annual
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annual
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Special Note Regarding Forward-Looking Statements
This Annual Report contains forward-looking statements, as such term is defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include
information about possible or assumed future sales, results of operations, developments,
regulatory approvals or other circumstances. Statements that use the terms ‘‘believe’’, ‘‘expect’’,
‘‘plan’’, ‘‘intend’’, ‘‘estimate’’, ‘‘anticipate’’, ‘‘project’’, ‘‘may’’, ‘‘will’’, ‘‘shall’’, ‘‘should’’ and similar
expressions, whether in the positive or negative, are intended to identify forward-looking
statements.
All forward-looking statements in this Annual Report reflect our current views about future
events and are based on assumptions and subject to risks and uncertainties. Consequently,
actual results may differ materially from those anticipated in these forward-looking statements as
a result of various factors.
influenced by very
In addition, we operate in a highly competitive, constantly changing environment that is
significantly
from business
combinations, aggressive marketing and pricing practices of competitors and regulatory
oversight. The following list is a summary of factors, the results of which, either individually or in
combination, if markedly different from our planning assumptions, could cause our business
results of operations, financial condition, cash flow, or prospect, to be materially adversely
affected from those expressed in any forward-looking statements contained in this Annual Report:
that have resulted
large organizations
•
trends in health care costs and utilization rates;
• ability to secure sufficient premium rate increases;
•
•
•
competitor pricing below market trends of increasing costs;
re-estimates of our policy and contract liabilities;
changes in government regulation of managed care, life insurance or property and casualty
insurance;
significant acquisitions or divestitures by major competitors;
introduction and use of new prescription drugs and technologies;
•
•
• a downgrade in our financial strength ratings;
•
litigation or legislation targeted at managed care, life insurance or property and casualty
insurance companies;
• ability to contract with providers and government agencies consistent with past practice;
• ability to successfully implement our disease management and utilization management
programs;
volatility in the securities markets and investment losses and defaults; and
•
• general economic downturns, major disasters and epidemics.
The foregoing list should not be construed to be exhaustive. We believe the forward-looking
statements in this Annual Report are reasonable; however, there is no assurance that the actions,
events or results anticipated by the forward-looking statements will occur or, if any of them do,
what impact they will have on our results of operations or financial condition. In view of these
uncertainties, you should not place undue reliance on any forward-looking statements, which are
based on our current expectations at the time the statements are made. Further, forward-looking
statements speak only as of the date they are made, and, other than as required by applicable
law, including the securities laws of the United States, we do not intend to update or revise any
of them in light of new information or future events.
2019 Financial Information
Financial Information 2019
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements 2019, 2018, and 2017
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1
30
33
34
35
40
41
42
43
44
46
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This financial discussion contains an analysis of our consolidated financial position and financial
performance as of December 31, 2019 and 2018, and consolidated results of operations for 2019, 2018,
and 2017. References to the terms "we", "our" or "us" used throughout this Management's Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”), refer to TSM and unless the context
otherwise requires, its direct and indirect subsidiaries. This analysis should be read in its entirety and in
conjunction with the consolidated financial statements, notes and tables included elsewhere in this Annual
Report on Form 10-K.
Overview
We are one of the most significant players in the managed care industry in Puerto Rico and have 60
years of experience in this industry. We offer a broad portfolio of managed care and related products in
the Commercial, Medicare, and the Government of Puerto Rico health insurance plan (similar to Medicaid)
(“Medicaid” or “the Government health plan”) markets. In the Commercial market we offer products to
corporate accounts, U.S. federal government employees, local government employees, individual accounts
and Medicare Supplement. We market our managed care products through an extensive network of
independent agents and brokers located throughout Puerto Rico, as well as an internal salaried sales force.
Medicaid is funded by the Government of Puerto Rico and the U.S. Government.
We have the exclusive right to use the BCBS name and mark throughout Puerto Rico, the U.S. Virgin
Islands, Costa Rica, the British Virgin Islands and Anguilla. As of December 31, 2019 we serve
approximately 924,000 members across all regions of Puerto Rico. For the years ended December 31,
2019 and 2018 respectively, our Managed Care segment represented approximately 92% of our total
consolidated premiums earned, net. We also participate in the life and property and casualty insurance
markets in Puerto Rico.
We participate in the managed care market through our subsidiaries, TSS, TSB and TSA. TSS, TSA,
and TSB are BCBSA licensees.
We participate in the life insurance market through our subsidiary, TSV, and in the property and casualty
insurance market through our subsidiary, TSP.
The Commissioner of Insurance of the Government of Puerto recognizes only statutory accounting
practices for determining and reporting the financial condition and results of operations of an insurance
company, for determining its solvency under the Puerto Rico insurance laws, and for determining whether
its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by
the Commissioner of Insurance of Puerto Rico to financial statements prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) in making such determinations. See Note 25, Statutory
Accounting, of the Notes to Consolidated Financial Statements, included this Annual Report.
2019 Consolidated Highlights
Key developments in our business during 2019 are described below:
• Net income for the year was $92.9 million, an increase from a net loss of $63.3 million for the prior year.
The increase in net income primarily reflects the 2018 $128.7 million unfavorable prior period reserve
development recognized in the Property and Casualty segment related to Hurricane Maria and the
impact of the net unrealized gains on equity investments.
• Consolidated premiums earned, net increased 10.7% year over year, to $3.3 billion, primarily reflecting
an increase in membership and higher average premium rates within the Managed Care segment.
• Consolidated claims incurred for the year were $2.7 billion, up 5.5% over last year, mostly reflecting
higher claims in the Managed Care segment by $254.2 million mostly driven higher enrollment, partially
offset by the aforementioned $128.7 million unfavorable reserve development related to Hurricane
Maria recognized by the Property and Casualty segment in 2018. The consolidated loss ratio
decreased 400 basis points, to 82.0%. The Managed Care segment’s Medical Loss Ratio (“MLR”) was
to 84.6%, up 10 basis points year over year.
1
• Consolidated operating expenses for the year were $569.4 million and the operating expense ratio was
17.5%, 130 basis points lower than last year.
Overview details
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 presented in this
Annual Report on Form 10-K 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. The following table shows premiums earned,
net and net fee revenue and operating income for each segment, as well as the intersegment premiums
earned, service revenues and other intersegment transactions, which are eliminated in the consolidated
results:
2
Revenue
General. Our revenue consists primarily of (i) premium revenue generated from our Managed Care
segment, (ii) administrative service fees received for Managed Care services provided to self-insured
employers, (iii) premiums we generate from our Life and Property and Casualty segments, and (iv)
investment income.
Premium Revenue. Our revenue primarily consists of premiums earned from the sale of managed
care products to the Commercial, Medicare Advantage and Medicaid sectors. We receive a monthly
payment from or on behalf of each member enrolled in our managed care plans (excluding ASO). We
recognize all premium revenue in our Managed Care segment during the month in which we are obligated
to provide services to an enrolled member. Premiums we receive in advance of that date are recorded as
unearned premiums.
Premiums are set prospectively, meaning that a fixed premium rate is determined at the beginning of
each contract year and revised at renewal. We renegotiate the premiums of different groups as their
existing annual contracts become due. Our Medicare Advantage contracts entitle us to premium payments
from CMS on behalf of each Medicare beneficiary enrolled in our plans, generally on a per member per
month (“PMPM”) basis. We submit rate proposals to CMS in June for each Medicare Advantage product
that will be offered beginning January 1 of the subsequent year in accordance with the competitive bidding
process under the MMA. Retroactive rate adjustments are made periodically with respect to our Medicare
Advantage plans based on the aggregate health status and risk scores of our plan participants. Premium
rates for the Medicaid business are based on a bid contract with ASES and are revised each year, at which
time rates are fixed for the plan year.
Premiums on traditional life insurance policies are reported as earned when due. Premiums on
accident and health and other short-term contracts are recognized as earned, primarily on a pro rata basis
over the contract period. Premiums on credit life policies are recognized as earned in proportion to the
amounts of insurance in force. Group insurance premiums are billed one month in advance and a grace
period of one month is provided for premium payment. If the insured fails to pay within the one-month grace
period, we may cancel the policy. We recognize premiums on property and casualty contracts as earned
on a pro rata basis over the policy term. Property and casualty policies are subscribed through general
agencies, which bill policy premiums to their clients in advance or, in the case of new business, at the
inception date and remit collections to us, net of commissions. The portion of premiums related to the period
prior to the end of coverage is recorded in the consolidated balance sheet as unearned premiums and is
transferred to premium revenue as earned.
Administrative Service Fees. Administrative service fees include amounts paid to us for administrative
services provided to self-insured contracts. We provide a range of customer services pursuant to our
administrative services only (“ASO”) contracts, including claims administration, billing, access to our
provider networks and membership services. Administrative service fees are recognized in the month in
which services are provided.
Investment Income. Investment income consists of interest and dividend income from investment
securities. See Note 5, Net Investment Income, of the Notes to Consolidated Financial Statements, included
in this Annual Report.
Other operating revenues. Other operating revenues primarily consist of revenues generated by the
health clinics reporting unit.
Expenses
Claims Incurred. Our largest expense is the Managed Care segment’s medical claims incurred, or
the cost of medical services we arrange for our members. Medical claims incurred include the payment of
benefits and losses, mostly to physicians, hospitals, pharmacies, and other service providers, and to
policyholders. We generally pay our providers on one of three forms: (1) fee-for-service contracts based
on negotiated fee schedules; (2) capitation arrangements, generally on a fixed PMPM payment basis,
whereby the provider generally assumes some of the medical expense risk; and (3) risk-sharing
arrangements, whereby we advance a PMPM payment and share the risk of certain medical costs of our
3
members with the provider based on actual experience as measured against pre-determined sharing ratios.
Claims incurred also include claims incurred in our Life and Property and Casualty segments. Each
segment’s results of operations depend to a significant extent on our ability to accurately predict and
effectively manage claims and losses. 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.
The MLR, which is calculated by dividing managed care claims incurred by managed care premiums
earned, net is one of our primary management tools for measuring these costs and their impact on our
profitability. The MLR is affected by the cost and utilization of services. The cost of services is affected by
many factors, in particular our ability to negotiate competitive rates with our providers. The cost of services
is also influenced by inflation and new medical discoveries, including new prescription drugs, therapies and
diagnostic procedures. Utilization rates, which reflect the extent to which beneficiaries utilize healthcare
services, significantly influence our medical costs. The level of utilization of services depends in large part
on the age, health and lifestyle of our members, among other factors. As the MLR is the ratio of claims
incurred to premiums earned, net, it is affected not only by our ability to contain cost trends but also by our
ability to increase premium rates to levels consistent with or above medical cost trends. We use MLRs
both to monitor our management of healthcare costs and to make various business decisions, including
what plans or benefits to offer and our selection of healthcare providers.
Operating Expenses. Operating expenses include commissions to external brokers, general and
administrative expenses, cost containment expenses such as case and disease management programs,
and depreciation and amortization. The operating expense ratio is calculated by dividing operating
expenses by premiums earned, net plus administrative service fees. A significant portion of our operating
expenses are fixed costs. Accordingly, it is important that we maintain certain level of volume of business
in order to compensate for the fixed costs. Significant changes in our volume of business will affect our
operating expense ratio and results of operations. We also have variable costs, which vary in proportion
to changes in volume of business.
