as follows:

 
 
June 30, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
                         
 Fixed maturities available for sale
                       
Obligations of government- sponsored enterprises
 
$
17,198
   
$
834
   
$
-
   
$
18,032
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
102,649
     
9,318
     
-
     
111,967
 
Municipal securities
   
592,541
     
51,941
     
-
     
644,482
 
Corporate bonds
   
195,227
     
31,534
     
-
     
226,761
 
Residential mortgage-backed securities
   
267,075
     
15,965
     
(263
)
   
282,777
 
Collateralized mortgage obligations
   
7,983
     
749
     
-
     
8,732
 
Total fixed maturities available for sale
 
$
1,182,673
   
$
110,341
   
$
(263
)
 
$
1,292,751
 

 
December 31, 2019
 
 
 
Amortized
cost
   
Gross
Unrealized
gains
   
Gross
Unrealized
losses
   
Estimated
fair value
 
                         
 Fixed maturities available for sale
                       
Obligations of government- sponsored enterprises
 
$
17,209
   
$
477
   
$
-
   
$
17,686
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
102,230
     
4,779
     
-
     
107,009
 
Municipal securities
   
595,051
     
34,735
     
(22
)
   
629,764
 
Corporate bonds
   
187,096
     
21,721
     
(74
)
   
208,743
 
Residential mortgage-backed securities
   
262,783
     
8,073
     
(320
)
   
270,536
 
Collateralized mortgage obligations
   
8,674
     
471
     
-
     
9,145
 
Total fixed maturities available for sale
 
$
1,173,043
   
$
70,256
   
$
(416
)
 
$
1,242,883
 
13

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

 
 
June 30, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
                         
Fixed maturities held to maturity
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
615
   
$
223
   
$
-
   
$
838
 
Residential mortgage-backed securities
   
165
     
6
     
-
     
171
 
Certificates of deposit
   
1,080
     
-
     
-
     
1,080
 
Total
 
$
1,860
   
$
229
   
$
-
   
$
2,089
 

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

 
June 30, 2020
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Other invested assets - Alternative investments
 
$
106,790
   
$
2,082
   
$
(3,347
)
 
$
105,525
 

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

14

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


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, 2020 and December 31, 2019 were as follows:

 
June 30, 2020
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Fixed maturities available for sale
                                                     
Residential mortgage-backed securities
 
$
9,137
   
$
(263
)
   
3
   
$
-
   
$
-
     
-
   
$
9,137
   
$
(263
)
   
3
 
Total fixed maturities
 
$
9,137
   
$
(263
)
   
3
   
$
-
   
$
-
     
-
   
$
9,137
   
$
(263
)
   
3
 
Other invested assets - Alternative investments
 
$
56,414
   
$
(3,129
)
   
14
   
$
5,953
   
$
(218
)
   
2
   
$
62,367
   
$
(3,347
)
   
16
 

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


The Company reviews the available for sale and other invested assets portfolios under the Company’s impairment review policy. Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material impairments and allowances 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.

 

Residential mortgage-backed securities: The unrealized losses on these investments were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities are guaranteed by a U.S. government-sponsored enterprise. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Company owns. The Company does not consider these investments to be credit impaired because the decline in fair value is attributable to changes in interest rates; 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.

 

Alternative investments: As of June 30, 2020, alternative investments with unrealized losses are not considered credit impaired based on market conditions.
15

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


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

 
June 30, 2020
 
 
 
Amortized
cost
   
Estimated
fair value
 
Fixed maturities available for sale
           
Due in one year or less
 
$
27,639
   
$
28,173
 
Due after one year through five years
   
498,068
     
535,717
 
Due after five years through ten years
   
205,045
     
225,692
 
Due after ten years
   
176,863
     
211,660
 
Residential mortgage-backed securities
   
267,075
     
282,777
 
Collateralized mortgage obligations
   
7,983
     
8,732
 
 
 
$
1,182,673
   
$
1,292,751
 
Fixed maturities held to maturity
               
Due in one year or less
 
$
1,080
   
$
1,080
 
Due after ten years
   
615
     
838
 
Residential mortgage-backed securities
   
165
     
171
 
 
 
$
1,860
   
$
2,089
 


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


Investments with an amortized cost of $239,285 and $145,981 and a fair value of $258,342 and $152,916 at June 30, 2020 and December 31, 2019, respectively, were pledged with the Federal Home Loan Bank of New York (FHLBNY) to secure short-term borrowings.

16

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

(4)
Realized and Unrealized Gains (Losses)


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

 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Realized gains (losses)
                       
Fixed maturity securities:
                       
Securities available for sale:
                       
Gross gains
 
$
777
   
$
1,775
   
$
1,551
   
$
2,647
 
Gross losses
   
-
     
(1
)
   
(6
)
   
(319
)
Total fixed securities
   
777
     
1,774
     
1,545
     
2,328
 
Equity investments:
                               
Gross gains
   
60
     
829
     
990
     
2,131
 
Gross losses
   
(1,158
)
   
(408
)
   
(2,770
)
   
(1,045
)
Gross losses from impaired securities
   
-
     
-
     
(678
)
   
-
 
Total equity investments
   
(1,098
)
   
421
     
(2,458
)
   
1,086
 
Other invested assets:
                               
Gross gains
   
100
     
189
     
226
     
321
 
Gross losses
   
-
     
(20
)
   
-
     
(56
)
Total other invested assets
   
100
     
169
     
226
     
265
 
Net realized investment (losses) gains
 
$
(221
)
 
$
2,364
   
$
(687
)
 
$
3,679
 


The gross losses from impaired securities during the six months ended June 30, 2020 is related to an equity method investment held by the Company.
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Changes in net unrealized gains (losses):
                       
Recognized in accumulated other comprehensive income (loss):
                       
Fixed maturities – available for sale
 
$
20,482
   
$
19,461
   
$
40,238
   
$
36,551
 
Other invested assets
   
(4,766
)
   
99
     
(4,198
)
   
672
 
 
 
$
15,716
   
$
19,560
   
$
36,040
   
$
37,223
 
Not recognized in the consolidated financial statements:
                               
Fixed maturities – held to maturity
 
$
(2
)
 
$
21
   
$
70
   
$
36
 


The change in deferred tax liability on unrealized gains recognized in accumulated other comprehensive income during the six months ended June 30, 2020 and 2019 was $7,205 and $7,446, respectively.


As of June 30, 2020, and December 31, 2019, no individual investment in securities exceeded 10% of stockholders’ equity.


17

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

(5)
Premiums and Other Receivables, Net


Premiums and other receivables, net were as follows:

 
 
June 30,
2020
   
December 31,
2019
 
Premium
 
$
145,775
   
$
188,861
 
Self-funded group receivables
   
23,946
     
28,672
 
FEHBP
   
13,053
     
13,894
 
Agent balances
   
36,344
     
30,784
 
Accrued interest
   
10,595
     
11,307
 
Reinsurance recoverable
   
235,291
     
239,767
 
Other
   
135,938
     
110,952
 
 
   
600,942
     
624,237
 
Less allowance for doubtful receivables:
               
Premium
   
41,406
     
36,622
 
Other
   
12,327
     
19,923
 
 
   
53,733
     
56,545
 
Total premium and other receivables, net
 
$
547,209
   
$
567,692
 


As of  June 30, 2020, and December 31, 2019, the Company had premiums and other receivables of $70,004 and $49,176, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of June 30, 2020 and December 31, 2019 were $25,631 and $22,091, respectively.
 
(6)
Property and Equipment, Net


Property and equipment, net are composed of the following:
 
 
 
June 30,
   
December 31,
 
 
 
2020
   
2019
 
 
           
Land
 
$
10,976
   
$
10,976
 
Buildings and leasehold improvements
   
129,070
     
92,752
 
Office furniture and equipment
   
31,420
     
27,878
 
Computer equipment and software
   
132,405
     
133,922
 
Automobiles
   
700
     
761
 
 
   
304,571
     
266,289
 
Less accumulated depreciation and amortization
   
177,886
     
177,701
 
Property and equipment, net
 
$
126,685
   
$
88,588
 


On June 19, 2020, the Company acquired a nine-story office building (the Building), located at 1451 F.D. Roosevelt Avenue, in San Juan, Puerto Rico, as well as the adjoining multi-level parking structure and a parking lot. See Note 9 for further information on the credit agreement obtained to partially finance the acquisition of the Building.
 
18

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

(7)
Fair Value Measurements


Our condensed consolidated balance sheets include the following financial instruments: securities available for sale, equity investments, policy loans, policyholder deposits, short-term borrowings and long-term borrowings.  We consider the carrying amounts of policy loans, policyholder deposits, short-term borrowings and long-term borrowings to approximate their fair value and are considered Level 2 financial instruments.  Certain assets are measured at fair value on a recurring basis and are disclosed below. These assets are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2019 Annual Report on Form 10-K.


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

 
 
June 30, 2020
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed maturity securities available for sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
18,032
   
$
-
   
$
18,032
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
111,967
     
-
     
-
     
111,967
 
Municipal securities
   
-
     
644,482
     
-
     
644,482
 
Corporate bonds
   
-
     
226,761
     
-
     
226,761
 
Residential agency mortgage-backed securities
   
-
     
282,777
     
-
     
282,777
 
Collateralized mortgage obligations
   
-
     
8,732
     
-
     
8,732
 
Total fixed maturities
 
$
111,967
   
$
1,180,784
   
$
-
   
$
1,292,751
 
Equity investments
 
$
185,308
   
$
154,059
   
$
5,237
   
$
344,604
 

 
 
December 31, 2019
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
17,686
   
$
-
   
$
17,686
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
107,009
     
-
     
-
     
107,009
 
Municipal securities
   
-
     
629,764
     
-
     
629,764
 
Corporate bonds
   
-
     
208,743
     
-
     
208,743
 
Residential agency mortgage-backed securities
   
-
     
270,536
     
-
     
270,536
 
Collateralized mortgage obligations
   
-
     
9,145
     
-
     
9,145
 
Total fixed maturities
 
$
107,009
   
$
1,135,874
   
$
-
   
$
1,242,883
 
Equity investments
 
$
177,136
   
$
105,180
   
$
5,209
   
$
287,525
 


There were no transfers between Levels 1 and 2 during the three and six months ended June 30, 2020 and the year ended December 31, 2019.
19

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


A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and six months ended June 30 is as follows:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
           
 
 
Three months ended
   
Six months ended
 
   
June 30, 2020
   
June 30, 2020
 
Beginning Balance
 
$
5,239
   
$
5,209
 
Unrealized in other accumulated comprehensive income
   
(2
)
   
28
 
Ending Balance
 
$
5,237
   
$
5,237
 


The fair value of investment securities is estimated based on quoted market prices for those or similar investments.  Additional information pertinent to the estimated fair value of investment in securities is included in Note 3.

(8)
Claim Liabilities


A reconciliation of the beginning and ending balances of claim liabilities is as follows:
 
 
Six months ended
June 30, 2020
 
 
 
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
 
                 
 
                 
Claim liabilities at beginning of period
 
$
341,277
   
$
367,981
   
$
709,258
 
Reinsurance recoverable on claim liabilities
   
-
     
(137,017
)
   
(137,017
)
Net claim liabilities at beginning of period
   
341,277
     
230,964
     
572,241
 
Claims incurred
                       
Current period insured events
   
1,308,194
     
58,559
     
1,366,753
 
Prior period insured events
   
(3,392
)
   
(9,821
)
   
(13,213
)
Total
   
1,304,802
     
48,738
     
1,353,540
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
1,039,871
     
23,660
     
1,063,531
 
Prior period insured events
   
257,073
     
27,952
     
285,025
 
Total
   
1,296,944
     
51,612
     
1,348,556
 
Net claim liabilities at end of period
   
349,135
     
228,090
     
577,225
 
Reinsurance recoverable on claim liabilities
   
-
     
147,989
     
147,989
 
Claim liabilities at end of period
 
$
349,135
   
$
376,079
   
$
725,214
 

*
Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations.
20

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

 
Six months ended
June 30, 2019
 
 
 
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
 
                 
 
                 
Claim liabilities at beginning of period
 
$
394,226
   
$
542,563
   
$
936,789
 
Reinsurance recoverable on claim liabilities
   
-
     
(315,543
)
   
(315,543
)
Net claim liabilities at beginning of period
   
394,226
     
227,020
     
621,246
 
Claims incurred
                       
Current period insured events
   
1,288,235
     
57,020
     
1,345,255
 
Prior period insured events
   
(27,588
)
   
(6,167
)
   
(33,755
)
Total
   
1,260,647
     
50,853
     
1,311,500
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
954,147
     
23,429
     
977,576
 
Prior period insured events
   
277,624
     
26,581
     
304,205
 
Total
   
1,231,771
     
50,010
     
1,281,781
 
Net claim liabilities at end of period
   
423,102
     
227,863
     
650,965
 
Reinsurance recoverable on claim liabilities
   
-
     
214,462
     
214,462
 
Claim liabilities at end of period
 
$
423,102
   
$
442,325
   
$
865,427
 

*
Other Business Segments include the Life Insurance and Property and Casualty segments, as well as intersegment eliminations.