Membership
Our results of operations depend in large part on our ability to maintain or grow our membership. In
addition to driving revenues, membership growth is necessary to successfully introduce new products,
maintain an extensive network of providers and achieve economies of scale. Our ability to maintain or grow
our membership is affected principally by the competitive environment, the economy, and general market
conditions.
The following table sets forth selected membership data as of the dates set forth below:
(1) Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare
Supplement, federal government employees and local government employees.
4
Results of Operations
Consolidated Operating Results
The following table sets forth our consolidated operating results for the years ended December 31,
2019, 2018, and 2017. Further details of the results of operations of each reportable segment are included
in the analysis of operating results for the respective segments.
(Dollar amounts in millions)
Years ended December 31,
Revenues:
Premiums earned, net
Administrative service fees
Net investment income
Other operating revenues
Total operating revenues
Net realized investment gains
Net unrealized investment gains (losses) on equity investments
Other income, net
Total revenues
Benefits and expenses:
Claims incurred
Operating expenses
Total operating costs
Interest expense
Total benefits and expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss) attributable to TSM
2019
2018
2017
$
3,252.9
9.9
62.0
8.6
$
2,938.6
14.7
61.9
5.8
$
2,826.9
16.5
51.6
3.7
3,333.4
5.8
32.2
4.2
3,375.6
2,666.3
569.4
3,235.7
7.6
3,243.3
3,021.0
0.3
(36.5)
11.3
2,996.1
2,527.6
554.7
3,082.3
6.9
3,089.2
2,898.7
10.8
-
6.6
2,916.1
2,353.1
477.2
2,830.3
6.8
2,837.1
132.3
39.4
92.9
$
(93.1)
(29.8)
(63.3)
$
79.0
24.5
54.5
$
Year ended December 31, 2019 compared with the year ended December 31, 2018
Premiums Earned, net
Premiums earned, net increased by $314.3 million, or 10.7%, to $3.3 billion. This increase primarily reflects
higher premiums in the Managed Care segment by $298.4 million. The growth in managed care premiums
reflects higher average premium rates across all lines of business and an increase in Medicare and
Commercial fully-insured membership. The increase was partially offset by lower Medicaid membership.
Net unrealized investment losses on equity investments
The $32.2 million in consolidated net unrealized investment gains on equity investments reflects the
impact of changes in equity markets.
Claims Incurred
Consolidated claims incurred increased by $138.7 million, or 5.5%, to $2.7 billion, mostly driven by an
increase in the claims incurred in the Managed Care segment of $254.2 million, partially offset by lower
claims incurred in the Property and Casualty segment of $128.7 million. The increase in managed care
claims primarily reflects higher Medicare and Commercial fully-insured enrollment, offset in part by the
decrease in Medicaid membership. The decrease in claims incurred in the Property and Casualty segment
5
was due to prior year losses related to hurricane Maria. The consolidated loss ratio decreased by 400 basis
points to 82.0%.
Operating Expenses
Consolidated operating expenses increased by $14.7 million, or 2.7%, to $569.4 million. The higher
operating expenses are mostly the result of higher personnel costs, provision for bad debts, and
commission expense; partially offset by the waiver of the 2019 HIP Fee. The consolidated expense ratio
decreased 130 basis points to 17.5%.
Income taxes
Consolidated income tax expense for the year ended December 31, 2019 was $39.4 million, compared
to a benefit of $29.8 million during the last year. The year over year change in income taxes primarily
reflects higher taxable income in all segments and the loss before taxes in 2018 in the Property and
Casualty segment.
Year ended December 31, 2018 compared with the year ended December 31, 2017
Premiums earned, net
Premiums earned, net increased by $111.7 million, or 4.0%, to $2.9 billion. This increase primarily
reflects higher premiums in the Managed Care segment by $99.1 million. Most of the growth in managed
care premiums was experienced in the Medicare business, reflecting the achievement of a four-star rated
Medicare Advantage HMO contract this year, resulting in a 5% bonus applied to the benchmark used in the
premium calculation, as well as an increase in the 2018 Medicare reimbursement rates. This increase was
partially offset by lower managed care membership.
Administrative service fees decreased $1.8 million, or 10.9%, mainly due to lower membership enrolled
in this business.
Net investment income increased $10.3 million, or 20.0%, to $61.9 million as a result of higher invested
balances and interest rates.
Net unrealized investment losses on equity investments
The $36.5 million in consolidated net unrealized investment losses on equity investments reflects the
impact of new accounting guidance implemented effective January 1, 2018, which requires the change in
unrealized gain (loss) of equity investments, previously recorded through comprehensive income, to be
recorded through earnings.
Claims Incurred
Consolidated claims incurred increased by $174.5 million, or 7.4%, to $2.5 billion, mostly driven by an
increase in the Property and Casualty segment gross losses related to Hurricane Maria, a category 4
hurricane that impacted Puerto Rico in September 2017, causing the segment to exceed its applicable
catastrophe reinsurance coverage limits and resulting in $128.7 million unfavorable reserve development
recorded in 2018. In addition, in 2017 the Managed Care segment experienced significantly lower utilization
following the hurricanes that occurred during that year, this hurricane-related drop in utilization is estimated
to have lowered the Managed Care segment’s claims by approximately $55 million. The 2017 period also
includes $14.8 million of losses related to Hurricanes Irma and Maria recognized by the Property and
Casualty segment. The consolidated loss ratio increased by 280 basis points to 86.0%.
Operating Expenses
Consolidated operating expenses increased by $77.5 million, or 16.2%, to $554.7 million. The higher
operating expenses are mostly the result of the reinstatement of the HIP Fee in 2018 and higher
professional services and personnel costs related to the ongoing managed care initiatives. The
consolidated expense ratio increased 200 basis points to 18.8%.
6
Income taxes
Consolidated income tax benefit for the year ended December 31, 2018 was $29.8 million, compared
to an expense of $24.5 million during 2017, primarily due to a change in the effective tax rate of certain
deferred tax liabilities in the Company’s Property and Casualty segment in order to reflect the expected tax
rate at which they will reverse, and a change in the enacted tax rate, from 39% to 37.5% following the
Puerto Rico income tax reform enacted in December 2018. These changes increased the deferred tax
expense by approximately $9.5 million. The consolidated income tax expense also reflects the tax impact
of net unrealized losses on equity investments and the lower operating income of the Managed Care
segment.
7
Managed Care Segment Operating Results
We offer our products in the Managed Care segment to three distinct market sectors in Puerto Rico:
Commercial, Medicare Advantage and Medicaid. For the year ended December 31, 2019, the Commercial,
Medicare and Medicaid sectors represented 24.6%, 43.3% and 23.9% of our consolidated premiums
earned, net, respectively.
(Dollar amounts in millions)
2019
2018
2017
Operating revenues:
Medical premiums earned, net:
Commercial
Medicare
Medicaid
Medical premiums earned, net
Administrative service fees
Net investment income
Total operating revenues
Medical operating costs:
Medical claims incurred
Medical operating expenses
Total medical operating costs
Medical operating income
Additional data:
Member months enrollment:
Commercial:
Fully-insured
Self-funded
Total Commercial member months
Medicare member months
Medicaid member months
Total member months
Medical loss ratio
Operating expense ratio
$
801.2
1,408.0
778.3
$
782.8
1,130.3
776.0
$
803.3
1,035.3
751.4
2,987.5
14.3
23.5
3,025.3
2,526.7
436.7
2,689.1
19.1
23.8
2,732.0
2,272.5
433.0
2,590.0
21.6
16.6
2,628.2
2,218.3
354.9
2,963.4
61.9
$
2,705.5
26.5
$
2,573.2
55.0
$
3,844,106
1,426,353
5,270,459
1,540,476
4,257,181
3,775,441
1,732,219
5,507,660
1,337,061
4,555,702
3,981,347
1,967,668
5,949,015
1,457,363
4,631,316
11,068,116
11,400,423
12,037,694
84.6%
14.5%
84.5%
16.0%
85.6%
13.6%
Year ended December 31, 2019 compared with the year ended December 31, 2018
Medical Premiums Earned, net
Medical premiums earned increased by $298.4 million, or 11.1%, to $3.0 billion. This increase is
principally the result of the following:
• Medical premiums generated by the Medicare business increased by $277.7 million, or 24.6%, to
$1,408.0 million, primarily reflecting an increase in enrollment of approximately 203,000 member
months and higher average premium rates, mainly reflecting higher membership risk score in 2019 and
an increase in reimbursement rates.
• Medical premiums generated by the Commercial business increased by $18.4 million, or 2.4%, to
$801.2 million. This fluctuation primarily reflects higher fully-insured member months during the year
by approximately 69,000 member months and higher average premium rates, offset in part by $12.1
million related to the suspension of the HIP fee pass-through in 2019.
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• Medical premiums generated by the Medicaid business increased by $2.3 million, or 0.3%, to $778.3
million. This increase primarily reflects higher premiums rates, offset by a decrease of $14.5 million
related to the suspension of the HIP fee pass-through in 2019 and lower enrollment by approximately
299,000 member months. The decrease in membership follows the lower membership assigned to us
by ASES when implementing the current Medicaid contract, which was effective November 1, 2018.
Medical Claims Incurred
Medical claims incurred increased by $254.2 million, or 11.2%, to $2.5 billion. The MLR of the segment
increased 10 basis points during the 2019 period, to 84.6%. This fluctuation is primarily attributed to the
net effect of the following:
• The medical claims incurred of the Medicare business increased by $183.1 million, or 19.5%, during
the 2019 period mostly driven by higher enrollment. The MLR at 79.8% was 340 basis points lower
than the same period last year, driven by favorable prior period reserve developments in 2019 and the
impact of cost containment initiatives. These decreases were partially offset by improved benefits in
the 2019 product offerings.
• The medical claims incurred of the Medicaid business increased by $55.5 million, or 8.1%, during the
2019 period. The MLR at 95.4% was 690 basis points higher than the same period last year. The
increased MLR reflects the higher required target MLR of the current Medicaid contract, the impact of
the elimination of the HIP fee pass-through in 2019, and a timing difference in the recognition of member
acuity in premiums. The current Medicaid contract requires a minimum MLR of 92%, including
allocation of healthcare quality improvements expenses.
• The medical claims incurred of the Commercial business increased by $15.6 million, or 2.4%, during
the 2019 period and its MLR, remained steady at 82.4% despite impact of the elimination of the HIP
fee pass-through in 2019. The HIP Fee pass-through lowered the 2018 MLR by approximately 130
basis points.
Medical Operating Expenses
Medical operating expenses increased by $3.7 million, or 0.9%, to $436.7 million. The higher operating
expenses are mainly due to an increase in personnel costs, provision for bad debts, and commission
expense, partially offset by the waiver of the 2019 HIP fee. The operating expense ratio decreased 150
basis points, to 14.5%, in 2019.
9
Year ended December 31, 2018 compared with the year ended December 31, 2017
Medical Premiums Earned, net
Medical premiums earned decreased by $99.1 million, or 3.8%, to $2.7 billion. This decrease is
principally the result of the following:
• Medical premiums generated by the Medicare business increased by $95.0 million, or 9.2%, to $1,130.3
million, primarily reflecting an increase in the 2018 Medicare reimbursement rates fee-for-service
benchmark for the first time since 2012, an increase in rates as the result of attaining a four-star rating
in the Company’s 2018 HMO product, and higher average membership risk score. These increases
were partially offset by lower enrollment by approximately 120,000 member months.
• Medical premiums generated by the Medicaid business increased by $24.6 million, or 3.3%, to $776.0
million. This increase primarily reflects higher premiums rates effective July 1, 2017 and $14.5 million
related to the reinstatement of the HIP fee pass-through. These increases were offset in part by a lower
enrollment by approximately 76,000 in member months and the impact of the profit sharing accrual,
which lowered 2018 premiums by $4.3 million. The decrease in membership reflects the lower
membership assigned by ASES when implementing the current Medicaid contract, which was effective
November 1, 2018. At the effective date of the current agreement TSS was assigned by ASES
approximately 280,000 subscribers. After this date, subscribers had approximately three months to
select their insurance carrier, during which time TSS was able to compete for membership across
Puerto Rico. As of December 31, 2018, our Medicaid membership was approximately 319,000
members
• Medical premiums generated by the Commercial business decreased by $20.5 million, or 2.6%, to
$782.8 million. This fluctuation primarily reflects lower fully-insured enrollment during the year of
approximately 206,000 member months; offset in part by $12.1 million related to the reinstatement of
the HIP fee pass-through in 2018 and higher average premium rates.
Medical Claims Incurred
Medical claims incurred decreased by $54.2 million, or 2.4%, to $2.3 billion. The MLR of the segment
decreased 110 basis points during the 2018 period, to 84.5%. These fluctuations are primarily attributed
to the net effect of the following:
• The medical claims incurred of the Medicare business increased by $33.1 million, or 3.6%, during the
2018 period and its MLR decreased by 450 basis points, to 83.2%. The lower MLR reflects the higher
premium rates in the 2018 period as well as cost containment initiatives implemented during the year;
partially offset by the impact of the hurricane related decrease in utilization in 2017. The hurricane
related decrease in utilization was estimated to lower 2017 claims by approximately $25.1 million, or
240 basis points of last year’s MLR.
• The medical claims incurred of the Commercial business increased by $22.3 million, or 3.6%, during
the 2018 period and its MLR, at 82.4%, was 490 basis points higher than the same period last year
primarily reflecting the decrease in utilization in the 2017 period caused by Hurricanes Irma and Maria
and claim trends higher than premium trends. The hurricane related decrease in utilization was
estimated to lower 2017 claims by approximately $27.8 million, or 340 basis points of last year’s MLR.
• The medical claims incurred of the Medicaid business decreased by $1.1 million, or 0.2%, during the
2018 period and its MLR decreased by 300 basis points, to 88.5%, mostly reflecting the impact of higher
premium rates in 2018 and cost containment initiatives; partially offset by the impact of hurricane related
decrease in utilization in 2017. The hurricane related decrease in utilization was estimated to lower
2017 claims by approximately $2.2 million, or 30 basis points of last year’s MLR.
10
Medical Operating Expenses
Medical operating expenses increased by $78.1 million, or 22.0%, to $433.0 million. The operating
expense ratio increased by 240 basis points to 16.0% in 2018. The higher operating expenses and expense
ratio are mostly driven by the reinstatement of the HIP fee in 2018, resulting in an increase of $50.1 million,
and professional services and personnel costs related to ongoing operational and clinical initiatives.
Life Segment Operating Results
(Dollar amounts in millions)
Years ended December 31,
Operating revenues:
Premiums earned, net:
Premiums earned
Assumed earned premiums
Ceded premiums earned
Premiums earned, net
Net investment income
Total operating revenues
Operating costs:
Policy benefits and claims incurred
Underwriting and other expenses
Total operating costs
Operating income
Additional data:
Loss ratio
Expense ratio
2019
2018
2017
$
188.4
2.1
(8.3)
$
175.3
2.1
(8.8)
$
166.4
4.2
(8.8)
182.2
27.3
209.5
105.9
81.7
168.6
25.6
194.2
99.0
75.3
161.8
24.8
186.6
87.3
79.9
187.6
21.9
$
174.3
19.9
$
167.2
19.4
$
58.1%
44.8%
58.7%
44.7%
54.0%
49.4%
Year ended December 31, 2019 compared with the year ended December 31, 2018
Operating Revenues
Premiums earned, net increased by $13.6 million, or 8.1% to $182.2 million, mainly as the result of higher
sales and improved policy retention in the Individual Life and Cancer lines of business.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred increased by $6.9 million, or 7.0%, to $105.9 million, mostly resulting
from higher volume of sales and actuarial reserves following improved portfolio persistency during the year.
The segment’s loss ratio decreased 60 basis points, to 58.1%.
Underwriting and Other Expenses
Increase in underwriting and other expenses of $6.4 million, or 8.5%, to $81.7 million mostly resulting
from higher commission expense reflecting the segment’s higher volume of business and improved portfolio
persistency. As a result, the segment’s operating expense ratio increased 10 basis points, to 44.8%.
11
Year ended December 31, 2018 compared with the year ended December 31, 2017
Operating Revenues
Premiums earned, net increased by $6.8 million, or 4.2% to $168.6 million, mainly as the result of higher
sales and improved policy retention in the Individual Life and Cancer lines of business.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred increased by $11.7 million, or 13.4%, to $99.0 million, mostly
resulting from higher number of deaths benefits paid in the Individual Life line of business, an increased
average cost of claims in the Cancer line of business, and higher actuarial reserves following improved
portfolio persistency. The segment’s loss ratio increased 470 basis points, to 58.7%.
Underwriting and Other Expenses
Decrease in underwriting and other expenses of $4.6 million, or 5.8%, to $75.3 million mostly results
from a lower amortization of deferred acquisition costs and value of business acquired assets reflecting the
segment’s improved portfolio persistency. As a result, the segment’s operating expense ratio improved to
44.7%, or 470 basis points.
12
Property and Casualty Segment Operating Results
(Dollar amounts in millions)
Years ended December 31,
Operating revenues:
Premiums earned, net:
Premiums written
Premiums ceded
Change in unearned premiums
Premiums earned, net
Net investment income
Total operating revenues
Operating costs:
Claims incurred
Underwriting and other operating expenses
2019
2018
2017
$
150.5
(52.3)
(10.5)
$
139.8
(60.4)
4.1
$
143.8
(62.3)
(4.3)
87.7
9.8
97.5
39.6
43.4
83.5
10.8
94.3
159.9
44.5
77.2
9.5
86.7
50.8
41.9
Total operating costs
Operating income (loss)
83.0
14.5
$
204.4
(110.1)
$
92.7
(6.0)
$
Additional data:
Loss ratio
Expense ratio
45.2%
49.5%
191.5%
53.3%
65.8%
54.3%
Year ended December 31, 2019 compared with the year ended December 31, 2018
Operating Revenues
Total premiums written increased by $10.7 million, or 7.7%, to $150.5 million, driven by higher volume
of Commercial and Personal Package, Commercial Auto, and Commercial Liability products. This increase
in volume was offset by lower sales of Commercial Property products, mostly resulting from the selective
and disciplined underwriting of Commercial risks.
The premiums ceded to reinsurers decreased by $8.1 million, or 13.4%, mostly reflecting a decrease
in cessions in the Commercial quota share agreement from 35% in 2017 to 25% since April 2019, as well
as the impact of the related incoming portfolio transfer. These decreases were offset in part by higher non-
proportional reinsurance costs, mostly in property catastrophe reinsurance.
The $14.6 million decrease in the change in unearned premiums reflects the segments higher premiums
written in 2019.
Claims Incurred
Claims incurred decreased by $120.3 million, or 75.2%, to $39.6 million driven by a $128.7 million
unfavorable prior period reserve development in claims in prior year related to Hurricane Maria. As a result,
the segment’s loss ratio decreased to 45.2%.
Underwriting and Other Expenses
Underwriting and other operating expenses decreased by $1.1 million, or 2.5%, to $43.4 million mostly
due to lower net commission expense. The segment’s operating expense ratio decreased by 380 basis
points, to 49.5%.
13
Year ended December 31, 2018 compared with the year ended December 31, 2017
Operating Revenues
Total premiums written decreased by $4.0 million, or 2.8%, to $139.8 million, driven by lower sales of
Commercial Package products, mostly the result of selective and disciplined underwriting of Commercial
risks.
The premiums ceded to reinsurers decreased by $1.9 million, or 3.0%. Prior year premiums ceded
include approximately $9.2 million of catastrophe reinsurance reinstatement costs. The 2018 includes an
increase in cessions in the Commercial quota share agreement from 30% in 2017 to 35% effective April
2018, as well as higher reinsurance costs for facultative and non-proportional property reinsurance.
The $8.4 million increase in the change in unearned premiums reflects the segments lower premiums
written in 2018.
Claims Incurred
Claims incurred increased by $109.1 million, or 214.8%, to $159.9 million mostly driven by an increase
in gross losses related to Hurricane Maria, causing the segment to exceed the applicable catastrophe
reinsurance coverage limits and resulting in a $128.7 million unfavorable reserve development. As loss
information emerged, reserves have been updated to reflect a worsening in the loss expectations for
Hurricane Maria. As a result, the segment’s loss ratio increased to 191.5% during this period. In 2017 we
recognized $14.8 million of hurricane related net losses.
Underwriting and Other Expenses
Underwriting and other operating expenses increased by $2.6 million, or 6.2%, to $44.5 million mostly
due to higher acquisition expenses, professional services, and personnel costs. The operating expense
ratio decreased by 100 basis points, to 53.3% in 2018.
14
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:
(Dollar amounts in millions)
Sources (uses) of cash:
Cash (used in) provided by operating activities
Net purchases of investment securities
Net capital expenditures
Capital contribution to equity method investees
Proceeds from long-term borrowings
Payments of long-term borrowings
Proceeds from policyholder deposits
Surrenders of policyholder deposits
Repurchase and retirement of common stock
Net change in short-term borrowings
Other
Net (decrease) increase in cash and cash equivalents
2019
2018
2017
$
$
$
(17.5)
(4.7)
(20.2)
(11.4)
-
(3.2)
28.9
(19.9)
(10.0)
54.0
(3.7)
(7.7)
7.5
(12.6)
(19.8)
-
-
(3.2)
18.5
(26.7)
(22.4)
-
(22.7)
(81.4)
288.9
(154.6)
(21.4)
-
24.3
(27.1)
13.6
(22.1)
(20.2)
-
14.1
95.5
$
$
$
Year ended December 31, 2019 compared to year ended December 31, 2018
Cash flows from operating activities decreased by $25.0 million during the year ended December 31,
2019 mostly due to higher claims paid by $296.6 million partially offset by an increase in premium collections
of $223.6 million; both fluctuations reflecting the increased volume in 2019. In addition, cash paid to
suppliers and employees decreased by $45.5 million when compared to the prior year.
Decrease in net purchases of investments in securities are part of our asset/liability management
strategy.
Increase in capital contribution reflects capital contributions in exchange for fifty percent participation
in equity method investees.
In August 2017, the Company’s Board of Directors authorized a $30.0 million repurchase program of
its Class B common stock (2017 Repurchase Program). 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 year 2019, the Company repurchased and retired 527,881 shares of our Class B
Common Stock shares at an average per share price of $18.92, for an aggregate cost of $10.0 million.
The net change in short-term borrowings represents the outstanding balance of short-term facilities
available to address timing differences between cash receipts and disbursements.
Decrease in other uses of cash reflects the change in outstanding checks in excess of bank balances.