The actual amounts of claims incurred in connection with insured events occurring in a prior period typically differ from estimates of such claims made in the prior period.  Amounts included as incurred claims for prior period insured events reflect the aggregate net amount of these differences.


The favorable developments in the claims incurred and loss-adjustment expenses for prior period insured events for the six months ended June 30, 2020 and 2019 are due primarily to better than expected utilization trends. Reinsurance recoverable on unpaid claims is reported as premiums and other receivables, net in the accompanying condensed consolidated interim 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 $4,746 and $14,069 during the three months and six months ended June 30, 2020, respectively. The change in the liability for future policy benefits during the three months and six months ended June 30, 2019 amounted to $9,297 and $17,994, respectively.
21

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


The following is information about total incurred but not reported (IBNR) liabilities plus expected development on reported claims included in the liability for unpaid claims adjustment expenses for the Managed Care segment as of June 30, 2020.
 
Incurred Year
 
Total of IBNR Liabilities Plus Expected
Development on Reported Claims
 
2019
 
$
25,985
 
2020
   
268,323
 

(9)
Borrowings

Long-Term Borrowings


A summary of the borrowings entered by the Company are as follows:

 
 
June 30, 2020
   
December 31, 2019
 
 
           
Secured loan payable of $11,187, payable in monthly installments of $137 through October 1, 2023, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.18% at June 30, 2020).
 
$
5,447
   
$
6,267
 
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 4.20% at June 30, 2020).
   
16,707
     
17,211
 
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 4.70% at June 30, 2020).
   
2,107
     
2,401
 
Secured loan payable of $31,350, payable in monthly installments of $105 through May 1, 2025, plus interest at prime rate (which was 3.25% at June 30, 2020). Last payment of $25,185 due on June 19, 2025.
   
31,350
     
-
 
Total borrowings
   
55,611
     
25,879
 
 
               
Less: unamortized debt issuance costs
   
671
     
185
 
 
 
$
54,940
   
$
25,694
 

22

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


Aggregate maturities of the Company’s borrowings as of June 30, 2020 are summarized as follows:

Remaining of 2020
 
$
2,245
 
2021
   
4,490
 
2022
   
4,490
 
2023
   
4,196
 
2024
   
14,484
 
Thereafter
   
25,706
 
 
 
$
55,611
 


On June 19, 2020, TSM entered into a $31,350 Credit Agreement (the Loan) with a commercial bank in Puerto Rico. The proceeds of the Loan were used by the Company to partially finance the acquisition of the Building (see Note 6).


The Loan is guaranteed by a mortgage over the Building, a pledge of all collateral related to the Building and an assignment of the rents collected for the lease of office space in the Building. Pursuant to the credit agreement, interest is payable on the outstanding principal balance of the Loan at an annual rate equal to the Prime Rate. Interest shall be paid on a monthly basis commencing on July 1, 2020 until the principal of the Loan has been paid in full.


The Company may, at its option and at any time, upon written notice as specified in the credit agreement, prepay prior to maturity, all or any part of the Loan upon the payment of a penalty fee of the outstanding principal amount at the time of the prepayment of 3% during the first year, 2% during the second year and 1% during the third year, and thereafter at par.


The four term loans under credit agreements with commercial banks in Puerto Rico include certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business. The Company was in compliance with all these covenants as of June 30, 2020.

Short-term Borrowings


The Company has several short-term facilities available to address timing differences between cash receipts and disbursements, consisting of collateralized advances from FHLBNY and a revolving credit facility.

•
In August 2019, Triple-S Salud, Inc. (TSS) and Triple-S Vida, Inc. (TSV) became members of the FHLBNY, which provides access to collateralized advances.  The borrowing capacity of TSS and TSV is up to 30% of their admitted assets as disclosed in the most recent filing with the Commissioner of Insurance but is constrained by the amount of collateral held at the FHLBNY (see Note 3). As of June 30, 2020, the borrowing capacity was approximately $120,074 for TSS and $91,943 for TSV.  As of December 31, 2019, the borrowing capacity was approximately $82,200 for TSS and $48,900 for TSV. The outstanding balance as of June 30, 2020 for TSV is $15,000 . TSS had no outstanding balance as of June 30, 2020. The outstanding balance as of December 31, 2019 for TSS and TSV was $25,000 and $29,000, respectively. The average interest rate of the outstanding balance is 0.41% and 1.79% as of June 30, 2020 and December 31, 2019, respectively.

•
Triple-S Advantage, Inc. (TSA) has 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 250 basis points and contains certain financial and non-financial covenants that are customary for this type of facility. This line of credit matured on June 30, 2020 and was renewed for an additional year. As of June 30, 2020, there is no outstanding balance.

23

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

(10)
Pension Plan
 

The components of net periodic benefit cost were as follows:
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Components of net periodic benefit cost:
                       
Interest cost
 
$
1,540
   
$
1,741
   
$
3,080
   
$
3,482
 
Expected return on assets
   
(2,209
)
   
(2,217
)
   
(4,418
)
   
(4,434
)
Amortization of actuarial loss
   
244
     
90
     
488
     
179
 
Settlement loss
   
356
     
375
     
712
     
750
 
Net periodic benefit cost
 
$
(69
)
 
$
(11
)
 
$
(138
)
 
$
(23
)

 

Employer Contributions:  The Company disclosed in its audited consolidated financial statements for the year ended December 31, 2019 that it expected to contribute $2,000 to the pension program in 2020.  As of June 30, 2020, the Company has not made contributions to the pension program. 

(11)
Stock Repurchase Program


The Company repurchases shares through open market transactions, in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, under repurchase programs authorized by the Board of Directors. Shares purchased under share repurchase programs are retired and returned to authorized and unissued status.


In August 2017 the Company’s Board of Directors authorized a $30,000 repurchase program (2017 $30,000 program) of its Class B common stock.  In February 2018 the Company’s Board of Directors authorized a $25,000 expansion of this program. In October 2019 the Company’s Board of Directors authorized an expansion to this repurchase program increasing its remaining balance up to a total of $25,000, effective November 2019. During the three months ended June 30, 2020, the Company repurchased and retired under this program 375,373 shares at an average per share price of $15.96, for an aggregate cost of $5,993. During the six months ended June 30, 2020, the Company repurchased and retired under this program 952,820 shares at an average per share price of $15.72, for an aggregate cost of $14,982. During the three months and six months ended June 30, 2019 no stocks were repurchased under a repurchase program. This program was completed in May 2020.

(12)
 Reinsurance


Triple-S Propiedad, Inc. (TSP) uses facultative reinsurance, pro rata, and excess of loss reinsurance treaties to manage its exposure to losses, including those from catastrophe events. TSP has geographic exposure to catastrophe losses from hurricanes and earthquakes. The incidence and severity of catastrophes are inherently unpredictable. Under these treaties, TSP ceded premiums written were $14,310 and $10,245 for the three months ended June 30, 2020 and 2019, respectively, and $30,717 and $23,674 for the six months ended June 30, 2020, and 2019, respectively. During the six months ended June 30, 2020, TSP ceded claims incurred amounting to $40,000 related to losses caused by the January 2020 earthquakes.
24

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


Principal reinsurance agreements are as follows:
 
•
Casualty excess of loss treaty provides reinsurance for losses up to $20,000, subject to a retention of $225.
 
•
Medical malpractice excess of loss treaty provides reinsurance for losses up to $3,000, subject to a retention of $150.
 
•
Property reinsurance treaty includes proportional cessions and a per risk excess of loss contract limiting losses to $400 in $30,000 risks.
 
•
Catastrophe protection is purchased limiting losses to $5,000 per event with losses up to approximately $809,000 in a $814,000 event.
 

All principal reinsurance contracts are for a period of one year and are subject to modifications and negotiations in each renewal. TSP’s current property and catastrophe reinsurance program was renewed effective April 1, 2020 for a twelve months period ending March 31, 2021. Other contracts were renewed as expiring on January 1, 2020.

(13)
Leases


The Company’s subsidiaries lease their regional offices, certain equipment, and warehouse facilities under non-cancelable operating leases. These contracts generally do not include purchase options or residual value guarantees. The remaining lease terms ranges from 0.5 to 14.4 years. The Company identifies leases when it has both the right to obtain substantially all economic benefits from the use of the asset and the right to direct the use of the asset.


The Company recognizes the right-of -use of assets and lease liabilities related to operating leases in its balance sheet statement under the caption of other assets and accounts payables and accrued liabilities, respectively. As of June 30, 2020, the right -of -use asset and lease liabilities balance was $14,421 and $14,655, respectively. As of December 31, 2019, the right-of -use asset and lease liabilities balance was $10,438 and $10,586, respectively. The weighted -average remaining lease term is 6.0 years as of June 30, 2020.


The Company uses the incremental borrowing rate for purposes of discounting lease payments for our operating leases since our lease agreements do not provide a readily determinable implicit rate. We estimate our incremental borrowing rate based on information available at lease commencement date. The weighted-average discount rate of our operating leases is 5.2% as of June 30, 2020.
25

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


Undiscounted cash flows of operating leases are summarized as follows:

Remaning of 2020
 
$
2,063
 
2021
   
3,935
 
2022
   
3,371
 
2023
   
2,273
 
2024
   
1,798
 
Thereafter
   
3,415
 
Total lease payments
   
16,855
 
Less: imputed interest
   
(2,200
)
Total
 
$
14,655
 


At December 31, 2019, operating lease commitments under lessee arrangements were $4,713, $3,790, $3,200, $2,171, $1,710 and $2,707 for 2020 through 2024 and thereafter, respectively. The following presents the lease cost recognized by the Company:

 
Six months ended
 
   
June 30, 2020
 
Operating lease cost
 
$
1,903
 
Short-term lease cost
   
629
 
Total lease cost
 
$
2,532
 


Also, the Company leases certain floors of one of its buildings and generates rental income. Maturity analysis of lease payments to be received from its lessees as of June 30, 2020, is summarized as follows:

Remaining of 2020
 
$
945
 
2021
   
1,909
 
2022
   
1,947
 
2023
   
1,986
 
2024
   
2,026
 
Thereafter
   
2,625
 
Total
 
$
11,438
 


26

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

(14)
Comprehensive Income (Loss)


The accumulated balances for each classification of other comprehensive income (loss), net of tax, are as follows:
 
 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Net Unrealized Gain on Securities
                       
Beginning Balance
 
$
73,709
   
$
40,749
   
$
57,830
   
$
27,308
 
Other comprehensive income before reclassifications
   
10,681
     
16,820
     
26,730
     
31,313
 
Amounts reclassified from accumulated other comprehensive income (loss)
   
720
     
(1,891
)
   
550
     
(2,943
)
Net current period change
   
11,401
     
14,929
     
27,280
     
28,370
 
Ending Balance
   
85,110
     
55,678
     
85,110
     
55,678
 
Liability for Pension Benefits Beginning Balance
   
(28,314
)
   
(24,190
)
   
(28,467
)
   
(24,246
)
Amounts reclassified from accumulated other comprehensive income
   
153
     
56
     
306
     
112
 
Ending Balance
   
(28,161
)
   
(24,134
)
   
(28,161
)
   
(24,134
)
Accumulated Other Comprehensive Income Beginning Balance
   
45,395
     
16,559
     
29,363
     
3,062
 
Other comprehensive income before reclassifications
   
10,681
     
16,820
     
26,730
     
31,313
 
Amounts reclassified from accumulated other comprehensive income (loss)
   
873
     
(1,835
)
   
856
     
(2,831
)
Net current period change
   
11,554
     
14,985
     
27,586
     
28,482
 
Ending Balance
 
$
56,949
   
$
31,544
   
$
56,949
   
$
31,544
 


(15)
Share-Based Compensation


 Share-based compensation expense recorded during the three months ended June 30, 2020 and 2019 was $4,235 and $4,320, respectively. Share-based compensation expense recorded during the six months ended June 30, 2020 and 2019 was $6,594 and $5,907, respectively. During the six months ended June 30, 2020 and 2019, 6,882 and 602 shares, respectively, were repurchased and retired as the result of non-cash tax withholdings upon vesting of shares. There were no non-cash tax withholdings during the three months ended June 30, 2020 and 2019.

(16)
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,
 
 
 
2020
   
2019
   
2020
   
2019
 
Numerator for earnings per share:
                       
Net income attributable to TSM available to stockholders
 
$
43,599
   
$
30,931
   
$
17,454
   
$
65,717
 
Denominator for basic earnings per share:
                               
Weighted average of common shares
   
23,193,626
     
22,830,399
     
23,287,787
     
22,794,297
 
Effect of dilutive securities
   
77,677
     
64,601
     
85,198
     
72,394
 
Denominator for diluted earnings per share
   
23,271,303
     
22,895,000
     
23,372,985
     
22,866,691
 
Basic net income per share attributable to TSM
 
$
1.88
   
$
1.35
   
$
0.75
   
$
2.88
 
Diluted net income per share attributable to TSM
 
$
1.87
   
$
1.35
   
$
0.75
   
$
2.87
 


27

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

(17)
Contingencies
 

The following information supplements and amends, as applicable, the disclosures in Note 24 to the Consolidated Financial Statements of the Company’s 2019 Annual Report on Form 10-K.  The Company’s business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, U.S. Virgin Islands (USVI), Costa Rica, British Virgin Islands (BVI), and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company’s compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.