Year ended December 31, 2018 compared to year ended December 31, 2017
Cash flow from operating activities decreased by $281.4 million for the year ended December 31, 2018
as compared to the year ended December 31, 2017, mostly reflecting Property and Casualty hurricane
related claim payments, last year’s collection of advances from reinsurers, and the 2018 HIP Fee payment;
offset in part by higher premium collections.
Decrease in net purchases of investments in securities are part of our asset/liability management
strategy using cash on hand.
15
In August 2017, the Company’s Board of Directors authorized a $30.0 million repurchase program of
its Class B common stock (2017 Repurchase Program) and in February 2018 the Company’s Board of
Directors authorized a $25.0 million expansion of this program. 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 year 2018, the Company repurchased and retired 903,888
shares of our Class B Common Stock shares at an average per share price of $24.76, for an aggregate
cost of $22.4 million.
Increase in Other is due to the change in outstanding checks in excess of bank balances.
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. See Note 19, Stock Repurchase Program, of the Notes to Consolidated Financial
Statements, included in this Annual Report.
Financing and Financing Capacity
Long-Term Borrowings
TSM has $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 December 31, 2019, 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.
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.
For further details, see Note 13, Borrowings, of the Notes to the Consolidated Financial Statements,
included in this Annual Report.
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”), repurchase agreements, and a revolving credit facility.
16
•
In August 2019, TSS and 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 to the Commissioner of Insurance but is constrained
by the amount of collateral held at the FHLBNY. See Note 3, Investment in Securities, of the Notes
to Consolidated Financial Statements, included in this Annual Report. As of December 31, 2019,
the borrowing capacity is approximately $82.2 million for TSS and $48.9 million for TSV. The
outstanding balance as of December 31, 2019 for TSS and TSV is $25.0 million and $29.0 million,
respectively. The average interest rate of the outstanding balance as of December 31, 2019 is
1.79%.
• As of December 31, 2019, TSS has $60.0 of available credit under repurchase agreements with
broker-dealers, which are short term borrowing facilities using securities as collateral. There are
no outstanding short-term borrowings under these facilities as of December 31, 2019.
• TSA has a $10.0 million revolving loan agreement with a commercial bank in Puerto Rico. This
line of credit has an interest rate of 30-day LIBOR plus 25 basis points and contains certain financial
and non-financial covenants that are customary for this type of facility. This line of credit matures
on April 30, 2020 and has no outstanding balance as of December 31, 2019.
We anticipate that we will have sufficient liquidity to support our currently expected needs.
Contractual Obligations
Our contractual obligations impact our short and long-term liquidity and capital resource needs.
However, our future cash flow prospects cannot be reasonably assessed based solely on such obligations.
Future cash outflows, whether contractual or not, will vary based on our future needs. While some cash
outflows are completely fixed (such as commitments to repay principal and interest on borrowings), most
are dependent on future events (such as the payout pattern of claim liabilities which have been incurred
but not reported).
• The table below describes the payments due under our contractual obligations, aggregated by type of
contractual obligation, including the maturity profile of our debt, operating leases and other long-term
liabilities, but excludes an estimate of the future cash outflows related to the following:
o
Alternative investments – The Company has $72.2 million of unfunded capital commitments
related to alternative investments. These commitments were excluded from this disclosure due
to the undetermined timing of their cash flows.
Unearned premiums – This amount accounts for the premiums collected prior to the end of
coverage period and does not represent a future cash outflow. As of December 31, 2019, we
had $93.3 million in unearned premiums.
Policyholder deposits – The cash outflows related to these instruments are not included because
they do not have defined maturities, such that the timing of payments and withdrawals is
uncertain. There are currently no significant policyholder deposits in paying status. As of
December 31, 2019, our policyholder deposits had a carrying amount of $189.1 million.
Other long-term liabilities – Due to the indeterminate nature of their cash outflows, $92.6 million
of other long-term liabilities are not reflected in the following table, consisting of $34.5 million of
liability for pension benefits, $10.3 million in deferred tax liabilities, and $47.8 million in liabilities
to the Federal Employees’ Health Benefits Plan Program.
o
o
o
Contractual obligations by year
(Dollar amounts in millions)
Total
2020
2021
2022
2023
2024
Thereafter
Borrowings (1)
Operating leases
Purchase obligations (2)
Claim liabilities (3)
Estimated obligation for future
policy benefits (4)
$
83.3
15.6
592.4
563.3
$
58.1
4.7
308.7
448.8
$
4.0
3.8
68.3
75.4
$
4.0
3.2
62.1
16.1
$
3.9
2.2
55.1
8.0
$
13.3
1.7
52.1
4.3
-
$
-
46.1
10.7
706.2
1,960.8
$
138.3
958.6
$
123.9
275.4
$
117.8
203.2
$
111.4
180.6
$
105.7
177.1
$
109.1
165.9
$
17
(1) As of December 31, 2019, our long-term borrowings consist of a credit agreement with a commercial
bank in Puerto Rico. Short-term borrowings represents the outstanding balance of short-term facilities
available to address timing differences between cash receipts and disbursements. See the “Financing
and Financing Capacity” section for additional information regarding our long-term borrowings
(2) Purchase obligations represent payments required by us under material agreements to purchase goods
or services that are enforceable and legally binding and where all significant terms are specified,
including: quantities to be purchased, price provisions and the timing of the transaction. Other purchase
orders made in the ordinary course of business for which we are not liable are excluded from the table
above. Estimated pension plan contributions amounting to $2.0 million were included within the total
purchase obligations. However, this amount is an estimate which may be subject to change in view of
the fact that contribution decisions are affected by various factors such as market performance,
regulatory and legal requirements and plan funding policy.
(3) Claim liabilities represent the amount of our claims processed and incomplete as well as an estimate
of the amount of incurred but not reported claims and loss-adjustment expenses. This amount does
not include an estimate of claims to be incurred subsequent to December 31, 2019. The expected
claims payments are an estimate and may differ materially from the actual claims payments made by
us in the future. Also, claim liabilities are presented gross, and thus do not reflect the effects of
reinsurance under which $325.0 million of reserves had been ceded at December 31, 2019.
(4) Our Life segment establishes, and carries as liabilities, actuarially determined amounts that are
calculated to meet its policy obligations when a policy matures or surrenders, an insured dies or
becomes disabled or upon the occurrence of other covered events. A significant portion of the
estimated obligation for future policy benefits to be paid included in this table considers contracts under
which we are currently not making payments and will not make payments until the occurrence of an
insurable event not under our control, such as death, illness, or the surrender of a policy. We have
estimated the timing of the cash flows related to these contracts based on historical experience as well
as expectations of future payment patterns. The amounts presented in the table above represent the
estimated cash payments for benefits under such contracts based on assumptions related to the receipt
of future premiums and assumptions related to mortality, morbidity, policy lapses, renewals,
retirements, disability incidence and other contingent events as appropriate for the respective product
type. All estimated cash payments included in this table are not discounted to present value nor do
they take into account estimated future premiums on policies in-force as of December 31, 2019 and
are gross of any reinsurance recoverable. The $706.2 million total estimated cash flows for all years
in the table is different from the liability of future policy benefits of $386.0 million included in our audited
consolidated financial statements principally due to the time value of money. Actual cash payments to
policyholders could differ significantly from the estimated cash payments as presented in this table due
to differences between actual experience and the assumptions used in the estimation of these
payments.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or
future material effect on our financial condition, revenues and expenses, results of operations, liquidity,
capital expenditures or capital resources.
Restriction on Certain Payments by the Corporation’s Subsidiaries
Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance of Puerto
Rico. These regulations, among other things, require insurance companies to maintain certain levels of
capital, thereby restricting the amount of earnings that can be distributed by the insurance subsidiaries to
TSM. As of December 31, 2019, our insurance subsidiaries were in compliance with such minimum capital
requirements. These regulations are not directly applicable to TSM, as a holding company, since it is not
an insurance company.
The $35.5 million credit agreement limits the amount of dividends or other distributions (including share
repurchases) payable by the Corporation to $50.0 million per year.
18
We do not expect that any of the previously described dividend restrictions will have a significant effect
on our ability to meet our cash obligations.
Solvency Regulation
To monitor the solvency of the operations, the BCBSA requires us, TSS, TSA, and TSB to comply with
certain specified levels of Risk Based Capital (”RBC”). RBC is designed to identify weakly capitalized
companies by comparing each company’s adjusted surplus to its required surplus (RBC ratio). The RBC
ratio reflects the risk profile of insurance companies. At December 31, 2019, TSM and TSS estimated RBC
ratio was above the 375% minimum BCBSA RBC requirement to avoid monitoring. At December 31, 2019,
TSA estimated RBC ratio was above the minimum BCBSA RBC requirement of 100% for smaller controlled
affiliate.
BCBSA’s primary licensees could be subject to monitoring if, over a 6 or 12 month period, its RBC ratio
declines by 80 or more points and which results in a level that is below 500%.
Other Contingencies
Legal Proceedings
Various litigation claims and assessments against us have arisen in the course of our business,
including but not limited to, our activities as an insurer and employer. Furthermore, the Commissioner of
Insurance, as well as other Federal, Puerto Rico, and Costa Rica government authorities, regularly make
inquiries and conduct audits concerning our compliance with applicable insurance and other laws and
regulations.
Given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain
matters could, from time to time, have an adverse effect on our operating results and/or cash flows. For a
description of our legal proceedings, see Note 24, Contingencies, of the Notes to Consolidated Financial
Statements, included in this Annual Report.
Guarantee Associations and Other Regulatory Commitments
To operate in Puerto Rico, insurance companies, such as our insurance subsidiaries, are required to
participate in guarantee associations, which are organized to pay policyholders contractual benefits on
behalf of insurers declared insolvent. These associations levy assessments, up to prescribed limits, on a
proportional basis, to all member insurers in the line of business in which the insolvent insurer was engaged.
In 2019, two local property and casualty insurance companies entered into a liquidation process,
accordingly, the property and casualty guarantee fund initiated the process to settle unpaid claims and
return unearned premiums of the insolvent insurers. In December 2019, the guarantee fund determined
and imposed an assessment to cover claims and return premiums, payable in two installments during 2020
based on premiums written in 2018. TSP’s share in this assement was $912 thousand. Annual
assessments are limited to 2% of direct premiums written, as defined. TSP has also accrued $716 thousand
to cover its estimate of assements based in premiums written in 2019 and loss data made available by the
guaranty fund. In accordance with insurance laws and regulations, assessments are recoverable through
policy surcharges. During 2018 and 2017, no assessment or payment was made for this contingency. It
is the opinion of management that any possible future guarantee association assessments will not have a
material effect on our operating results and/or cash flows, although there is no ceiling on these payment
obligations.
Pursuant to the Puerto Rico Insurance Code, our Property and Casualty subsidiary is a member of
Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de Responsabilidad Profesional
Médico-Hospitalaria (SIMED). The syndicate was organized for the purpose of underwriting medical-
hospital professional liability insurance. As a member, the Property and Casualty segment shares risks
with other member companies and, accordingly, is contingently liable in the event the syndicate cannot
meet their obligations. During 2019, 2018, and 2017, no assessment or payment was made for this
contingency. It is the opinion of management that any possible future syndicate assessments will not have
a material effect on our operating results and/or cash flows, although there is no ceiling on these payment
19
obligations. In December 2018, SIMED declared a distribution to its members; the Company’s share of this
distribution was $2.9 million, which is presented with other income in the accompanying consolidated
statement of earnings.