 

The Company is involved in various legal actions arising in the ordinary course of business. The Company is also defendant 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 the Company believes the 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. However, there are legal proceedings where a loss is reasonably possible, and for which it is possible to reasonably estimate the amount of the possible loss or range of losses. We currently believe that the range of possible losses for such proceedings in excess of established reserves is, in the aggregate, from $0 to approximately $10,000 at June 30, 2020. The outcome of legal proceedings is inherently uncertain; 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.

Claims by Heirs of Former Shareholders


The Company and TSS are defending four individual lawsuits: Vera Sanchez, et al, v. Triple-S; Olivella Zalduondo, et al, v. Seguros de Servicios de Salud, et al; Cebollero Santamaria v. Triple-S Salud, Inc., et al; and Ruiz de Porras, et al, v. Triple-S Salud, Inc.  All claims were filed in the Puerto Rico Court of First Instance by persons who claim to have inherited a total of 41 shares of the Company or one of its predecessors or affiliates (before giving effect to a 3,000-for-one stock split).  While each case presents unique facts and allegations, the lawsuits generally allege that the redemption of the shares by the Company pursuant to transfer and ownership restrictions contained in the Company’s (or its predecessors’ or affiliates’) articles of incorporation and bylaws was improper.  Consequently, the remedy requested by the plaintiffs is to be recognized as shareholders of the Company in the corresponding proportion.


As a result of the Puerto Rico Supreme Court’s decision to deny the applicability of the statute of limitations contained in the local securities law, these claims are being litigated on their merits.
28

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


In Cebollero Santamaria v. Triple-S Salud, Inc., et. al. the Puerto Rico Court of First Instance entered partial summary judgment in favor of plaintiff on June 20, 2019. The Company filed a request for reconsideration that is pending adjudication and intends to continue defending this case vigorously in an appeal stage if necessary.


In Vera Sanchez, et. al. v. Triple-S, Inc., the Puerto Rico Court of First Instance entered summary judgment in favor of the Company. Plaintiffs appealed before the Puerto Rico Court of Appeals. The Company filed its opposition on October 31, 2019. On June 24, 2020, the Court of Appeals revoked the summary judgement and remanded the case back to the Court of First Instance on the grounds that summary judgement was inappropriate because there are disputes as to issues of material fact. We will continue to defend this case vigorously.


In Ruiz de Porras, et. al. v. Triple-S, Inc. the discovery stage is now completed.  The Company intends to file a motion for summary judgment to dismiss all claims.


In Olivella Zalduondo, et al, v. Seguros de Servicios de Salud, et al, the Court of First Instance entered summary judgment in favor of the Company in November 2019, dismissing the complaint with prejudice. Plaintiffs appealed the decision on January 16, 2020. The Company will continue to defend this case as needed.

In re Blue Cross Blue Shield Antitrust Litigation


TSS is a co-defendant with multiple Blue Plans and the Blue Cross Blue Shield Association in a multi-district class action litigation filed by a group of providers and subscribers on July 24, 2012 and October 1, 2012, respectively, that has since been consolidated by the United States District Court for the Northern District of Alabama, Southern Division, in the case captioned In re Blue Cross Blue Shield Association Antitrust Litigation. Essentially, provider plaintiffs allege that the exclusive service area requirements of the Primary License Agreements with the Blue Plans constitute an illegal horizontal market allocation under federal antitrust laws. As per provider plaintiffs, the quid pro quo for said “market allocation” is a horizontal price fixing and boycott conspiracy implemented through BCBSA and whose benefits are allegedly derived through the BCBSA’s BlueCard/National Accounts Program. Among the remedies sought, provider plaintiffs seek increased compensation rates and operational changes. In turn, subscriber plaintiffs allege that the alleged conspiracy to allocate markets have prevented subscribers from being offered competitive prices and resulted in higher premiums for Blue Plan subscribers. Subscribers seek damages for the amounts that the Blue Plan premiums allegedly have been artificially inflated as a result of the alleged antitrust violations. Both actions seek injunctive relief.
29

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


Prior to consolidation, motions to dismiss were filed by several plans, including TSS - whose request was ultimately denied by the court without prejudice. On April 6, 2015, plaintiffs filed suit in the United States District Court of Puerto Rico against TSS. Said complaint, nonetheless, is believed not to preclude TSS’ jurisdictional arguments. Since inception, the Company has joined BCBSA and other Blue Plans in vigorously contesting these claims. On April 5, 2018, the United States District Court for the Northern District of Alabama, Southern Division, issued it’s ruling on the parties’ respective motions for partial summary judgment on the standard of review applicable to plaintiffs’ claims under Section 1 of the Sherman Act and subscriber plaintiffs’ motion for partial summary judgment on the Blue Plan’s single entity defense. After considering the “undisputed” facts (for summary judgment purposes only) and evidence currently on record in the light most favorable to defendants, the court essentially found that: (a) the combination of Exclusive Service Areas and the National Best Efforts Rule are subject to the Per Se standard of review; (b) there remain genuine issues of material fact as to whether defendants’ conduct can be shielded by the “single entity” defense; and (c) claims concerning the BlueCard Program and uncoupling rules are due to be analyzed under the Rule of Reason standard.


On April 16, 2018 Defendants moved the Federal District Court for the Northern District of Alabama to certify for immediate interlocutory appeal the court’s April 5, 2018 Standard of Review Ruling. On June 12, 2018 Hon. Judge Proctor agreed to grant Defendant’s motion for certification pursuant to 28 U.S.C. §1292(b). Defendants filed their Notice of Appeal on July 12, 2018. On December 12, 2018, the Court of Appeals for the Eleventh Circuit denied Defendants’ petition to appeal the District Court’s Standard of Review Ruling. The parties re-commenced mediation with subscribers in April 2019 and with providers in September 2019. Based on the state of negotiation with subscribers, the Company has accrued $32,000 related to this legal proceeding. 

Claims Relating to the Provision of Health Care Services
 

TSS is a defendant in several claims for collection of monies in connection with the provision of health care services.

 

On April 17, 2015, the Puerto Rico Health Insurance Administration ("ASES" by its Spanish acronym) notified the Company of a complaint from a medical service provider demanding payment amounting to $5,073. Claimant alleges that TSS did not pay the claims, paid them incorrectly, or recovered payments from the provider for which TSS did not have the right. TSS answered the complaint and counterclaimed. TSS denies any wrongdoing and will continue to defend this matter vigorously. The parties have concluded the claim reconciliation process and have agreed on a settlement amount to be paid by ASES. On July 28, 2020 ASES approved the disbursment and issued a resolution closing the complaint.

 

On January 12, 2015, American Clinical Solutions LLC, a limited liability company that provides clinical laboratory services filed a complaint in Florida state court alleging that TSM and TSS failed to pay certain clinical laboratory services provided to Blue Cross Blue Shield members. TSS and TSM have filed a motion to dismiss alleging lack of jurisdiction. TSM and TSS also requested a transfer of the case to Puerto Rico. Plaintiff has requested jurisdictional discovery, which is ongoing. The claim amounts to $5,000. TSS and TSM will continue to vigorously oppose this claim. 

(18)
Segment Information
 

The Company’s operations are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Company 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.
30

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


The following tables summarize the operations by reportable segment for the three months and six months ended June 30, 2020 and 2019:
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Managed Care:
                       
Premiums earned, net
 
$
788,773
   
$
793,355
   
$
1,598,059
   
$
1,498,405
 
Administrative service fees
   
2,809
     
2,456
     
5,003
     
5,088
 
Intersegment premiums/service fees
   
1,076
     
1,645
     
2,719
     
3,129
 
Net investment income
   
4,690
     
5,479
     
9,698
     
11,357
 
Total managed care
   
797,348
     
802,935
     
1,615,479
     
1,517,979
 
Life Insurance:
                               
Premiums earned, net
   
47,523
     
44,511
     
93,709
     
88,233
 
Intersegment premiums
   
545
     
508
     
1,036
     
986
 
Net investment income
   
6,795
     
6,822
     
13,725
     
13,382
 
Total life insurance
   
54,863
     
51,841
     
108,470
     
102,601
 
Property and Casualty Insurance:
                               
Premiums earned, net
   
22,239
     
21,627
     
42,664
     
40,857
 
Intersegment premiums
   
154
     
154
     
307
     
307
 
Net investment income
   
2,323
     
2,384
     
4,448
     
4,871
 
Total property and casualty insurance
   
24,716
     
24,165
     
47,419
     
46,035
 
Other segments: *
                               
Intersegment service revenues
   
2,007
     
2,007
     
5,042
     
3,973
 
Operating revenues from external sources
   
303
     
1,591
     
4,342
     
3,168
 
Total other segments
   
2,310
     
3,598
     
9,384
     
7,141
 
Total business segments
   
879,237
     
882,539
     
1,780,752
     
1,673,756
 
TSM operating revenues from external sources
   
7
     
377
     
255
     
828
 
Elimination of intersegment premiums/service fees
   
(1,775
)
   
(2,307
)
   
(4,062
)
   
(4,422
)
Elimination of intersegment service revenues
   
(2,007
)
   
(2,007
)
   
(5,042
)
   
(3,973
)
Consolidated operating revenues
 
$
875,462
   
$
878,602
   
$
1,771,903
   
$
1,666,189
 

*
Includes segments that are not required to be reported separately, primarily the health clinics.
31

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

 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Operating income (loss):
                       
Managed care
 
$
29,322
   
$
29,302
   
$
43,489
   
$
51,412
 
Life insurance
   
9,457
     
5,215
     
14,506
     
10,855
 
Property and casualty insurance
   
6,777
     
4,784
     
6,535
     
8,338
 
Other segments *
   
(2,409
)
   
(730
)
   
(2,913
)
   
(1,122
)
Total business segments
   
43,147
     
38,571
     
61,617
     
69,483
 
TSM operating revenues from external sources
   
7
     
377
     
255
     
828
 
TSM unallocated operating expenses
   
(1,841
)
   
(3,137
)
   
(3,244
)
   
(5,169
)
Elimination of TSM intersegment charges
   
2,403
     
2,403
     
4,806
     
4,806
 
Consolidated operating income
   
43,716
     
38,214
     
63,434
     
69,948
 
Consolidated net realized investment (losses) gains
   
(221
)
   
2,364
     
(687
)
   
3,679
 
Consolidated net unrealized investment gains (losses) on equity investments
   
28,338
     
3,323
     
(28,468
)
   
22,992
 
Consolidated interest expense
   
(1,864
)
   
(1,831
)
   
(3,717
)
   
(3,619
)
Consolidated other income, net
   
801
     
1,705
     
4,406
     
2,874
 
Consolidated income before taxes
 
$
70,770
   
$
43,775
   
$
34,968
   
$
95,874
 
 
                               
Depreciation and amortization expense:
                               
Managed care
 
$
2,930
   
$
2,792
   
$
5,976
   
$
5,549
 
Life insurance
   
308
     
273
     
580
     
545
 
Property and casualty insurance
   
91
     
86
     
203
     
180
 
Other segments*
   
352
     
193
     
673
     
378
 
Total business segments
   
3,681
     
3,344
     
7,432
     
6,652
 
TSM depreciation expense
   
156
     
196
     
312
     
393
 
Consolidated depreciation and amortization expense
 
$
3,837
   
$
3,540
   
$
7,744
   
$
7,045
 

*
Includes segments that are not required to be reported separately, primarily the health clinics.

 
 
June 30,
2020
   
December 31,
2019
 
Assets:
           
Managed care
 
$
1,344,379
   
$
1,190,538
 
Life insurance
   
1,030,522
     
981,370
 
Property and casualty insurance
   
603,537
     
592,758
 
Other segments *
   
30,304
     
28,346
 
Total business segments
   
3,008,742
     
2,793,012
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
20,214
     
28,167
 
Property and equipment, net
   
65,461
     
25,623
 
Other assets
   
46,134
     
37,176
 
 
   
131,809
     
90,966
 
Elimination entries-intersegment receivables and others
   
(119,121
)
   
(65,152
)
Consolidated total assets
 
$
3,021,430
   
$
2,818,826
 

*
Includes segments that are not required to be reported separately, primarily the health clinics.
32

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


(19)
Subsequent Events
 

The Company evaluated subsequent events through the date the unaudited condensed consolidated interim financial statements were issued. No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standard Codification.

33
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, 2020. 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, 2019 and the MD&A included therein, and our unaudited condensed consolidated interim financial statements and accompanying notes as of and for the three months and six months ended June 30, 2020 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, the development of the COVID-19 outbreak, 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 60 years of experience in this industry. We offer a broad portfolio of managed care and related products in the Commercial, Medicaid and Medicare Advantage markets. In the Commercial market, we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Insurance Plan (a government of Puerto Rico and U.S. federal government funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid). 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, 2019 under the sub-caption “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.”
 
We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands (USVI), Costa Rica, the British Virgin Islands (BVI) and Anguilla.  As of June 30, 2020, we served approximately 932,000 managed care members across all regions of Puerto Rico. For the six months ended June 30, 2020 and 2019, 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 in Puerto Rico.
 