In addition, our Property and Casualty insurance subsidiary is a member of the Compulsory Vehicle
Liability Insurance Joint Underwriting Association (the “Association”). The Association was organized in
1997 to underwrite insurance coverage of motor vehicle property damage liability risks effective January 1,
1998. As a participant, the segment shares the risk proportionally with other members based on a formula
established by the Insurance Code. During the years 2019 and 2018, the Association distributed to the
Company an amount based on the good experience of the business amounting to $0.2 million and $0.2
million, respectively. In June 2017, the Association declared a special dividend of $70.0 million as
authorized by a recent amendment to the Act creating the Association. The distribution was subject to a
unique and special tax rate of 50%. The dividend was paid net of its related tax in December 2018. The
share of the Property and Casualty segment in this distribution was $2.4 million.
The Property and Casualty segment is also member of the Puerto Rico Fire and Allied Lines
Underwriting Association and the Puerto Rico Auto Assign Plan. These entities periodically impose
assessments to cover operations and other charges. The assessments recorded from these entities were
$10 thousand, $9 thousand and $1 thousand in 2019, 2018 and 2017, respectively.
Critical Accounting Estimates
Our consolidated financial statements and accompanying notes included in this Annual Report on Form
10-K have been prepared in accordance with GAAP applied on a consistent basis. The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. We continually evaluate the accounting policies and estimates we use to prepare our
consolidated financial statements. In general, management’s estimates are based on historical experience
and various other assumptions it believes to be reasonable under the circumstances. The following is an
explanation of our accounting policies considered most significant by management. These accounting
policies require us to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Such estimates and assumptions could change in the future
as more information is known. Actual results could differ materially from those estimates.
The policies discussed below are considered by management to be critical to an understanding of our
consolidated financial statements because their application places the most significant demands on
management’s judgment, with financial reporting results relying on estimation about the effect of matters
that are inherently uncertain. For all these policies, management cautions that future events may not
necessarily develop as forecasted, and that the best estimates routinely require adjustment. Management
believes that the amounts provided for these critical accounting estimates are adequate.
20
Claim Liabilities
Claim liabilities by segment as of December 31, 2019 were as follows:
(Dollar amounts in millions)
Managed care
Property and casualty insurance
Life insurance
Consolidated
$
$
340.2
322.0
47.1
709.3
Management continually evaluates the potential impact of changes in the factors considered for its
claim liabilities estimates, both positive and negative, and uses the results of these evaluations to adjust
recorded claim liabilities and underwriting criteria. Our profitability depends in large part on our ability to
accurately predict and effectively manage the amount of claims incurred, particularly those of the Managed
Care segment and the losses arising from the Life and Property and Casualty segments. Management
regularly reviews its premiums and benefits structure to reflect our underlying claims experience and
revised actuarial data; however, several factors could adversely affect our underwriting results. Some of
these factors are beyond management’s control and could adversely affect its ability to accurately predict
and effectively control claims incurred. Examples of such factors include changes in health practices,
economic conditions, change in utilization trends including those caused by epidemic conditions, healthcare
costs, the advent of natural disasters, and malpractice litigation. Costs in excess of those anticipated could
have a material adverse effect on our results of operations.
We recognize claim liabilities as follows:
Managed Care Segment
At December 31, 2019, claim liabilities for the Managed Care segment amounted to $340.2 million and
represented 48.0% of our total consolidated claim liabilities and 18.1% of our total consolidated liabilities.
Claim liabilities are determined employing actuarial methods that are commonly used by managed care
actuaries and meet Actuarial Standards of Practice, which require that the claim liabilities be adequate
under moderately adverse circumstances. The segment determines the amount of the liability by following
a detailed actuarial process that entails using both historical claim payment patterns as well as emerging
medical cost trends to project a best estimate of claim liabilities. Under this process, historical claims
incurred dates are compared to actual dates of claims payment. This information is analyzed to create
“completion” or “development” factors that represent the average percentage of total incurred claims that
have been paid through a given date after being incurred. Completion factors are applied to claims paid
through the financial statement date to estimate the ultimate claim expense incurred for the current period.
Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the
estimate of the total expected claims incurred. The majority of unpaid claims, both reported and unreported,
for any period, are those claims which are incurred in the final months of the period. Since the percentage
of claims paid during the period with respect to claims incurred in those months is generally very low, the
above-described completion factor methodology is less reliable for such months. In order to complement
the analysis to determine the unpaid claims, historical completion factors and payment patterns are applied
to incurred and paid claims for the most recent twelve months and compared to the prior twelve-month
period. Incurred claims for the most recent twelve months also take into account recent claims expense
levels and health care trend levels (trend factors). Using all of the above methodologies, our actuaries
determine based on the different circumstances the unpaid claims as of the end of period.
Because the reserve methodology is based upon historical information, it must be adjusted for known
or suspected operational and environmental changes. These adjustments are made by our actuaries based
on their knowledge and their estimate of emerging impacts to benefit costs and payment speed.
21
Managed care claim liabilities also include a provision for adverse deviation, which is an estimate for
known environmental factors that are reasonably likely to affect the required level of reserves. This provision
for adverse deviation is intended to capture the potential adverse development from known environmental
factors such as our entry into new geographical markets, changes in our geographic or product mix, the
introduction of new customer populations, variation in benefit utilization, disease outbreaks, changes in
provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and
variation in claims processing speed and payment patterns, changes in technology that provide faster
access to claims data or change the speed of adjudication and settlement of claims, variability in claim
inventory levels, non-standard claim development, and/or exceptional situations that require judgmental
adjustments in setting the reserves for claims.
Circumstances to be considered in developing our best estimate of reserves include changes in
enrollment, utilization levels, unit costs, mix of business, benefit plan designs, provider reimbursement
levels, processing system conversions and changes, claim inventory levels, regulatory and legislative
requirements, claim processing patterns, and claim submission patterns. A comparison or prior period
liabilities to re-estimated claim liabilities based on subsequent claims development is also considered in
making the liability determination. In the actuarial process, the methods and assumptions are not changed
as reserves are recalculated, but rather the availability of additional paid claims information drives our
changes in the re-estimate of the unpaid claim liability. Changes in such development are recorded as a
change to current period benefit expense. The re-estimates or recasts are done monthly for the previous
four calendar quarters. On average, about 92% of the claims are paid within three months after the last
day of the month in which they were incurred and about 5% are within the next three months, for a total of
97% paid within six months after the last day of the month in which they were incurred.
Management regularly reviews its assumptions regarding claim liabilities and makes adjustments to
claims incurred when necessary. If management’s assumptions regarding cost trends and utilization are
significantly different than actual results, our consolidated statement of earnings and financial position could
be impacted in future periods. Changes to prior year estimates may result in an increase in claims incurred
or a reduction of claims incurred in the period the change is made. Further, due to the considerable
variability of health care costs, adjustments to claims liabilities are made in each period and are sometimes
significant as compared to the net income recorded in that period. Prior year development of claim liabilities
is recognized immediately upon the actuary’s judgment that a portion of the prior year liability is no longer
needed or that an additional liability should have been accrued. Health care trends are monitored in
conjunction with the claim reserve analysis. Based on these analyses, rating trends are adjusted to
anticipate future changes in health care cost or utilization. Thus, the Managed Care segment incorporates
those trends as part of the development of premium rates in an effort to keep premium rating trends in line
with claims trends.
22
As described above, completion factors and claims trend factors can have a significant impact on the
determination of our claim liabilities. The following example provides the estimated impact on our
December 31, 2019 claim liabilities, assuming the indicated hypothetical changes in completion and trend
factors:
(Dollar amounts in millions)
Completion Factor 1
(Decrease) Increase
Claims Trend Factor 2
(Decrease) Increase
In completion factor
In unpaid claim
liabilities
In claims trend
factor
In unpaid claim
liabilities
-1.2%
-0.8%
-0.4%
0.4%
0.8%
1.2%
$20.1
13.3
6.6
(6.6)
(13.1)
(19.6)
1.5%
1.0%
0.5%
-0.5%
-1.0%
-1.5%
$20.4
13.6
6.8
(6.8)
(13.6)
(20.4)
(1) Assumes (decrease) increase in the completion factors for the most recent twelve months.
(2) Assumes (decrease) increase in the claims trend factors for the most recent twelve months.
The segments’ reserving practice is to consistently recognize the actuarial best estimate as the ultimate
liability for claims within a level of confidence required by actuarial standards. Management believes that
the methodology for determining the best estimate for claim liabilities at each reporting date has been
consistently applied.
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are
ultimately settled. Liabilities at any year-end are continually reviewed and re-estimated as information
regarding actual claims payments or run-out becomes known. This information is compared to the originally
established year-end liability. Negative amounts reported for incurred claims related to prior years result
from claims being settled for amounts less than originally estimated. The reverse is true of reserve
shortfalls. Medical claim liabilities are usually described as having a “short tail”, which means that they are
generally paid within several months of the member receiving service from the provider. Accordingly, the
majority, or approximately 93%, of any redundancy or shortfall relates to claims incurred in the previous
calendar year-end, with the remaining 7% related to claims incurred prior to the previous calendar year-
end. Management has not noted any significant emerging trends in claim frequency and severity and the
normal fluctuations in enrollment and utilization trends from year to year.
23
The following table shows the variance between the segment’s incurred claims for current period
insured events and the incurred claims for such years had they been determined retrospectively (the
“Incurred claims related to current period insured events” for the year shown plus or minus the “Incurred
claims related to prior period insured events” for the following year as included in Note 11, Claim Liabilities
and Claim Adjustment Expenses, of the Notes to Consolidated Financial Statements, included in this
Annual Report). This table shows that the segments’ estimates of this liability have approximated the actual
development.
(Dollar amounts in millions)
Years ended December 31,
Total incurred claims:
As reported (1)
On a retrospective basis
Variance
Variance to total incurred claims as reported
2018
2017
2016
$
2,308.5
2,279.2
$
2,231.1
2,195.1
$
2,356.6
2,343.8
$
29.3
$
36.0
$
12.8
1.3%
1.6%
0.5%
(1) Includes total claims incurred less adjustments for prior year reserve development.
Management expects that substantially all of the development of the 2019 estimate of medical claims
payable will be known during 2020.
In the event this segment experiences an unexpected increase in health care cost or utilization trends,
we have the following options to cover claim payments:
• Through the management of our cash flows and investment portfolio.
•
In the Commercial business we have the ability to increase the premium rates throughout the year in
the monthly renewal process, when renegotiating the premiums for the following contract year of each
group as they become due. We consider the actual claims trend of each group when determining the
premium rates for the following contract year.
• We have available short-term borrowing facilities that from time to time address differences between
cash receipts and disbursements.
For additional information on our credit facilities, see section “Financing and Financing Capacity”.
Life Segment
At December 31, 2019, claim liabilities for the life segment amounted to $47.1 million and represented
6.6% of total consolidated claim liabilities and 2.5% of our total consolidated liabilities.
The claim liabilities related to the life segment are based on methods and underlying assumptions in
accordance with GAAP. The estimate of claim liabilities for this segment is based on the amount of benefits
contractually determined for reported claims, and on estimates based on past experience modified for
current trends, for unreported claims. This estimate relies on observations of ultimate loss experience for
similar historical events.
Claim reserve reviews are generally conducted on a monthly basis, in light of continually updated
information. We review reserves using current inventory of policies and claims data. These reviews
incorporate a variety of actuarial methods, judgments and analysis.