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS); Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB). TSS, TSA and TSB are Blue Cross Blue Shield Association (BCBSA) licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the USVI, Costa Rica, the BVI, and Anguilla.
 
34
 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 18 of the Condensed Consolidated Interim Financial Statements included in Quarterly Report on Form 10-Q.
 
Our revenues primarily consist of premiums earned, net and investment income. Premiums are derived from the sale of managed care products and property and casualty and life insurance contracts.  Substantially all our earnings are generated in Puerto Rico.
 
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and policyholders. Each segment’s results of operations depend to a significant extent on their ability to accurately predict and effectively manage claims. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period. Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses.
 
We use operating income as a measure of performance of the underwriting and investment functions of our segments. We also use the loss ratio and the operating expense ratio as measures of performance.  The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100. The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.
 
Recent Developments

COVID-19

COVID-19 Situation in Puerto Rico

As of August 5, 2020, the Puerto Rico Department of Health reported 19,651 positive COVID-19 cases and a total of 246 confirmed and probable COVID-19-related deaths in Puerto Rico.

Puerto Rico was under a stay-at-home order (as amended and extended, the “Order”) from March 15, 2020 until June 16, 2020.  The Order required the closure of non-essential businesses for the same period of time.  On May 1, 2020, the Governor issued a new order providing for the gradual re-opening of the economy beginning on May 4, 2020, provided that the risk of contagion does not increase significantly.  The Governor has issued several other executive orders establishing the rules to continue the gradual re-opening of the economy, the latest of which is effective until August 15, 2020. However, due to the recent increase in COVID-19 cases, the last two (2) executive orders have reinstated certain social distancing measures, such as the total closure of businesses on Sundays, subject to certain exceptions.

Healthcare is considered an essential service under the Order; therefore, all functions of our Managed Care business, other than sales, have been excluded from closure.  Our Life and Property & Casualty businesses, which had been closed since March 16, 2020, re-opened on May 5, 2020, subject to compliance with certain safety and risk management measures.

We have implemented our business continuity and risk mitigation plans and are closely monitoring how the outbreak develops in order to ensure the health and safety of our employees and visitors.

Economic Impact

It is still too early to fully assess the ultimate economic impact of the pandemic and lockdown.  However, the 2020 Fiscal Plan (as defined below) estimates that the economy of Puerto Rico will contract by 4% in real terms in fiscal year 2020 (which ended on June 30, 2020), largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021.  These projections incorporate the combined effect of the measures enacted by the federal and Puerto Rico governments (discussed below), which are expected to play an essential role in mitigating the economic damage from the sudden economic shock caused by the pandemic.  
35
See Item 1A.  Risk Factors – Risks Related to our Business – “Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us.” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Legislative Measures and Initiatives

The federal and state governments have enacted a number of measures in response to the COVID-19 outbreak and the impact the outbreak has had on the economy, public health, government, individuals, and businesses. We include summaries of some of those measures below.

Funding and Economic Relief for Puerto Rico

Public Law 116-127, known as the Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, makes approximately $182.9 million available for Puerto Rico’s Medicaid Program and increases the percentage of federal government funding for its Medicaid program expenditures from 76% to approximately 82% during the emergency period.  Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security or CARES Act, enacted on March 27, 2020, includes a series of direct relief and financial assistance measures for Puerto Rico residents and businesses.  The CARES Act also assigns $2.2 billion to the Government of Puerto Rico to cover necessary expenditures related to COVID-19 and not included in the territory’s budget, among other measures. The Puerto Rico government has earmarked approximately $1 billion for its COVID-19 response.

Measures Impacting our Business

The FFCRA and CARES Act also require health plans and insurers to cover testing for COVID-19 without imposing cost-sharing or prior authorization requirements.  On April 16, 2020, the Puerto Rico Government enacted Act number 43, which requires health plans and insurers to cover COVID-19-related diagnostic and treatment services, including hospitalization, without cost-sharing.  Our regulators have also issued regulations and circular letters requiring waivers of pre-authorizations for certain services and drugs, requiring temporary coverage of certain out-of-network providers and services, and limiting cost-sharing for certain services.  See Item 1A. Risk Factors – “The COVID-19 pandemic and local, state and federal governments’ response to the pandemic may have a material adverse effect on our business, financial condition and results of operations” in this Quarterly Report on Form 10-Q.

Puerto Rico Economy

PROMESA and the Oversight Board

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

Commonwealth Fiscal Plan and Plan of Adjustment

The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated May 27, 2020 (the “2020 Fiscal Plan”).  As mentioned above, the 2020 Fiscal Plan estimates that the economy of Puerto Rico will contract by 4% in real terms in fiscal year 2020, largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021. This new economic outlook exacerbates the Commonwealth government’s fiscal challenges. As a result of these changes, the 2020 Fiscal Plan projects that the Commonwealth will have a pre-contractual debt service deficit each year through 2025 if the measures and structural reforms contemplated by the plan are not successfully implemented. It estimates that the proposed fiscal measures and structural reforms will drive approximately $10 billion in savings and extra revenue through 2025 and a cumulative 0.88% increase in growth by fiscal year 2029. However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2020 Fiscal Plan’s projections reflect an annual deficit starting in fiscal year 2032.

36
 On February 28, 2020, the Oversight Board filed an amended plan of adjustment for the Commonwealth, the Employees Retirement System of the Government of the Commonwealth and the Puerto Rico Public Buildings Authority in the pending debt restructuring proceedings under Title III of PROMESA (the “Proposed Plan of Adjustment”). In light of the COVID-19 pandemic, however, the Oversight Board requested that the court adjourn court proceedings related to the Proposed Plan of Adjustment so as to allow for the Government and the Oversight Board to prioritize the health and safety of the people of Puerto Rico and to gain a better understanding of the economic and fiscal impact of the pandemic.

Property & Casualty Litigation

As of June 30, 2020, our Property and Casualty subsidiary had been served in a total of 461 cases relating to Hurricane Maria. Of those, 341 remained open as of June 30, 2020. See Item 1A. Risk Factors – Risks Related to our Business – “Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations” and “We face risks related to litigation” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Property and Casualty Reinsurance Program

The Company’s Property and Casualty segment completed the renewal of its reinsurance property and catastrophe program effective April 1, 2020 for twelve-month term ending March 31, 2021.  The new reinsurance program considers a change in cessions in the Commercial Property quota share agreement from 25% to 20% and provides the segment with a catastrophe loss protection of $809 million in excess of $5 million. The cost of the new reinsurance program is estimated to be approximately $2.0 million more than the expiring program.

Recent Seismic Activity

On January 7, 2020, a magnitude 6.4 earthquake struck Puerto Rico, causing island-wide power outages and extensive damage to infrastructure and property in the southwest region of the island.  The 6.4 magnitude earthquake was preceded by foreshocks and followed by aftershocks. During the three months ended March 31, 2020, the Company recognized $5 million in losses related to this event, which is its maximum exposure for a single event under its current reinsurance program.

See “Item 1A.  Risk Factors—Risks Related to Our Business – Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Legislative Initiatives

On July 20, 2020, the Governor of Puerto Rico announced she would call the legislature to an extraordinary session for the consideration of legislative projects affecting the healthcare insurance industry, among other measures.

Acquisition of Life Insurance Portfolio

Effective June 1, 2020, our Life Insurance company acquired a life insurance portfolio from a local insurance company. The portfolio represents approximately $5.5 million in annualized premiums.

ASES Contract Premium Negotiations

Our contract with ASES for the provision of health coverage to the medically indigent in Puerto Rico under the Puerto Rico Health Reform Program (similar to Medicaid), provides for the annual negotiation of premium rates. The premium rates for the current contract year expired on June 30, 2020. However, we have executed amendments to the contract extending the current premium rates until August 30, 2020 while new premium rates are negotiated. The new premium rates will be effective retroactively from July 1, 2020 and will apply through the expiration of the contract on September 30, 2021.
 
37
Recent Accounting Standards

For a description of recent accounting standards, see Note 2 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q.

Managed Care Membership
 
 
As of June 30,
 
   
2020
   
2019
 
Managed care enrollment:
           
Commercial 1
   
433,471
     
436,407
 
Medicare
   
134,601
     
128,670
 
Medicaid
   
364,157
     
364,495
 
Total
   
932,229
     
929,572
 
Managed care enrollment by funding arrangement:
               
Fully-insured
   
823,247
     
811,594
 
Self-insured
   
108,982
     
117,978
 
Total
   
932,229
     
929,572
 

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

38
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
   
Six months ended
 
   
June 30,
   
June 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Revenues:
                       
Premiums earned, net
 
$
858.5
   
$
859.5
   
$
1,734.4
   
$
1,627.5
 
Administrative service fees
   
2.8
     
2.5
     
5.0
     
5.1
 
Net investment income
   
13.8
     
15.0
     
28.1
     
30.4
 
Other operating revenues
   
0.4
     
1.6
     
4.4
     
3.2
 
Total operating revenues
   
875.5
     
878.6
     
1,771.9
     
1,666.2
 
Net realized investment (losses) gains
   
(0.2
)
   
2.4
     
(0.7
)
   
3.6
 
Net unrealized investment gains (losses) on equity investments
   
28.3
     
3.3
     
(28.5
)
   
23.0
 
Other income, net
   
0.8
     
1.7
     
4.4
     
2.9
 
Total revenues
   
904.4
     
886.0
     
1,747.1
     
1,695.7
 
Benefits and expenses:
                               
Claims incurred
   
653.1
     
706.3
     
1,367.6
     
1,329.5
 
Operating expenses
   
178.7
     
134.1
     
340.9
     
266.7
 
Total operating expenses
   
831.8
     
840.4
     
1,708.5
     
1,596.2
 
Interest expense
   
1.8
     
1.8
     
3.7
     
3.6
 
Total benefits and expenses
   
833.6
     
842.2
     
1,712.2
     
1,599.8
 
Income before taxes
   
70.8
     
43.8
     
34.9
     
95.9
 
Income tax expense
   
27.2
     
12.9
     
17.5
     
30.2
 
Net income attributable to TSM
 
$
43.6
   
$
30.9
   
$
17.4
   
$
65.7
 

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
 
Operating Revenues
 
Consolidated premiums earned, net decreased by $1.0 million, or 0.1%, to $858.5 million during the three months ended June 30, 2020.  This decrease primarily reflects lower premiums in the Managed Care segment by $4.5 million offset in part by a growth in premiums in the Life Insurance segment of $3.1 million.
 
Net unrealized investment gains on equity investments
 
The $28.3 million in consolidated net unrealized investment gains on equity investments reflect the impact of changes in equity markets.
 
Claims Incurred
 
Consolidated claims incurred decreased by $53.2 million, or 7.5%, to $653.1 million, and the consolidated loss ratio decreased 610 basis points, to 76.1%, when compared to the prior-year period primarily reflecting lower claims across all segments, mostly the result of the COVID-19 pandemic. Managed Care claims incurred decreased $43. 7 million and its MLR decreased 510 basis points reflecting lower utilization of services as the result of the government enforced lockdown and the prohibition of elective procedures due to the COVID-19 pandemic, as well as the reinstatement of the HIP fee pass-through in 2020. This reduction is offset by other costs such as COVID-19 related treatment and testing, the waiver of medical and payment policies, and the assistance we are providing to our elderly population and other vulnerable members.
 
Following the government enforced lockdown related to the COVID-19 pandemic in mid-March, we have seen a decrease in utilization of Managed Care services as members and providers deferred non-emergent or elective health services.  While this trend has caused, and may continue to cause, a short-term decrease in our claim costs, we expect these costs to increase and affect our medical cost trends as the demand for the deferred non-emergent or elective health services resumes.  The access to and demand for care was most constrained from mid-March through April, began to recover in late May and approached more typical levels by the end of this quarter.
 
39
Operating Expenses
 
Consolidated operating expenses increased by $44.6 million, or 33.3%, to $178.7 million. The increase in operating expenses mostly results from the recognition of a contingency reserve of $32 million related to a legal proceeding in our Managed Care segment (see Note 17 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q) and the reinstatement in 2020 of the Health Insurance Providers Fee (HIP fee) of $14.9 million.  For the three months ended June 30, 2020, the consolidated operating expense ratio increased 510 basis points to 20.7%.
 
Income Taxes
 
Consolidated income tax expense for the three months ended June 30, 2020 increased by $14.3 million to $27.2 million primarily reflecting the higher taxable income in 2020.
 
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
 
Operating Revenues
 
Consolidated premiums earned, net increased by $106.9 million, or 6.6%, to $1,734.4 million during the six months ended June 30, 2020.  This increase primarily reflects higher premiums in the Managed Care and Life Insurance segments by $99.8 million and $5.6 million, respectively.
 
Net unrealized investment losses on equity investments
 
The $28.5 million in consolidated net unrealized investment losses on equity investments reflect the impact of changes in equity markets.
 
Claims Incurred
 
Consolidated claims incurred increased by $38.1 million, or 2.9%, to $1,367.6 million, during the six months ended June 30, 2020.  The consolidated loss ratio decreased 280 basis points, to 78.9%, from the prior-year period, mostly reflecting lower Managed Care utilization of services since mid-March as the result of the government enforced lockdown due to the COVID-19 pandemic and the effect in the MLR of the reinstatement of the HIP fee pass-through in 2020.  These decreases were partially offset by the increased benefits in our 2020 Medicare product offering and $5 million of earthquake losses recorded by the Property and Casualty segment.
 