The key assumption with regard to claim liabilities for our life segment is related to claims incurred prior
to the end of the year, but not yet reported to our subsidiary. A liability for these claims is estimated based
upon experience with regards to amounts reported subsequent to the close of business in prior years.
There are uncertainties in the development of these estimates; however, in recent years our estimates have
resulted in immaterial redundancies or deficiencies.
24
Property and Casualty Segment
At December 31, 2019, claim liabilities for the Property and Casualty segment amounted to $322.0
million and represented 45.4% of the total consolidated claim liabilities and 17.2% of our total consolidated
liabilities. Claims liabilities related to losses caused by Hurricanes Irma and Maria amount to approximately
$241.7 million.
Estimates of the ultimate cost of claims and loss-adjustment expenses of this segment are based
largely on the assumption that past developments, with appropriate adjustments due to known or
unexpected changes, are a reasonable basis on which to predict future events and trends, and involve a
variety of actuarial techniques that analyze current experience, trends and other relevant factors. Property
and casualty insurance claim liabilities are categorized and tracked by line of business. Medical malpractice
policies are written on a claims-made basis. Policies written on a claims-made basis require that claims be
reported during the policy period. Other lines of business are written on an occurrence basis. Hurricane
losses initially include the use of models from industry recognized firms having data, historical and current
information about the events, to estimate ultimate losses. These estimates are supplemented by internal
estimates of other costs deemed necessary to develop the ultimate losses. As loss information emerges,
claims are separated between those with solid estimates and the remained claims. Additional reserves are
provided based on paid loss experience for unreported, potential development, and loss expenses.
Individual case estimates for reported claims are established by a claims adjuster and are changed as
new information becomes available during the course of handling the claim. Our property and casualty
business, other than medical malpractice, is primarily short-tailed business, where losses (e.g. paid losses
and case reserves) are generally reported quickly.
Claim reserve reviews are generally conducted on a quarterly basis, in light of continually updated
information. Our actuary certifies reserves for both current and prior accident years using current claims
data. These reviews incorporate a variety of actuarial methods, judgments, and analysis. For each line of
business, a variety of actuarial methods are used, with the final selections of ultimate losses that are
appropriate for each line of business selected based on the current circumstances affecting that line of
business. These selections incorporate input from management, particularly from the claims, underwriting
and operations divisions, about reported loss cost trends and other factors, including the severity and
frequency of such claims, that could affect the reserve estimates.
Key assumptions are based on the consideration that past emergence of paid losses and case reserves
is credible and likely indicative of future emergence and ultimate losses. A key assumption is the expected
loss ratio for the current accident year. This expected loss ratio is generally determined through a review
of the loss ratios of prior accident years and expected changes to earned pricing, loss costs, mix of
business, and other factors that are expected to impact the loss ratio for the current accident year. Another
key assumption is the development patterns for paid and reported losses (also referred to as the loss
emergence and settlement patterns). The reserves for unreported claims for each year are determined
after reviewing the indications produced by each actuarial projection method, which, in turn, rely on the
expected paid and reported development patterns and the expected loss ratio for that year.
At December 31, 2019, the claim liabilities of the Property and Casualty segment fall within the actuarial
reserve range determined by the actuaries. Management reviews the results of the reserve estimates in
order to determine any appropriate adjustments in the recording of reserves. Adjustments to reserve
estimates are made after management’s consideration of numerous factors, including but not limited to the
magnitude of the difference between the actuarial indication and the recorded reserves, improvement or
deterioration of actuarial indications in the period, the maturity of the accident year, trends observed over
the recent past and the level of volatility within a particular line of business. In general, changes are made
more quickly to more mature accident years and less volatile lines of business. Varying the net expected
loss ratio by +/-1% in all lines of business for the six most recent accident years would increase/decrease
the claims incurred by approximately $5.1 million.
25
Liability for Future Policy Benefits
Our Life segment establishes, and carries as liabilities, actuarially determined amounts that are
calculated to meet its policy obligations when a policy matures or surrenders, an insured dies or becomes
disabled or upon the occurrence of other covered events. We compute the amounts for actuarial liabilities
in conformity with GAAP.
Liabilities for future policy benefits for whole life and term insurance products and active life reserves
for accident and health products are computed by the net level premium method, using interest assumptions
of 4.40% in 2019 and ranging from 3.90% to 5.75% in 2018 and 2017, and withdrawal, mortality, morbidity
and maintenance expense assumptions appropriate at the time the policies were issued (or when a block
of business was purchased, as applicable). Accident and health unpaid claim reserves are stated at
amounts determined by estimates on individual claims and estimates of unreported claims based on past
experience. Deferred annuity reserves are carried at the account value.
For deferred annuities, the liability for future policy benefits is equal to total policy account values. The
liabilities for all other products are based upon a variety of actuarial assumptions that are uncertain. The
most significant of these assumptions is the level of anticipated death and health claims. Other
assumptions that are less significant to the appropriate level of the liability for future policy benefits are
anticipated policy persistency rates, investment yields, and operating expense levels. These are reviewed
frequently by our subsidiary’s external actuaries, to assure that the current level of liabilities for future policy
benefits is sufficient, in combination with anticipated future cash flows, to provide for all contractual
obligations. For all products, except for deferred annuities, the basis for the liability for future policy benefits
is established at the time of issuance of each contract and would only change if our experience deteriorates
to the point that the level of the liability is not adequate to provide for future policy benefits. We do not
currently expect that level of deterioration to occur.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain costs for acquiring life and property and casualty insurance business are deferred. Acquisition
costs related to the Managed Care segment are expensed as incurred.
The costs of acquiring new life business, principally commissions, and certain variable underwriting
and policy issue expenses of our Life segment, have been deferred. These costs, including value of
business acquired (“VOBA”) recorded upon our acquisitions of TSV and TSB, are amortized to income over
the premium-paying period of the related whole life and term insurance policies in proportion to the ratio of
the expected annual premium revenue to the expected total premium revenue, and over the anticipated
lives of universal life policies in proportion to the ratio of the expected annual gross profits to the expected
total gross profits. The expected premiums revenue and gross profits are based upon the same mortality
and withdrawal assumptions used in determining the liability for future policy benefits. For universal life
and deferred annuity policies, changes in the amount or timing of expected gross profits result in
adjustments to the cumulative amortization of these costs. The effect on the amortization of deferred policy
acquisition costs (“DPAC” or “DAC”) of revisions to estimated gross profits is reported in earnings in the
period such estimated gross profits are revised.
The schedules of amortization of life insurance DPAC and VOBA are based upon actuarial assumptions
regarding future events that are uncertain. For all products, other than universal life and deferred annuities,
the most significant of these assumptions is the level of contract persistency and investment yield rates.
For these products the basis for the amortization of DPAC and VOBA is established at the issue of each
contract and would only change if our segment’s experience deteriorates to the point that the level of the
net liability is not adequate. We do not currently expect that level of deterioration to occur. For the universal
life and deferred annuity products, amortization schedules are based upon the level of historic and
anticipated gross profit margins, from the date of each contract’s issued (or purchase, in the case of VOBA).
These schedules are based upon several actuarial assumptions that are uncertain, are reviewed annually
and are modified if necessary. The most significant of these assumptions are claims, investment yield rates
and contract persistency. Based upon the most recent actuarial reviews of all of the assumptions, we do
not currently anticipate material changes to the level of these amortization schedules.
26
The property and casualty business acquisition costs consist of commissions net of reinsurance
commissions, during the production of business are deferred and amortized ratably over the terms of the
policies. The method used in calculating deferred acquisition costs limits the amount of such deferred costs
to actual costs or their estimated realizable value, whichever is lower.
Impairment of Investments
Impairment of an investment exists if a decline in the estimated fair value is below the amortized cost
of the security. Management regularly monitors and evaluates the difference between the cost and
estimated fair value of fixed maturity investments and other invested assets. For investments with a fair
value below cost, the process includes evaluating: (1) the length of time and the extent to which the
estimated fair value has been less than amortized cost for fixed maturity securities, or cost for equity
securities, (2) the financial condition, near-term and long-term prospects for the issuer, including relevant
industry conditions and trends, and implications of rating agency actions, (3) the Company’s intent to sell
or the likelihood of a required sale prior to recovery, (4) the recoverability of principal and interest for fixed
maturity securities, or cost for equity securities, and (5) other factors, as applicable. This process is not
exact and further requires consideration of risks such as credit and interest rate risks. Consequently, if an
investment’s cost exceeds its estimated fair value solely due to changes in interest rates, other-than
temporary impairment may not be appropriate.
Due to the subjective nature of our analysis, along with the judgment that must be applied in the
analysis, it is possible that we could reach a different conclusion whether or not to impair a security if we
had access to additional information about the investee. Additionally, it is possible that the investee’s ability
to meet future contractual obligations may be different than what we determined during its analysis, which
may lead to a different impairment conclusion in future periods.
If after monitoring and analyzing impaired securities, management determines that a decline in the
estimated fair value of any fixed maturity security or other invested asset below cost is other than temporary,
the carrying amount of the security is reduced to its fair value according to current accounting guidance.
The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value.
In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is
accounted for as if it had been purchased on the measurement date of the impairment. For debt securities,
the discount (or reduced premium) based on the new cost basis may be accreted into net investment
income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to
the effective yield.
Management reviews investment portfolios under our impairment review policy. Given current market
conditions and the significant judgments involved, there is a continuing risk that further declines in fair value
may occur and material other-than-temporary impairments may be recorded in future periods. Management
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.
During the years ended December 31, 2019 and 2018, we were not required to recognize an other-
than-temporary impairment. During the year ended December 31, 2017 we recognized an other-than-
temporary impairment on equity securities amounting to $49 thousand. The impairment analysis indicated
that, none of the securities whose carrying amount exceeded its estimated fair value was considered other-
than-temporarily impaired as of that date; however, several factors are beyond management’s control, such
as the following: financial condition of the issuers, movement of interest rates, specific situations within
corporations, among others. Over time, the economic and market environment may provide additional
insight regarding the estimated fair value of certain securities, which could change management’s judgment
regarding impairment. This could result in realized losses related to other-than-temporary declines being
charged against future income.
Our fixed maturity securities are sensitive to interest rate and credit risk fluctuations, which impact the
fair value of individual securities. Our equity securities are sensitive to equity price risks, for which potential
losses could arise from adverse changes in the value of equity securities. For additional information on the
sensitivity of our investments, see “Quantitative and Qualitative Disclosures About Market Risk” in this
Annual Report.
27
A detail of the 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 December 31, 2019 and 2018 is included in Note 3,
Investment in Securities, of the Notes to Consolidated Financial Statements, included in this Annual Report.
Allowance for Doubtful Receivables
We estimate the amount of uncollectible receivables in each period and establish an allowance for
doubtful receivables considering, among other things, the continued deterioration of the local economy, the
exposure to government accounts and the challenging business environment in the Island. The allowance
for doubtful receivables amounted to $56.5 million and $42.0 million as of December 31, 2019 and 2018,
respectively. As of December 31, 2019 and 2018, the Company had premiums and other receivables of
$49.2 million and $54.3 million, respectively, from the Government of Puerto Rico, including its agencies,
municipalities, and public corporations. The related allowance for doubtful receivables as of December 31,
2019 and 2018 was $22.1 million and $21.0 million, respectively. The amount of the allowance is based
on the aging of unpaid accounts, information about the customer’s creditworthiness and other relevant
information. The estimates of uncollectible accounts are revised each period, and changes are recorded
in the period they become known. In determining the allowance, we use predetermined percentages
applied to aged account balances, as well as individual analysis of large accounts. These percentages are
based on our collection experience and are periodically evaluated. A significant change in the level of
uncollectible accounts would have a material effect on our results of operations.