Following the government enforced lockdown related to the COVID-19 pandemic in mid-March, we have seen a decrease in utilization of Managed Care services as members and providers deferred non-emergent or elective health services.  While this trend has caused, and may continue to cause, a short-term decrease in these costs, we expect  these costs to increase in the second half of the year and affect our medical cost trends as the demand for the deferred non-emergent or elective health services resumes.  The access to and demand for care was most constrained from mid-March through April, began to recover in late May and approached more typical levels by the end of June.
 
Operating Expenses
 
Consolidated operating expenses increased by $74.2 million, or 27.8%, to $340.9 million. The increase in operating expenses mostly results from the recognition of a $32 million contingency reserve related to a legal proceeding in our Managed Care segment, (see Note 17 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q), the reinstatement of the HIP fee in 2020 of $31.2 million and higher amortization of deferred acquisition costs.  The consolidated operating expense ratio increased 330 basis points to 19.6%.
 
Income Taxes
 
Consolidated income tax expense for the six months ended June 30, 2020 decreased by $12.7 million to $17.5 million primarily reflecting the lower taxable income in 2020.
 
40
Managed Care Operating Results

 
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Medical premiums earned, net:
                       
Medicare
 
$
372.4
   
$
366.0
   
$
760.2
   
$
698.6
 
Medicaid
   
221.1
     
227.0
     
442.0
     
401.4
 
Commercial
   
195.8
     
200.8
     
396.9
     
399.3
 
Medical premiums earned, net
   
789.3
     
793.8
     
1,599.1
     
1,499.3
 
Administrative service fees
   
3.4
     
3.6
     
6.7
     
7.3
 
Net investment income
   
4.7
     
5.5
     
9.7
     
11.4
 
Total operating revenues
   
797.4
     
802.9
     
1,615.5
     
1,518.0
 
Medical operating costs:
                               
Medical claims incurred
   
627.0
     
670.7
     
1,304.8
     
1,260.7
 
Medical operating expenses
   
141.1
     
102.9
     
267.2
     
205.9
 
Total medical operating costs
   
768.1
     
773.6
     
1,572.0
     
1,466.6
 
Medical operating income
 
$
29.3
   
$
29.3
   
$
43.5
   
$
51.4
 
                                 
Additional data:
                               
Member months enrollment:
                               
Commercial:
                               
Fully-insured
   
975,212
     
955,463
     
1,953,554
     
1,908,515
 
Self-funded
   
327,030
     
353,961
     
657,262
     
716,451
 
Total commercial
   
1,302,242
     
1,309,424
     
2,610,816
     
2,624,966
 
Medicare
   
405,203
     
385,835
     
813,110
     
769,443
 
Medicaid
   
1,077,456
     
1,092,132
     
2,145,472
     
2,121,868
 
Total member months
   
2,784,901
     
2,787,391
     
5,569,398
     
5,516,277
 
Medical loss ratio
   
79.4
%
   
84.5
%
   
81.6
%
   
84.1
%
Operating expense ratio
   
17.8
%
   
12.9
%
   
16.6
%
   
13.7
%

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
 
Managed Care Operating Revenues
 
Managed Care premiums earned decreased by $4.5 million, or 0.6%, to $789.3 million. This decrease is principally the result of the following:

•
Premiums generated by the Medicare business increased by $6.4 million, or 1.7% to $372.4 million, mostly due to an increase in enrollment of approximately 19,000 member months, which primarily reflects a more competitive product offering, and an increase in the average membership risk score. This increase in premiums earned was partially offset by the recognition of estimated premium rebates due to the lower MLR resulting from the decreased utilization of services following the pandemic-related lockdown. 

•
Premiums generated by the Medicaid business decreased by $5.9 million, or 2.6% to $221.1 million, primarily reflecting lower membership of approximately 15,000 member months. In addition, the 2019 quarter includes retroactive premiums related to adjustments to the premium rates for high cost high need members as part of an ongoing reconciliation with ASES.

•
Premiums generated by the Commercial business decreased by $5.0 million, or 2.5%, to $195.8 million, mainly reflecting lower average premium rates and the recognition of estimated premium rebates due to the lower MLR resulting from the decreased utilization of services following the government enforced lockdown due to the COVID-19 pandemic.  These decreases were partially offset by an increase in fully-insured enrollment during the quarter by approximately 20,000 member months and the reinstatement of the HIP fee pass-through in 2020.
 
41
Managed Care Claims Incurred
 
Managed Care claims incurred decreased by $43.7 million, or 6.5%, to $627.0 million when compared to the three months ended June 30, 2019. The medical loss ratio (MLR) of the segment decreased 510 basis points during the 2020 period, to 79.4%.  This fluctuation is primarily attributed to the net effect of the following:
 
•
Claims incurred in the Medicare business decreased by $13.9 million, or 4.6%, during the 2020 period and its MLR decreased 520 basis points to 77.2%.  The lower MLR mostly reflects lower utilization of services as the result of the government enforced lockdown due to the COVID-19 pandemic, which was in force during most of the second quarter, partially offset by improved benefits in the 2020 product offerings and the impact of the previously mentioned estimated premium rebates.

•
Claims incurred in the Medicaid business increased by $0.3 million, or 0.1%, during the 2020 period.  The MLR, at 93.7%, was 260 basis point higher than the same period last year.  The higher MLR mostly reflects the impact of the retroactive premiums adjustment in the second quarter of 2019 mentioned above.

•
Claims incurred in the Commercial business decreased by $30.1 million, or 18.6%, during 2020 and its MLR decreased 1,340 basis points, to 67.5%.  The lower MLR mostly reflects the impact of the lower utilization as a result of the lockdown and the reinstatement of the HIP fee pass-through in 2020.  These decreases were partially offset by the impact of the previously mentioned estimated premium rebates and the impact in 2019 of favorable prior period reserve development.
 
Managed Care Operating Expenses
 
Managed Care operating expenses increased by $38.2 million, or 37.1%, to $141.1 million.  The operating expense ratio increased by 490 basis points to 17.8% in 2020. The higher operating expenses and expense ratio are mostly driven by the recognition of a contingency reserve related to a legal proceeding and a $14.9 million increase in the HIP Fee following the reinstatement of the fee in 2020, offset in part by lower professional fees and personnel costs.
 
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
 
Managed Care Operating Revenues
 
Managed Care premiums earned increased by $99.8 million, or 6.7%, to $1,599.1 million. This increase is principally the result of the following:
 
•
Premiums generated by the Medicare business increased by $61.6 million, or 8.8%, to $760.2 million, mostly due to higher average premium rates, reflecting an increase in the average membership risk score revenue in 2020, and higher member months enrollment by approximately 44,000.  These increases were partially offset by the recognition of estimated premium rebates due to the lower MLR resulting from the decreased utilization of services as the result of the government enforced lockdown due to the COVID-19 pandemic.

•
Premiums generated by the Medicaid business increased by $40.6 million, or 10.1% to $442.0 million, primarily reflecting higher average premium rates, an increase in enrollment of approximately 24,000 member months, the reinstatement of the HIP fee pass-through in 2020, and the impact of the profit sharing accrual recorded in 2019. These increases were partially offset due to the impact recognized in the 2019 period, of the retroactive premiums related to adjustments to the premium rates for high cost high need members as part of an ongoing reconciliation with ASES.

•
Premiums generated by the Commercial business decreased by $2.4 million, or 0.6%, to $396.9 million.  This fluctuation primarily reflects lower average premium rates and the recognition of estimated premium rebates due to the lower MLR resulting from the decreased utilization of services as the result of the government enforced lockdown.  These decreases were partially offset by higher fully-insured enrollment during the quarter by approximately 45,000 member months, and the reinstatement of the HIP fee pass-through in 2020.

42
Managed Care Claims Incurred
 
Managed Care claims incurred increased by $44.1 million, or 3.5%, to $1,304.8 million when compared to the six months ended June 30, 2019.  The MLR of the segment decreased 250 basis points during 2020, to 81.6%. This fluctuation is primarily attributed to the net effect of the following:
 
•
Claims incurred in the Medicare business increased by $38.8 million, or 6.8%, during the 2020 period and its MLR decreased 150 basis points, to 80.0%.  The increase in claim cost is due to higher member months partially offset by the loser MLR.  The lower MLR mostly reflects lower utilization of services as the result of the government enforced lockdown due to the COVID-19 pandemic, which was in force during most of the second quarter, partially offset by improved benefits in the 2020 product offerings.  In addition, the 2019 MLR was favorably impacted by prior period reserve development.

•
The Managed Care claims incurred in the Medicaid business increased by $42.3 million, or 11.6%, during 2020 and its MLR increased 130 basis points, to 92.0%. The higher MLR mostly reflects the impact of the retroactive premiums adjustment in the second quarter of 2019 mentioned above and an unfavorable prior period reserve development in the 2020 period.

•
Claims incurred in the Commercial business decreased by $37.0 million, or 11.3%, during 2020 and its MLR decreased 890 basis points, to 73.0%. These decreases mostly result from lower utilization related to the COVID-19 lockdown and the impact in the MLR of the reinstatement of the HIP fee pass-through in 2020. These decreases were partially offset by the impact of the previously mentioned estimated premium rebates, higher fully-insured enrollment, and the impact in 2019 of favorable prior period reserve development.
 
Managed Care Operating Expenses
 
Managed Care operating expenses increased by $61.3 million, or 29.8%, to $267.2 million. The operating expense ratio increased by 290 basis points to 16.6% in 2020. The higher operating expenses mostly result from the recognition of a contingency reserve related to a legal proceeding and the reinstatement in 2020 of the HIP fee of $31.2 million, offset in part by a decrease in the provision for doubtful accounts and professional fees.

 
43
Life Insurance Operating Results

 
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums earned
 
$
50.6
   
$
46.8
   
$
99.6
   
$
92.4
 
Assumed earned premiums
   
-
     
0.3
     
-
     
1.0
 
Ceded premiums earned
   
(2.5
)
   
(2.1
)
   
(4.8
)
   
(4.2
)
Premiums earned, net
   
48.1
     
45.0
     
94.8
     
89.2
 
Net investment income
   
6.8
     
6.8
     
13.7
     
13.4
 
Total operating revenues
   
54.9
     
51.8
     
108.5
     
102.6
 
Operating costs:
                               
Policy benefits and claims incurred
   
20.6
     
27.3
     
48.0
     
53.3
 
Underwriting and other expenses
   
24.8
     
19.3
     
46.0
     
38.4
 
Total operating costs
   
45.4
     
46.6
     
94.0
     
91.7
 
Operating income
 
$
9.5
   
$
5.2
   
$
14.5
   
$
10.9
 
Additional data:
                               
Loss ratio
   
42.8
%
   
60.7
%
   
50.6
%
   
59.8
%
Operating expense ratio
   
51.6
%
   
42.9
%
   
48.5
%
   
43.0
%

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
 
Operating Revenues
 
Premiums earned, net increased by $3.1 million, or 6.9%, to $48.1 million, mainly as the result of higher sales, mainly in the Individual Life, Cancer, and Group Business lines of business, and by the acquisition of an insurance portfolio during this quarter. Although premiums increased over the same period last year, premium growth slowed down during the second quarter as a result of the two-month government enforced lockdown due to COVID-19.
 
Policy Benefits and Claims Incurred
 
Policy benefits and claims incurred decreased by $6.7 million, or 24.5%, to $20.6 million, mostly as the result of lower actuarial reserves following an increase of policy cancellations and lower claim levels through all lines of business due to the lockdown. As a result, the segment’s loss ratio decreased 1,790 basis point to 42.8%.
 
Underwriting and Other Expenses
 
Underwriting and other expenses increased $5.5 million, or 28.5%, to $24.8 million mostly reflecting higher amortization of deferred acquisition costs as a result of policy cancellations following the segment’s lower volume of business due to the COVID-19 lockdown. The segment’s operating expense ratio increased 870 basis points to 51.6%.
 
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
 
Operating Revenues
 
Premiums earned, net increased by $5.6 million, or 6.3%, to $94.8 million, mainly as the result of higher sales across all lines of business.  Although premiums increased over the same period last year, premium growth slowed down during the second quarter as a result of the two-month government enforced lockdown.
 
44
Policy Benefits and Claims Incurred
 
Policy benefits and claims incurred decreased by $5.3 million, or 9.9%, to $48.0 million, mostly as the result of lower actuarial reserves following higher policy cancellations than usual, mainly in the Home Services line of business after the COVID-19 lockdown. As a result, the segment’s loss ratio decreased 920 basis point to 50.6%.
 
Underwriting and Other Expenses
 
Underwriting and other expenses increased $7.6 million, or 19.8%, to $46.0 million mostly reflecting higher amortization of deferred acquisition costs as a result of policy cancellations due to the lockdown.  The segment’s operating expense ratio increased 550 basis points to 48.5%.

Property and Casualty Insurance Operating Results

 
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
(dollar amounts in millions)
 
2020
   
2019
   
2020
   
2019
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums written
 
$
38.4
   
$
36.4
   
$
71.6
   
$
67.3
 
Premiums ceded
   
(14.3
)
   
(10.3
)
   
(30.7
)
   
(23.7
)
Change in unearned premiums
   
(1.7
)
   
(4.3
)
   
2.1
     
(2.5
)
Premiums earned, net
   
22.4
     
21.8
     
43.0
     
41.1
 
Net investment income
   
2.3
     
2.4
     
4.4
     
4.9
 
Total operating revenues
   
24.7
     
24.2
     
47.4
     
46.0
 
Operating costs:
                               
Claims incurred
   
6.5
     
9.4
     
17.4
     
18.0
 
Underwriting and other expenses
   
11.5
     
10.0
     
23.5
     
19.7
 
Total operating costs
   
18.0
     
19.4
     
40.9
     
37.7
 
Operating income
 
$
6.7
   
$
4.8
   
$
6.5
   
$
8.3
 
Additional data:
                               
Loss ratio
   
29.0
%
   
43.1
%
   
40.5
%
   
43.8
%
Operating expense ratio
   
51.3
%
   
45.9
%
   
54.7
%
   
47.9
%

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
 
Operating Revenues
 
Total premiums written increased by $2.0 million, or 5.5%, to $38.4 million, driven by higher sales of Commercial Package policies partially offset by a decrease in Commercial Liability policies.
 
The premiums ceded to reinsurers increased by $4.0 million, or 38.8%, as a result of the increase in premiums written and higher costs in nonproportional reinsurance mostly resulting from lower reinsurance premium adjustment in current period when compared to the same period in prior year.
 
The change in unearned premiums is $2.6 million lower than the same period in prior year mostly resulting from the effects of the changes in the quotas share cession. In current year the commercial quota share changed from 25% to 20% and in prior year the quota share changed from 35% to 25%.
 
Claims Incurred
 
Claims incurred decreased by $2.9 million, or 30.9%, to $6.5 million primarily driven by better loss experience in the segment’s ongoing business resulting from the effects of the lockdown. As a result, the loss ratio decreased 1,410 basis points, from 43.1% to 29.0%.

45
Underwriting and Other Expenses
 
Underwriting and other operating expenses increased by $1.5 million, or 15.0%, to $11.5 million mostly due to higher net commission expense following the increase in net premiums earned. The net commission expense for the current period is impacted by a lower capitalization of deferred acquisition costs. The operating expense ratio was 51.3%, 540 basis points higher than prior year.
 
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
 
Operating Revenues
 
Total premiums written increased by $4.3 million, or 6.4%, to $71.6 million, mostly driven by higher premiums particularly in Commercial Package, Commercial Auto and Commercial Property products, partially offset by lower Commercial Liability premiums.
 
The premiums ceded to reinsurers increased by $7.0 million, or 29.5%, mostly due to approximately $3.0 million of the reinsurance reinstatement premiums following losses recorded after the earthquakes experienced in the southwest region of Puerto Rico in January 2020, as well as higher premiums written and increased nonproportional reinsurance costs.
 
The change in unearned premiums is favorably impacting premiums earned by $4.6 million when compared to prior year mostly reflecting the benefits of the changes in the commercial quota share program.
 
Claims Incurred
 
Claims incurred decreased by $0.6 million, or 3.3%, to $17.4 million mostly due to better loss experience in the segment’s on-going business due to the effects of the COVID-19 measures and lockdown, partially offset by the recognition of $5.0 million of earthquake losses after the January 2020 events. As a result, the loss ratio improved by 330 basis points, to 40.5% during this period.
 
Underwriting and Other Expenses
 
Underwriting and other operating expenses increased by $3.8 million, or 19.3%, to $23.5 million mostly due to higher net commission expense following the increase in net premiums earned. Current year net commission expense is impacted by a lower capitalization of deferred acquisition costs. The operating expense ratio was 54.7%, 680 basis points higher than prior 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)
 
2020
   
2019
 
Sources (uses) of cash:
           
Cash provided by operating activities
 
$
170.3
   
$
26.3
 
Net (purchases) proceeds of investment securities
   
(105.6
)
   
25.5
 
Net capital expenditures
   
(45.9
)
   
(10.7
)
Capital contribution on equity method investees
   
(4.9
)
   
-
 
Proceeds from long-term borrowings
   
30.8
     
-
 
Payments of long-term borrowings
   
(1.6
)
   
(1.6
)
Net change in short-term borrowings
   
(39.0
)
   
-
 
Proceeds from policyholder deposits
   
16.4
     
8.2
 
Surrenders of policyholder deposits
   
(8.2
)
   
(11.4
)
Repurchase and retirement of common stock
   
(14.9
)
   
-
 
Other
   
33.8
     
12.4
 
Net increase in cash and cash equivalents
 
$
31.2
   
$
48.7
 

46
The increase of approximately $144.0 million in net cash provided by operating activities is mostly due to higher premium collections partially offset by higher claims and income taxes paid.
 
Net (purchases) proceeds from investment securities are part of our asset/liability management strategy.
 
The increase in capital contribution reflects capital contributions in exchange for a participation in equity method investees.
 
On June 19, 2020, TSM entered into a $31.4 million Credit Agreement (the Loan) with a commercial bank in Puerto Rico. The proceeds of the Loan were used by the Company to partially finance the acquisition of a Building, which such acquisition is included within the capital expenditures in the statement of cash flows.  For further details, see Note 9 of the condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
 
The net change in short-term borrowings represents the repayment of short-term facilities available to address timing differences between cash receipts and disbursements.
 
In August 2017, the Company’s Board of Directors authorized a $30.0 million repurchase program of its Class B common stock and in February 2018 the Company’s Board of Directors authorized a $25.0 million expansion of this program. In October 2019, the Company’s Board of Directors authorized an additional expansion to this program increasing its remaining balance up to a total of $25.0 million, effective November 2019. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the six months ended June 30, 2020, the Company repurchased and retired under this program 952,820 shares at an average per share price of $15.72, for an aggregate cost of $15.0 million, completing the amount available for repurchases under this program.
 
The fluctuation in other sources of cash reflects the $20.8 million change in outstanding checks in excess of bank balances.
 
Financing and Financing Capacity
 
Long-Term Borrowings
 
TSM has 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 Term Loans B and C mature in January 2024. Term Loan A was used to refinance a previous $41.0 million secured loan payable with the same commercial bank.  Pursuant to the credit agreement, interest is payable on the outstanding balance of the Loan at the following annual rate: (i) 100 basis points over LIBOR for Term Loan A, (ii) 275 basis points over LIBOR for Term Loan B, and, (iii) 325 basis points over LIBOR for Term Loan C. The loan includes certain financial and non-financial covenants, which are customary for this type of facility, including negative covenants imposing certain restrictions on the Company’s business. Failure to meet these covenants may trigger the accelerated payment of the outstanding balance. As of June 30, 2020, we are in compliance with these covenants.
 
As detailed above, the three term loans under our credit agreement with a commercial bank in Puerto Rico bear interest rates in relation to 1-month and 3-month LIBOR, a widely used interest rate benchmark.
 
In July 2017, the Financial Conduct Authority (“FCA”) in the United Kingdom, which regulates LIBOR, announced that it would phase out this benchmark by the end of 2021. In response, the U.S. Federal Reserve convened the Alternative Reference Rates Committee (“ARRC”), a working group comprised of private market participants, to ensure a transition to a new reference rate.
 
The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”), which is an index based on the cost of borrowing overnight cash collateralized by U.S. Treasury securities. Currently, there is no definitive information regarding the future use of SOFR as a widely accepted benchmark or any other replacement rate.
 
47
If LIBOR rates are no longer available, we are subject to an alternative benchmark rate, as defined in the credit agreement of our long-term bank loan. At this time, we cannot assess the impact, if any, on the interest paid on this loan. Alternatively, the loan could be refinanced by us without prepayment penalties.
 
 We will closely follow any new developments regarding the LIBOR phase out.
 
On June 19, 2020, TSM entered into a $31.4 million Credit Agreement with a commerciaI bank in Puerto Rico. The proceeds of the Loan were used by the Company to partially finance the acquisition of a Building. The Credit Agreement is guaranteed by a mortgage over the Building, a pledge of all collateral relate to the Building and an assignment of the rents collected for the lease of office space in the Building. Approximately 64.25% of the acquired Building is currently leased to third parties. The Company expects to move within the next year some of its offices currently leased to third parties to the new Building and together with the leased space to fully occupy the new facilities. Pursuant to the credit agreement, interest is payable on the outstanding principal balance of the Loan at an annual rate equal to the Prime Rate. Interest shall be paid on a monthly basis commencing on July 1, 2020 until the principal of the Loan has been paid in full.
 
The Company may, at its option and at any time, upon notice as specified in the credit agreement, prepay prior to maturity, all or any part of the Term Loan upon the payment of a penalty fee of the outstanding principal amount at the time of the prepayment of 3% during the first year, 2% during the second year and 1% during the third year, and thereafter at par.
 
The Credit Agreement includes certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business. The Company was in compliance with these covenants as of June 30, 2020.
 
See Note 9 of the condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for a summary of the long-term borrowings.
 
Short-Term Facilities
 
We have several short-term facilities available to address timing differences between cash receipts and disbursements, consisting of collateralized advances from the Federal Home Loan Bank of New York (“FHLBNY”) and a revolving credit facility. See Note 9 of the condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for details of available short-term facilities.
 
We anticipate that we will have sufficient liquidity to support our currently expected needs.
 
For further details, see Note 13, Borrowings, of the Notes to the Consolidated Financial Statements, included in “Item 8, Financial Statements and Supplementary Data”, of our Annual Report on Form 10-K for the year ended December 31, 2019.
 
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, 2019. A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
 
48
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 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 this evaluation, our chief executive officer and chief financial officer have concluded that as of June 30, 2020, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.
 
There were no significant changes in our disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed the evaluation referred to above.
 
Changes in Internal Controls Over Financial Reporting
 
No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended June 30, 2020 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 17 to the unaudited condensed consolidated interim 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, 2019.
 
The following risk factor was updated during the three months ended June 30, 2020.
 
The COVID-19 pandemic and local, state and federal governments’ response to the pandemic may have a material adverse effect on our business, financial condition and results of operations.
 
On March 11, 2020, the World Health Organization characterized the outbreak of a novel strain of coronavirus (COVID-19) as a global pandemic.  In response, the Puerto Rico Governor issued a stay at home order (as amended and extended, the “Order”) from March 15, 2020 until June 16, 2020.  The Order required the closure of non-essential businesses for the same period of time.  On May 1, 2020, the Governor issued a new order providing for the gradual re-opening of the economy beginning on May 4, 2020, provided that the risk of contagion does not increase significantly.  New sales have been affected in all our segments and lines of business during the lockdown as sales functions in all our businesses, had to be performed remotely given that they were not considered essential under the Order.

49
At this point it is not possible to reliably estimate the length or severity of this outbreak, the length and effectiveness of government and private sector mitigation measures, and other variables which will determine the ultimate financial impact of the pandemic on the Company.  Additionally, the situation is rapidly developing and evolving.  We are therefore unable to reliably estimate the ultimate impact of the COVID-19 pandemic on the Company.  However, certain risks discussed in our 2019 Annual Report on Form 10-K may increase or materialize.  We are closely monitoring the development of the situation to assess its impact on our business.  We have experienced a temporary decrease in utilization caused by postponement or cancelation of elective services and medical appointments driven by the Order, which could cause our MLR to temporarily drop below the Affordable Care Act (ACA) and Medicare required ratios.  Conversely, the pandemic could result in a material increase in medical claims as COVID-19 cases increases and the return of deferred utilization.  In addition, the postponement or cancellation of medical appointments, treatments and evaluations in our High Cost High Needs (HCHN) Medicaid membership during the pandemic has and may continue to affect our ability to provide qualifying encounter or utilization data to certify them as such, which has and may continue to result in assignment of such members to a different rate cell with lower premium payments and retroactive premium adjustments by ASES. See Item 1A.  Risk Factors – Risks Relating to the Regulation of Our Industry– “ASES’s risk adjustment payment system and payment structure, and its dependence on scarce or unavailable data, make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.”
 
Furthermore, COVID-19 related federal and state legislation and regulation may adversely impact our business, financial condition and results of operations. For example, the U.S. and Puerto Rico legislatures have enacted or are contemplating measures requiring health care insurers to cover and/or waive pre-authorization and cost-sharing for COVID-19 related testing, vaccines, treatment or services, which may adversely affect our profitability.  In addition, any legislation requiring insurance companies to make advance payments to providers not linked to services previously provided increases our credit risk and could have a material impact on our business financial conditions and results of operations.
 
See Item 1A.  Risk Factors – Risks Related to our Business – “Our inability to contain managed care costs may adversely affect our business and profitability” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
 
Our Property & Casualty business interruption policies include an exclusion of coverage due to virus or bacteria.  However, there are federal and local legislative efforts to retroactively eliminate such exclusions or otherwise require property and casualty insurers to cover COVID-19 losses under their business interruption policies.  While we believe this type of legislative measure could be challenged on constitutional and other grounds, if successfully implemented, it would have a material adverse effect on our Property and Casualty Insurance segment.  With respect to our Life segment, there is a risk that the pandemic result in a higher number of deaths, and therefore a higher number of claims for death benefits than assumed in our actuarial models.
 