In addition to premium-related receivables, we evaluate the risk in the realization of other accounts
receivable, including balances due from third parties related to overpayment of medical claims and rebates,
among others. These amounts are individually analyzed, and the allowance determined based on the
specific collectivity assessment and circumstances of each individual case.
We consider this allowance adequate to cover probable losses that may result from our inability to
subsequently collect the amounts reported as accounts receivable. However, such estimates may change
significantly in the event that unforeseen economic conditions adversely impact the ability of third parties
to repay the amounts due to us.
Goodwill and Other Intangible Assets
Our consolidated goodwill and other intangible assets at December 31, 2019 were $28.6 million and
$1.9 million, respectively. At December 31, 2018 the consolidated goodwill and other intangible assets
were $25.4 million and $2.6 million, respectively. The goodwill and other intangible assets balance for both
years were primarily related to the acquisition of TSA in 2011. As of December 31, 2019 and 2018, the
goodwill related to TSA was $25.0 million. As of December 31, 2019 and 2018 other intangible assets
related to the TSA acquisition were $1.9 million and $2.6 million, respectively.
We account for goodwill and intangible assets with indefinite lives in accordance with Accounting
Standard Codification (ASC) No. 350, Goodwill and Other Intangible Assets, which specifies the types of
acquired intangible assets that are required to be recognized and reported separately from goodwill. Under
this guidance, goodwill is not amortized but is tested for impairment at least annually and more frequently
if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized
to the extent that the carrying amount exceeds the asset’s fair value. For goodwill, the impairment
determination is made at the reporting unit level and consists of two steps.
Our impairment tests involve the use of estimates related to the fair value of the reporting unit and
require a significant degree of management judgment and the use of subjective assumptions. The
Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the two-
step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill
impairment loss to be recognized (if any). First, the Company determines the fair value of a reporting unit
and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill
over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating
28
the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill.
Our goodwill impairment test uses the income and market approach to estimate a reporting unit’s fair
value. Use of the income and market approach for our goodwill impairment test reflects our view that
valuation methodology provides a reasonable estimate of fair value. The income approach is developed
using assumptions about future premiums, expected claims, MLR, operating expenses and net income
derived from our internal planning process and historical trends. These estimated future cash flows are
then discounted. Our assumed discount rate is based on our industry’s weighted average cost of capital. It
assumes the effective implementation of measures to contain the utilization and cost trends. Events or
changes in circumstances, including a decrease in membership, an increase in MLR and/or operating
expenses, could result in goodwill impairment. The market approach is developed based upon the valuation
multiples of various financial or operational measures calculated using the market value of minority interest
in publicly traded guideline companies. These multiples are then applied to the relevant financial or
operational metrics of the interest and used to develop an estimate of value.
We completed our annual impairment tests of existing goodwill during the fourth quarter of 2019 and
2018. Limited interim impairment tests are also performed when potential impairment indicators exist or
other changes in our business occur. If we do not achieve our earnings objectives or the cost of capital
rises significantly, the assumptions and estimates underlying these impairment evaluations could be
adversely affected and result in future impairment charges that would negatively impact our operating
results. The result of the impairment test performed in 2019 and 2018 indicated that the fair value of the
TSA unit exceeded its carrying value by approximately 35% and 62%, respectively.
While we believe we have appropriately allocated the purchase price of our acquisitions, this allocation
requires many assumptions to be made regarding the fair value of assets and liabilities acquired. In
addition, estimated fair values developed based on our assumptions and judgments might be significantly
different if other reasonable assumptions and estimates were to be used. If estimated fair values are less
than the carrying values of the reporting unit or if significant impairment indicators are noted relative to other
intangible assets subject to amortization, we may be required to record impairment losses against future
income.
Other Significant Accounting Policies
We have other accounting policies that are important to an understanding of the consolidated financial
statements. See Note 2, Significant Accounting Policies, of the Notes to Consolidated Financial
Statements, included in this Annual Report.
29
Recently Issued Accounting Standards
For a description of our recently issued accounting standards, see Note 2, Significant Accounting
Policies, of the Notes to Consolidated Financial Statements, included in this Annual Report.
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 in the normal course of business. We are also subject to additional market risk with respect
to certain of our financial instruments. We must effectively manage, measure, and monitor the market risk
associated with our invested assets and interest rate sensitive liabilities. We have established and
implemented comprehensive policies and procedures to minimize the effects of potential market volatility.
Market Risk Exposure
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.
Analytical tools and monitoring systems are in place to assess each one of the elements of market risks.
Our investment portfolio consists mainly of investment grade fixed income and a smaller portion is held
in equity securities and alternative investments. The investment portfolio is conservative, diversified across
and within asset classes, and has the following objectives, in order of importance: capital preservation,
liquidity, income generation and capital appreciation. The interest rate risk of both our investments and
liabilities is regularly evaluated.
The investment portfolio is centrally managed by investment professionals and decisions are taken
based on the guidelines and limitations described in our Investment Policy and the Puerto Rico Insurance
Code. The Investment Policy is approved by the Board of Directors following the recommendation of the
Investment and Financing Committee of the Board of Directors (the “Investment and Financing
Committee”). The Investment and Financing Committee establishes guidelines to ensure the Investment
Policy is adhered to and any exception must be reported to the Investment and Financing Committee.
We use a sensitivity analysis to measure the market risk related to our holdings of invested assets and
other financial instruments. This analysis estimates the potential changes in fair value of the instruments
subject to market risk. This sensitivity analysis is an estimate and should not be viewed as predictive of
our future financial performance. Our actual losses in any year could exceed the amounts indicated in the
following paragraphs. Limitations related to this sensitivity analysis include:
•
•
the market risk information is limited by the assumptions and parameters established in creating the
related sensitivity analysis, including the impact of prepayment rates on mortgages; and
the model assumes that the composition of assets and liabilities remains unchanged throughout the
year.
Accordingly, we use such models as tools and not as a substitute for the experience and judgment of
our management.
Interest Rate Risk
Our exposure to interest rate changes results from our significant holdings of fixed maturity securities. We
are also exposed to interest rate risk from our variable interest secured term loan and from our policyholder
deposits.
Equity Price Risk
Our investments in equity securities expose us to price risks, for which potential losses could arise from
adverse changes in the value of these investments.
30
Risk Measurement
Our investment securities are a source of market risk. As of December 31, 2019, approximately 76%
of our investment portfolio consisted of fixed maturity securities. The remaining balance is comprised of
equity securities and alternative investments. Our fixed maturity securities classified as available-for-sale
and alternative investments are recorded at fair value and changes in the fair value of these securities, net
of the related tax effect, are excluded from operations and are reported as a separate component of other
comprehensive income (loss) until realized. Fixed maturity securities classified as held-to-maturity are
recorded at amortized cost and adjusted for the amortization or accretion of premiums or discounts. Equity
securities are recorded at fair value and changes in fair value are included in earnings. The fair value of
the investments in our available-for-sale and held-to-maturity portfolios is exposed to both interest rate risk
and equity price risk.
Interest Rate Risk
We have evaluated the net impact to the fair value of our fixed income investments of a significant one-
time change in interest rate risk using a combination of both statistical and fundamental methodologies.
From these shocked values, a resultant market price appreciation/depreciation can be determined after
portfolio cash flows are modeled and evaluated over instantaneous 100, 200, and 300 basis point rate
shifts. Techniques used in the evaluation of cash flows include Monte Carlo simulation through a series of
probability distributions over 200 interest rate paths. Necessary prepayment speeds are compiled using
Yield Book, which sources numerous factors in deriving speeds, including but not limited to: historical
speeds, economic indicators, street consensus speeds, etc. Securities evaluated by us under these
scenarios include mortgage pass-through certificates and collateralized mortgage obligations of U.S.
agencies, and private label structures, if cash flows information is available. The following table sets forth
the result of this analysis for the years ended December 31, 2019 and 2018. The analysis does not consider
any action that management can take to mitigate the impact of changes in market rates.
(Dollar amounts in millions)
Change in Interest Rates
Expected
Fair Value
Amount of
Decrease
%
Change
December 31, 2019:
Base Scenario
+100 bp
+200 bp
+300 bp
December 31, 2018:
Base Scenario
+100 bp
+200 bp
+300 bp
$
1,244.9
1,187.4
1,130.8
1,077.0
$
1,202.0
1,148.2
1,097.9
1,049.4
(57.5)
(114.1)
(167.9)
(96.7)
(147.0)
(195.5)
(4.6)%
(9.2)%
(13.5)%
(7.8)%
(11.8)%
(15.7)%
We believe that an interest rate shift in a 12-month period of 100 basis points represents a moderately
adverse outcome, while a 200 basis point shift is significantly adverse, and a 300 basis point shift is less
likely given historical precedents. Although we classify 99.9% of our fixed maturity securities as available-
for-sale, our cash flows and the intermediate duration of our investment portfolio should allow us to hold
securities until maturity, thereby avoiding the recognition of losses, should interest rates rise significantly.
Equity Price Risk
Our equity securities are composed of mutual funds whose underlying assets are comprised of
domestic equity securities, domestic preferred equity securities, international equity securities and higher
risk fixed income instruments. The fixed income mutual funds invest mainly in loan participations and high
yield debt. The securities in these funds are issued by corporations, financial institutions and governmental
31
entities that are either unrated or have non-investment grade ratings from either Standard & Poor’s or
Moody’s.
Our investments in mutual funds exposes us to equity price risk and credit risk. We manage these
exposures by closely monitoring the performance of these mutual funds.
Assuming an immediate decrease of 10% in the market value of our equity securities as of December
31, 2019 and 2018, the hypothetical loss in the fair value of these investments would have been
approximately $28.8 million and $27.9 million, respectively.
Alternative Price Risk
Our alternative investments in the available-for-sale portfolio are comprised of commitments to limited
liability partnerships. These private funds call capital over time and invest in various asset classes such as
traditional private equity, infrastructure equity, real estate debt and corporate debt. These investments are
unrated, illiquid and expose us to a variety of underlying risks. We manage these exposures by closely
monitoring the performance of these funds. The fair value of alternative investments is estimated using the
net asset value of the Company’s ownership interest in the partnerships as a practical expedient to
determining an independent fair value.
Assuming an immediate decrease of 10% in the market value of our alternative investments as of
December 31, 2019 and 2018, the hypothetical loss in the fair value of these investments would have been
approximately $10.1 million and $7.4 million, respectively.
Other Risk Measurement
We are subject to interest rate risk on our variable interest secured term loan and our policyholder
deposits. Shifting interest rates do not have a material effect on the fair value of these instruments. The
secured term loan has a variable interest rate structure, which reduces the potential exposure to interest
rate risk. The policyholder deposits have short-term interest rate guarantees, which also reduce the
accounts’ exposure to interest rate risk.