See Item 1A. Risk Factors – Risks Related to our Business – “Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
 
Finally, while estimates vary, the COVID-19 pandemic is widely considered to have had and continue to have a significant effect on the Puerto Rico, U.S. and global economies. Financial market volatility caused by the pandemic may decrease the value of our investment portfolios, including our pension plan asset portfolio. Furthermore, as the financial capacity of our customers is adversely affected, we may experience delinquency in premium payments and ultimately a decrease in insured customers in our commercial line of business and premiums earned, net, or other adverse effects. See Item 1A. Risk Factors – Risks Related to our Business – “Our investment portfolios are subject to varying economic and market conditions.” See also “The securities and credit markets could experience extreme volatility and disruption.” and “Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us.” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
 
These and other risks, some of which we may be unable to identify at this time due to the evolving and highly uncertain nature of this event, could adversely impact our business, financial condition and results of operations.
 
50
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities by the Issuer

The following table presents information related to our repurchases of common stock for the period indicated:

(Dollar amounts in millions, except per share data)
 
Total Number
of Shares
Purchased
(1)
   
Average
Price
Paid per
Share
   
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Programs (1)
   
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs
 
                         
Apri 1, 2020 to April 30, 2020
   
197,739
   
$
15.15
     
197,739
   
$
3.0
 
May 1, 2020 to May 31, 2020
   
177,634
     
16.87
     
177,634
     
-
 
June 1, 2020 to June 30, 2020
   
-
     
-
     
-
     
-
 

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

Item 3.
Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.
Mine Safety Disclosures
 
Not applicable.
 
Item 5.
Other Information

We are reporting the following events corresponding to Item 1.01 of Form 8-K (Entry into a Material Definitive Agreement).
 
On August 5, 2020, Triple-S Salud, Inc., a Puerto Rico insurance company (“Triple-S”) and managed care subsidiary of Triple-S Management Corporation (the “Company”), entered into two amendments (collectively, the “Amendments”) with the Puerto Rico Health Insurance Administration (“ASES,” by its Spanish acronym) for the offering of health care services for the Medicaid and Child Health Insurance subscribers for the Government of Puerto Rico’s revised Medicaid health insurance program (the “Contract”). The Company announced the entry into the Contract under Item 1.01 of a Current Report on Form 8-K dated September 27, 2018, an amendment to the Contract under Item 1.01 of a Current Report on Form 8-K dated November 6, 2019 and a further amendment to the Contract under Item 1.01 of a Current Report on Form 8-K dated November 19, 2019.
 
The first amendment (“Amendment I”), among other things, extended the rating period which ended on June 30, 2020 to July 31, 2020 (the “Extension Period”) to provide Triple-S and ASES additional time to negotiate revised PMPM for the rating period commencing on July 1, 2020. During the Extension Period, the existing per member per month payment rates made by ASES to Triple-S under the Contract for enrollees remained the same. In addition, Amendment I provides that upon final agreement of revised per member per month payment rates, and the approval of such payment rates by CMS and the Financial Oversight and Management Board for Puerto Rico, such rates would be effective as of July 1, 2020, and ASES and Triple-S would reconcile any differences in per member per month payments made during the Extension Period as a result of the revised rates.
 
The second amendment (“Amendment J”), among other things, extended the rating period which ended on July 31, 2020 (as a result of Amendment I) to August 31, 2020 (the “Additional Extension Period”) to provide Triple-S and ASES additional time to negotiate revised PMPM for the rating period commencing on July 1, 2020. During the Additional Extension Period, the existing per member per month payment rates made by ASES to Triple-S under the Contract for will remain the same. In addition, Amendment J provides that upon final agreement of revised per member per month payment rates, and the approval of such payment rates by CMS and the Financial Oversight and Management Board for Puerto Rico, such rates would be effective as of July 1, 2020, and ASES and Triple-S would reconcile any differences in per member per month payments made during the Additional Extension Period as a result of the revised rates.
 
The foregoing summary of the terms and conditions of the Amendments is subject to, and qualified in its entirety by, the full text of the Amendments included as exhibits to this Quarterly Report on Form 10-Q.
 
51

Item 6.
Exhibits

Exhibits
Description
 
 
Amendment to the contract between Administracion de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Government Health Plan dated as of May 1, 2020.
   
Amendment to the contract between Administracion de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Government Health Plan dated as of June 29, 2020.
   
Amendment to the contract between Administracion de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Government Health Plan dated as of July 31, 2020.
   
11
Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three and six months ended June 30, 2020 and 2019 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.
 
 
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.

52
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 6, 2020
 
By:
/s/ Roberto García-Rodríguez
 
 
 
 
 
Roberto García-Rodríguez
 
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
Date:
August 6, 2020
 
By:
/s/ Juan J. Román-Jiménez
 
 
 
 
 
Juan J. Román-Jiménez
 
 
 
 
 
Executive Vice President and Chief Financial Officer



53
Exhibit 10.1

CONTRACT NUMBER: 2019-000052G

AMENDMENT TO THE CONTRACT BETWEEN
ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES)
and
TRIPLE-S SALUD, INC.
to
ADMINISTER THE PROVISION OF PHYSICAL
AND BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN

THIS AMENDMENT TO THE CONTRACT BETWEEN ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES) AND TRIPLE-S SALUD, INC., FOR THE PROVISION OF PHYSICAL AND BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN (the “Amendment”) is by and between Triple-S Salud, Inc. (“the Contractor”), a managed care organization duly organized and authorized to do business under the laws of the Government of Puerto Rico, with employer identification number 66-0555677 represented by President, Ms. Madeline Hernández Urquiza, of legal age, single, resident of San Juan, Puerto Rico, and the Puerto Rico Health Insurance Administration (Administración de Seguros de Salud de Puerto Rico, hereinafter referred to as “ASES” or “the Administration”), a public corporation of the Commonwealth of Puerto Rico, with employer identification number 66-0500678, represented by its Executive Director, Jorge E. Galva Rodríguez, JD, MHA, of legal age, married and resident of Vega Alta, Puerto Rico.

WHEREAS, the Contractor and ASES executed a Contract for the provision of Physical Health and Behavioral Health Services under the Government Health Plan for the Commonwealth of Puerto Rico, on September 21, 2018, (hereinafter referred to as the “Contract”);

WHEREAS, the Contract provides, pursuant to Article 55, that the Parties may amend such Contract by mutual written consent;

WHEREAS, all provisions of the Contract will remain in full force and effect as described therein, except as otherwise provided in this Amendment.

NOW, THEREFORE, and in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree to clarify and/or amend the Contract as follows:

I.
AMENDMENTS


1.
Section 2 shall be amended to add the following terms and its definition:

Sub-capitated: An arrangement that exists when an organization being paid under a capitated system contracts with other providers on a capitated basis, sharing a portion of the original capitated premium. Can be done under Carve Out, with the providers being paid on a PMPM basis.

 
2.
Section 10.5.1.5 shall be amended and replaced in its entirety as follows:

  10.5.1.5.
With the exceptions noted below, the Contractor shall negotiate rates with Providers, and such rates shall be specified in the Provider Contract. Payment arrangements may take any form allowed under Federal law and the laws of Puerto Rico, including Capitation payments, Fee-for-Service payment, and salary, if any, subject to Section 10.6 concerning permitted risk arrangements.
 

10.5.1.5.1
Claims submitted for professional services that are listed in the current Medicare Part B fee schedule, as established under Section 1848(b) of the Social Security Act, and as applicable to the Puerto Rico locality, shall be reimbursed by the Contractor at not less than 70 percent (70%) of the payment that would apply to such services if they were furnished under Medicare Part B during the applicable fiscal year, disregarding services that are paid through sub-capitated arrangements. Any claims subject to reimbursement in accordance with this Section 10.5.1.5.1 that have been reimbursed at less than 70 percent (70%) of the corresponding rates on the Medicare Part B fee schedule shall be re-adjudicated for payment in compliance with this Section.  The Contractor shall comply with all data collection and reporting requests from ASES, in the manner and frequency set forth by ASES, to validate the Contractor’s compliance with this Section.  ASES reserves the right to apply this section retroactively to January 1, 2020 if approved by CMS, the Puerto Rico Office of the Comptroller, and the Financial Oversight and Management Board for Puerto Rico. Nothing in this Section requires the reduction of fees paid above the 70% of Medicare Part B fee schedule
 

10.5.1.5.2
Dental services as described in Section 7.6 shall be reimbursed in an amount no less than those amounts specified in Attachment 11-A to this Contract and shall not be subject to the requirements set forth in Section 10.5.1.5.1.
 

3.
Immediately following Section 10.6.1, a new Section 10.6.2 shall be inserted stating as follows:


10.6.2
The Contractor shall ensure that PMGs subject to a risk sharing arrangement with the Contractor receive an adjustment in budget, considering  the difference between current fee for service reimbursements for which the PMG is at risk and increases in reimbursement amounts necessary to meet new minimum reimbursement thresholds, as established in Section 10.5.1.5.1, unless a new financial arrangement is negotiated between and agreed upon by the Contractor and the PMG.


4.
Immediately following Section 22.1.1.1, a new Section 22.1.1.2 shall be inserted stating as follows:


22.1.1.2
The GHP (Vital) PMPM Payment rates included in Attachment 11 to this Contract, as amended, shall be effective to account for new requirements set forth in Section 10.5.1.5.1. ASES will increase the per member per month (PMPM) capitation rates to MCOs to account for the additional costs incurred by the MCOs with respect to the minimum fee schedule, as of the effective date of the Amendment.  If Section 10.5.1.5.1 is applied retroactively to January 1, 2020, Attachment 11 shall be further amended to the extent necessary to accommodate additional impacts caused by such retroactivity to current PMPM Payment rates.

 
5.
Attachment 11 of the Contract, as amended, shall be replaced in its entirety by a new Attachment 11 as set forth in Exhibit A to this Amendment.  Attachment 11-A remains unchanged.

II.
RATIFICATION

All other terms and provisions of the original Contract, as amended by Contracts Number 2019- 0000--52A, B, C, D, E and F and of any and all documents incorporated by reference therein, not specifically deleted or modified herein shall remain in full force and effect.  The Parties hereby affirm their respective undertakings and representations as set forth therein, as of the date thereof.  Capitalized terms used in this Amendment, if any, shall have the same meaning assigned to such terms in the Contract.

III.
EFFECT; CMS APPROVAL

The Parties agree and acknowledge that this Amendment, including any attachments, is subject to approval by the United States Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) and the Financial Oversight and Management Board for Puerto Rico (“FOMB”), and that ASES shall submit this Amendment for CMS and FOMB approval.

Following CMS and FOMB approval of the updated PMPM Payment rates (“Updated PMPM Payment Rates”) attached hereto as Exhibit A, which the Parties acknowledge and agree may occur after the Amendment Effective Date, as defined in Section IV of this Amendment below, such Updated PMPM Payment Rates shall be applied as of either the Amendment Effective Date, or January 1, 2020, if this date is so approved by CMS, the Comptroller and FOMB, provided that,


(1)
Notwithstanding the foregoing, because Updated PMPM Payment Rates are subject to CMS and FOMB approval, ASES shall continue to pay Contractor at the PMPM Payment Rates that existed prior to the Amendment Effective Date until such time as the Updated PMPM Payment Rates have been approved by CMS and FOMB;


(2)
Within thirty (30) calendar days following CMS and FOMB approval of Updated PMPM Payment Rates, the parties shall begin to reconcile any difference in (i) PMPM Payments made by ASES to Contractor after the Amendment Effective Date or January 1, 2020, as applicable, and (ii) Updated PMPM Payment Rates.


(3)
The Contractor’s obligation as contemplated in Section 10.6.2 shall be effective after (i) approval from CMS and FOMB is granted; (ii) the parties reconcile any difference in PMPM as of the Amendment Effective Date; and (iii) the reconciled increase in PMPM capitation rates are paid to the Contractor.

IV.
AMENDMENT EFFECTIVE DATE

Contingent upon approval of CMS and FOMB, this Amendment shall become effective as of the date of its signature (the “Amendment Effective Date”) and remains in effect throughout the term of the Contract.

V.
ENTIRE AGREEMENT

This Amendment constitutes the entire understanding and agreement of the Parties with regards to the subject matter hereof, and the parties by their execution and delivery of this Second Amendment to the Contract hereby ratify all of the terms and conditions of the Contract, as amended by Contract Number 2019-000052A, Contract Number 2019-000052B, Contract Number 2019-000052C, Contract Number 2019-000052D, Contract Number 2019-000052E, Contract Number 2019-000052F, and as supplemented by this Agreement.

The Parties agree that ASES will be responsible for the submission and registration of this Amendments in the Office of the Comptroller General of the Commonwealth, as required under law and applicable regulations.

ACKNOWLEDGED BY THE PARTIES by their duly authorized representatives on this 1st day of May 2020.

ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES)

/s/ Jorge E. Galva Rodríguez
5/1/2020
Jorge E, Galva Rodríguez, JD, MHA
Date
EIN: 66-0500678
 
TRIPLE-S SALUD, INC.

/s/ Madeline Hernández Urquiza
5/1/2020
Madeline Hernández Urquiza
Date
EIN: 66-0555677

Account No.: 256-5325 to 5330
 
Administracion de Seguros de Salud
May 1, 2020 to June 30, 2020
PSG (Vital) PMPM Premium Rates
Rate Cell
   
PMPM Premium Rate
 
Medicaid Pulmonary
 
$
229.84
 
Medicaid Diabetes or Low Cardio
 
$
364.98
 
Medicaid High Cardio
 
$
793.47
 
Medicaid Renal
 
$
1,616.11
 
Medicaid Cancer
 
$
1,921.36
 
Medicaid Male 45+
 
$
135.06
 
Medicaid Male 19-44
 
$
97.06
 
Medicaid Male 14-18
 
$
82.79
 
Medicaid Female 45+
 
$
178.62
 
Medicaid Female 19-44
 
$
128.15
 
Medicaid Female 14-18
 
$
96.70
 
Medicaid Age 7-13
 
$
84.79
 
Medicaid Age 1-6
 
$
96.67
 
Medicaid Under 1
 
$
258.32
 
Commonwealth Pulmonary
 
$
161.42
 
Commonwealth Diabetes or Low Cardio
 
$
198.81
 
Commonwealth High Cardio
 
$
434.65
 
Commonwealth Renal
 
$
663.54
 
Commonwealth Cancer
 
$
1,408.29
 
Commonwealth Male 45+
 
$
77.36
 
Commonwealth Male 19-44
 
$
54.52
 
Commonwealth Male 14-18
 
$
50.87
 
Commonwealth Female 45+
 
$
108.29
 
Commonwealth Female 19-44
 
$
92.38
 
Commonwealth Female 14-18
 
$
62.60
 
Commonwealth Age 7-13
 
$
67.54
 
Commonwealth Age 1-6
 
$
81.48
 
Commonwealth Under 1
 
$
275.77
 
CHIP Pulmonary
 
$
205.45
 
CHIP Diabetes
 
$
553.29
 
CHIP Age 7-13
 
$
76.17
 
CHIP Age 14+
 
$
70.28
 
CHIP Age 1-6
 
$
100.67
 
CHIP Under 1
 
$
269.43
 
Dual Eligible Part A and B
 
$
829.44
 
Dual Eligible Part A Only
 
$
353.51
 
Maternity Delivery Kick Payment
 
$
4,907.38
 


Exhibit 10.2

CONTRACT NUMBER: 2019-000052I

AMENDMENT TO THE CONTRACT BETWEEN
ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES)

and

TRIPLE-S SALUD, INC.
to
ADMINISTER THE PROVISION OF PHYSICAL AND BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN

THIS AMENDMENT TO THE CONTRACT BETWEEN ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES) AND TRIPLE-S SALUD, INC., FOR THE PROVISION OF PHYSICAL AND BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN (the “Amendment”) is by and between Triple-S Salud, Inc. (“the Contractor”), a managed care organization duly organized and authorized to do business under the laws of the Commonwealth of Puerto Rico, with employer identification number 66-0555677 and represented by its President, Madeline Hernandez Urquiza, of legal age, single, resident of San Juan, Puerto Rico, and the Puerto Rico Health Insurance Administration (Administración de Seguros de Salud de Puerto Rico, hereinafter referred to as “ASES” or “the Administration”), a public corporation of the Commonwealth of Puerto Rico, with employer identification number 66-0500678, represented by its Executive Director, Jorge E. Galva Rodríguez, JD, MHA, of legal age, married and resident of Vega Alta, Puerto Rico.

WHEREAS, the Contractor and ASES executed a Contract for the provision of Physical Health and Behavioral Health Services under the Government Health Plan for the Commonwealth of Puerto Rico, on September 21, 2018, (hereinafter referred to as the “Contract”);

WHEREAS, the Contract provides, pursuant to Article 55, that the Parties may amend such Contract by mutual written consent;

WHEREAS, all provisions of the Contract will remain in full force and effect as described therein, except as otherwise provided in this Amendment.

NOW, THEREFORE, and in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree to clarify and/or amend the Contract as follows:

I.
AMENDMENTS

 
1.
Section 21.4.1 shall be amended as follows:

  21.4.1
Notwithstanding anything to the contrary in this Agreement, because the parties have not completed the revision of the PMPM Payments by the expiration of the current rating period which ends on June 30, 2020 (the “Expired Rating Period”) such that the new rating period must commence without updated PMPM Payments, then the following shall occur:

  (a)
ASES shall continue to pay Contractors at the PMPM Payment rates that existed during the Expired Rating Period;


(b)
As soon as practicable, but in no event more than thirty (30) days following the expiration of the Expired Rating Period, the parties shall complete in good faith the review of updated PMPM Payments (the “Updated PMPM Payments”).


(c)
Following agreement upon Updated PMPM Payments, the parties shall execute an amendment to Attachment 11 of the Contract setting forth the Updated PMPM Payments. Such amendment and the Updated PMPM Payments shall be effective as of July 1st, 2020 as if the Updated PMPM Payments had been agreed upon at the expiration of the Expired Rating Period, provided that,


(1)
Notwithstanding the foregoing, because Updated PMPM Payment rates are subject to CMS and FOMB approval, ASES will continue to pay Contractors at the PMPM Payment rates that existed during the Expired Rating Period until such time as CMS and the FOMB have approved the Updated PMPM Payments, and;


(2)
within thirty (30) calendar days following CMS’ and the FOMB’s approval of Updated PMPM Payment rates, the Parties shall begin to reconcile any difference between (i) PMPM Payments that ASES made to Contractors after the Expired Rating Period and (ii) Updated PMPM Payment rates.

II.
RATIFICATION

All other terms and provisions of the original Contract, as amended by Contracts Number 2019- 000052 A, B, C, D, E, F, G, and H, and of any and all documents incorporated by reference therein, not specifically deleted or modified herein shall remain in full force and effect. The Parties hereby affirm their respective undertakings and representations as set forth therein, as of the date thereof. Capitalized terms used in this Amendment, if any, shall have the same meaning assigned to such terms in the Contract.

III.
EFFECT; CMS APPROVAL

The Parties agree and acknowledge that this Amendment, including any attachments, is subject to approval by the United States Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) and the Financial Oversight and Management Board for Puerto Rico (“FOMB”), and that ASES shall submit this Amendment for CMS and FOMB approval.

IV.
AMENDMENT EFFECTIVE DATE

Contingent upon approval of CMS, this Amendment shall become effective July 1, 2020 (the “Amendment Effective Date”) and remain in effect until July 31, 2020.

V.
ENTIRE AGREEMENT

This Amendment constitutes the entire understanding and agreement of the Parties with regards to the subject matter hereof, and the parties by their execution and delivery of this Amendment to the Contract hereby ratify all of the terms and conditions of the Contract, as amended by Contract Number 2019-000052, including amendments A, B, C, D, E, F, G, H, and I as supplemented by this Agreement.

The Parties agree that ASES will be responsible for the submission and registration of this Amendments in the Office of the Comptroller General of the Commonwealth, as required under law and applicable regulations.

ACKNOWLEDGED BY THE PARTIES by their duly authorized representatives on this 29th day of June, 2020.

ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES)

_/s/ Jorge E. Galva Rodríguez
6/29/2020
Jorge E. Galva Rodríguez, JD, MHA
Date
EIN: 66-05000678

TRIPLE-S SALUD, INC.

/s/ Madeline Hernández Urquiza
6/29/2020
Ms. Madeline Hernández Urquiza, President
Date
EIN: 66-0555677

Account No. 256-5325 to 5330


Exhibit 10.3

CONTRACT NUMBER: 2019-000052J
AMENDMENT TO THE CONTRACT BETWEEN
ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES)
and
TRIPLE-S SALUD, INC.
to
ADMINISTER THE PROVISION OF PHYSICAL AND BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN

THIS AMENDMENT TO THE CONTRACT BETWEEN ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES) AND TRIPLE-S SALUD, INC., FOR THE PROVISION OF PHYSICAL AND BEHAVIORAL HEALTH SERVICES UNDER THE GOVERNMENT HEALTH PLAN (the “Amendment”) is by and between Triple-S Salud, Inc. (“the Contractor”), a managed care organization duly organized and authorized to do business under the laws of the Commonwealth of Puerto Rico, with employer identification number 66-0555677 and represented by its President, Madeline Hernandez Urquiza, of legal age, single, resident of San Juan, Puerto Rico, and the Puerto Rico Health Insurance Administration (Administración de Seguros de Salud de Puerto Rico, hereinafter referred to as “ASES” or “the Administration”), a public corporation of the Commonwealth of Puerto Rico, with employer identification number 66-0500678, represented by its Executive Director, Jorge E. Galva Rodríguez, JD, MHA, of legal age, married and resident of Vega Alta, Puerto Rico.

WHEREAS, the Contractor and ASES executed a Contract for the provision of Physical Health and Behavioral Health Services under the Government Health Plan for the Commonwealth of Puerto Rico, on September 21, 2018, (hereinafter referred to as the “Contract”);

WHEREAS, the Contract provides, pursuant to Article 55, that the Parties may amend such Contract by mutual written consent;

WHEREAS, all provisions of the Contract will remain in full force and effect as described therein, except as otherwise provided in this Amendment.

NOW, THEREFORE, and in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree to clarify and/or amend the Contract as follows:

I.
AMENDMENTS


1.
Section 21.4.1 shall be amended as follows:


21.4.1
Notwithstanding anything to the contrary in this Contract, because the Parties have not completed the revision of the PMPM Payments by the expiration of the current rating period which ended on June 30, 2020 (the “Expired Rating Period”) such that the new rating period must commence without revised PMPM Payments, then the following shall occur:


21.4.1.1
ASES shall continue to pay Contractors at the PMPM Payment rates that existed during the Expired Rating Period;


21.4.1.2
As soon as practicable, but in no event more than sixty (60) days following the expiration of the Expired Rating Period, or sooner if the revised PMPM Payments (“Updated PMPM Payments”) become available, the Parties shall complete in good faith the review of the Updated PMPM Payments.


21.4.1.3
Following agreement upon the Updated PMPM Payments, the Parties shall execute an amendment to Attachment 11 of the Contract setting forth the Updated PMPM Payments. Such amendment and the Updated PMPM Payments shall be effective as of July 1st, 2020 as if the Updated PMPM Payments had been agreed upon at the expiration of the Expired Rating Period, provided that,


21.4.1.3.1
Notwithstanding the foregoing, because Updated PMPM Payments are subject to CMS and the Financial Oversight and Management Board (“FOMB”) approval, ASES will continue to pay Contractors at the PMPM Payment rates that existed during the Expired Rating Period until such time as CMS and the FOMB have approved the Updated PMPM Payments, and;


21.4.1.3.2
Within thirty (30) calendar days following CMS’s and the FOMB’s approval of the Updated PMPM Payments, the Parties shall begin to reconcile any difference between (i) PMPM Payments that ASES made to Contractors after the Expired Rating Period and (ii) Updated PMPM Payments.

II.
RATIFICATION

All other terms and provisions of the original Contract, as amended by Contracts Number 2019- 000052 A, B, C, D, E, F, G, H, and I and of any and all documents incorporated by reference therein, not specifically deleted or modified herein shall remain in full force and effect. The Parties hereby affirm their respective undertakings and representations as set forth therein, as of the date thereof. Capitalized terms used in this Amendment, if any, shall have the same meaning assigned to such terms in the Contract.

III.
EFFECT; CMS APPROVAL

The Parties agree and acknowledge that this Amendment, including any attachments, is subject to approval by the United States Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) and the Financial Oversight and Management Board for Puerto Rico (“FOMB”), and that ASES shall submit this Amendment for CMS and FOMB approval.

IV.
AMENDMENT EFFECTIVE DATE

Contingent upon approval of CMS, this Amendment shall become effective August 1, 2020 (the “Amendment Effective Date”) and remain in effect until August 30, 2020 or the date on which a new amendment setting forth the Updated PMPM Payments is executed, whichever is sooner.

V.
ENTIRE AGREEMENT

This Amendment constitutes the entire understanding and agreement of the Parties with regards to the subject matter hereof, and the Parties by their execution and delivery of this Amendment to the Contract hereby ratify all of the terms and conditions of the Contract Number 2019-000052, including amendments A, B, C, D, E, F, G, H, I and this Amendment J.

The Parties agree that ASES will be responsible for the submission and registration of this Amendment in the Office of the Comptroller General of the Commonwealth, as required under law and applicable regulations.

ACKNOWLEDGED BY THE PARTIES by their duly authorized representatives on this 31st day of July 2020.

ADMINISTRACIÓN DE SEGUROS DE SALUD DE PUERTO RICO (ASES)

_/s/ Jorge E. Galva Rodríguez
7/31/2020
Name: Jorge E, Galva Rodríguez, JD, MHA
Date
EIN: 66-05000678

TRIPLE-S SALUD, INC.

/s/ Madeline Hernández Urquiza
7/31/2020
Ms. Madeline Hernández Urquiza, President
Date
EIN: 66-0555677

Account No. 256-5325 to 5330


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 6, 2020          
 
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 6, 2020
 
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, 2020 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 6, 2020
 
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, 2020 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 6, 2020
 
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.