32
Triple-S Management Corporation and
Subsidiaries
Consolidated Financial Statements
December 31, 2019, 2018, and 2017
33
115 TRIPLE -S MANAGEMENT
To Our Stockholders
Management's Report on Internal Control Over Financial Reporting
The management of Triple-S Management Corporation (the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting and for the assessment of the
effectiveness of "internal control over financial reporting," as defined under Exchange Act Rule 13a-
15(f). The Company's internal control over financial reporting is a process designed by, or under the
supervision of, the Company's Chief Executive Officer and Chief Financial Officer, and effected by
the Company's Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company's
consolidated financial statements for external purposes in accordance with Generally Accepted
Accounting Principles (GAAP), and includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
• provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and that receipts and
expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a material effect
on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management, under the supervision and with the participation of the Chief Financial Officer and Chief
Executive Officer, assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2019, based on criteria described in the "Internal Control—Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) on May 14, 2013. Based on that assessment and those criteria, management has
concluded that the Company's internal control over financial reporting was effective as of December
31, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's consolidated financial statements for external reporting purposes in
accordance with GAAP.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their
report, which appears herein.
1‘1.1111ft.
Roberto arcia- odriguez
Presiden CEO
-sr
• 40
Execu lye esident & CFO
ow—
1M'
an J.
r
1:5
Triple-S Management Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2019 and 2018
(dollar amounts in thousands, except share information)
Assets
Investments and cash
Fixed maturities available for sale, at fair value
2019
2018
(amortized cost of $1,173,043 in 2019 and $1,168,369 in 2018)
$
1,242,883
$
1,199,402
Fixed maturities held to maturity, at amortized cost
(fair value of $2,019 in 2019 and $2,619 in 2018)
Equity investments, at fair value
(cost of $242,069 in 2019 and $265,858 in 2018)
Other invested assets, at net asset value
(amortized cost of $97,575 in 2019 and $72,627 in 2018)
Policy loans
Cash and cash equivalents
Total investments and cash
Premium and other receivables, net
Deferred policy acquisition costs and value of business acquired
Property and equipment, net
Deferred tax asset
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Claim liabilities
Liability for future policy benefits
Unearned premiums
Policyholder deposits
Liability to Federal Employees’ Health Benefits and
Federal Employees' Programs
Accounts payable and accrued liabilities
Deferred tax liability
Short-term borrowings
Long-term borrowings
Liability for pension benefits
Total liabilities
Commitments and contingencies
Stockholders’ equity
1,860
2,492
287,525
279,164
100,508
10,861
109,837
74,015
9,469
117,544
1,753,474
1,682,086
567,692
234,885
88,588
77,294
28,599
68,294
2,818,826
$
$
709,258
386,017
93,301
189,120
47,781
325,761
10,257
54,000
25,694
34,465
628,444
215,159
81,923
79,010
25,397
48,229
2,760,248
$
936,789
361,495
82,990
174,110
44,926
275,228
3,245
-
28,883
31,274
1,875,654
1,938,940
Triple-S Management Corporation stockholders' equity
Common stock Class A, $1 par value. Authorized
100,000,000 shares; issued and outstanding
950,968 at December 31, 2018
Common stock Class B, $1 par value. Authorized 100,000,000
shares; issued and outstanding 23,799,633 and 21,980,492
shares at December 31, 2019 and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net
Total Triple-S Management Corporation stockholders' equity
Non-controlling interest in consolidated subsidiary
Total stockholders' equity
-
951
23,800
60,504
830,198
29,363
943,865
(693)
943,172
21,980
34,021
761,970
3,062
821,984
(676)
821,308
Total liabilities and stockholders’ equity
$
2,818,826
$
2,760,248
The accompanying notes are an integral part of these consolidated financial statements.
40
Triple-S Management Corporation and Subsidiaries
Consolidated Statements of Earnings
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share information)
Revenues:
Premiums, net
Administrative service fees
Net investment income
Other operating revenues
2019
2018
2017
$
3,252,880
9,946
62,007
8,553
$
2,938,591
14,701
61,909
5,794
$
2,826,932
16,514
51,615
3,660
Total operating revenues
3,333,386
3,020,995
2,898,721
Net realized investment gains (losses):
Total other-than-temporary impairment losses on securities
Net realized gains, excluding other-than-temporary impairment
losses on securities
Total net realized investment gains
Net unrealized investment gains (losses) on equity investments
Other income, net
Total revenues
Benefits and expenses:
Claims incurred, net of reinsurance
Operating expenses
Total operating costs
Interest expense
Total benefits and expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Less: Net loss attributable to non-controlling interest
-
5,843
5,843
32,151
4,206
-
298
298
(36,546)
11,312
(49)
10,880
10,831
-
6,533
3,375,586
2,996,059
2,916,085
2,666,256
569,406
3,235,662
7,672
2,527,613
554,715
3,082,328
6,903
2,353,101
477,213
2,830,314
6,794
3,243,334
3,089,231
2,837,108
132,252
39,375
92,877
17
(93,172)
(29,866)
(63,306)
4
78,977
24,496
54,481
5
Net income (loss) attributable to Triple-S Management Corporation
$
92,894
$
(63,302)
$
54,486
Earnings per share attributable to Triple-S Management Corporation
Basic net income (loss) per share
Diluted net income (loss) per share
$
$
3.98
3.97
$
$
(2.76)
(2.76)
$
$
2.27
2.26
The accompanying notes are an integral part of these consolidated financial statements.
41
Triple-S Management Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
December 31, 2019, 2018, and 2017
(dollar amounts in thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Net unrealized change in fair value of available for sale securities, net of taxes
Defined benefit pension plan:
Actuarial (loss) gain, net
Prior service credit, net
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Comprehensive loss attributable to non-controlling interest
Comprehensive income (loss) attributable to Triple-S Management Corporation
2019
2018
2017
$
92,877
$
(63,306)
$
54,481
30,522
(9,048)
13,867
(4,221)
-
26,301
119,178
17
119,195
$
738
-
(8,310)
(71,616)
4
(71,612)
$
(5,028)
20
8,859
63,340
5
63,345
$
The accompanying notes are an integral part of these consolidated financial statements.
42
Triple-S Management Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
December 31, 2019, 2018, and 2017
(dollar amounts in thousands)
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Triple-S
Management
Corporation
Non-controlling
Interest in
Total
Retained
Earnings
Comprehensive
Income (Loss)
Stockholders’
Equity
Consolidated
Subsidiary
Stockholders’
Equity
Balance, December 31, 2016
$
951
$
23,321
$
65,592
$
730,904
$
42,395
$
863,163
$
(677)
$
862,486
Share-based compensation
Repurchase and retirement of common stock
Comprehensive income (loss)
-
-
-
167
(861)
-
6,909
(19,359)
-
-
-
-
-
54,486
8,859
7,076
(20,220)
63,345
-
-
(5)
7,076
(20,220)
63,340
Balance, December 31, 2017
$
951
$
22,627
$
53,142
$
785,390
$
51,254
$
913,364
$
(682)
$
912,682
Share-based compensation
Repurchase and retirement of common stock
Comprehensive income (loss)
Cumulative effect adjustment due to
implementation of ASU 2016-01
-
-
-
-
-
-
-
-
287
(934)
3,070
(22,191)
-
-
-
-
(63,302)
(8,310)
3,357
(23,125)
(71,612)
39,882
(39,882)
-
-
-
6
-
3,357
(23,125)
(71,606)
-
Balance, December 31, 2018
$
951
$
21,980
$
34,021
$
761,970
$
3,062
$
821,984
$
(676)
$
821,308
Share-based compensation
Repurchase and retirement of common stock
Issuance of Common Stock
Stock dividend
Dividend
Common Stock Class A conversion to Class B
Comprehensive income (loss)
-
-
48
-
-
(999)
-
222
(534)
-
1,133
-
999
-
11,383
(9,573)
1,151
23,522
-
-
-
-
-
-
(24,655)
(11)
-
-
-
-
-
-
-
11,605
(10,107)
1,199
-
(11)
-
-
-
-
-
-
-
11,605
(10,107)
1,199
-
(11)
-
92,894
26,301
119,195
(17)
119,178
Balance, December 31, 2019
$
-
$
23,800
$
60,504
$
830,198
$
29,363
$
943,865
$
(693)
$
943,172
The accompanying notes are an integral part of these consolidated financial statements.
43
Triple-S Management Corporation and Subsidiaries
Consolidated Statements of Cash Flows
December 31, 2019, 2018, and 2017
(dollar amounts in thousands)
44
Triple-S Management Corporation and Subsidiaries
Consolidated Statements of Cash Flows
December 31, 2019, 2018, and 2017
(dollar amounts in thousands)
45
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
1.
Nature of Business
Triple-S Management Corporation (the Corporation, the Company or TSM) was incorporated under
the laws of the Commonwealth of Puerto Rico to engage, among other things, as the holding
company of entities primarily involved in the insurance industry.
The Company has the following wholly owned subsidiaries: (1) Triple-S Salud, Inc. (TSS) and Triple-
S Advantage, Inc. (TSA), are managed care organizations that provide health benefits services to
subscribers through contracts with hospitals, physicians, dentists, laboratories, and other
organizations; (2) Triple-S Vida, Inc. (TSV) and Triple-S Blue, Inc. (TSB), are engaged in the
underwriting of life and accident and health insurance policies and the administration of annuity
contracts; and (3) Triple-S Propiedad, Inc. (TSP), is engaged in the underwriting of property and
casualty insurance policies. The Company, TSS, TSA and TSB are members of the Blue Cross and
Blue Shield Association (BCBSA). The Company and the above mentioned subsidiaries are subject
directly or indirectly to the regulations of the Commissioner of Insurance of the Commonwealth of
Puerto Rico (the Commissioner of Insurance), the General Superintendence of Insurance of Costa
Rica, the Office of the Commissioner of Insurance of the government of the U.S. Virgin Islands
(USVI), the British Virgin Islands (BVI) Financial Services Commission, and the Anguilla Financial
Services Commission.
The Company also owns a controlling interest in a health clinic in Puerto Rico, as part of our strategic
initiatives. Besides its current operations, this health clinic owns controlling interests in other health
clinics throughout the island.
Through our subsidiary TSS, we provide services to participants of the Commonwealth of Puerto
Rico Health Insurance Plan (similar to Medicaid) (Medicaid). On September 21, 2018, TSS entered
into a contract with the Puerto Rico Health Insurance Administration (ASES by its Spanish acronym),
as one of the five managed care organizations (MCOs), that offer health care services to Medicaid
and Child Health Insurance subscribers for the government of Puerto Rico’s revised Medicaid health
insurance program. The contract is effective from November 1, 2018 to September 30, 2021, which
term may be extended an additional year at ASES’s option. The revised delivery model requires
MCOs to serve subscribers in an island-wide basis, rather than through the assignment of specific
regions within the Island. Under the new agreement, TSS is responsible for the provision of medical,
mental, pharmacy, and dental healthcare services on an at-risk basis to subscribers who enroll with
TSS. ASES pays TSS a per member per month rate that varies depending on the clinical condition
or category of the subscriber. Prior to the effective date of the new contract, TSS provided medical,
mental, pharmacy and dental healthcare services to Medicaid subscribers in the Metro-North and
West regions of the government of Puerto Rico’s health insurance program on an at-risk basis.
A substantial majority of the Company’s business activity is within Puerto Rico, and as such, the
Company is subject to the risks associated with the Puerto Rico economy.
46
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
2.
Significant Accounting Policies
The following are the significant accounting policies followed by the Company and its subsidiaries:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP). The consolidated
financial statements include the financial statements of the Company and its subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the
Company to make a number of estimates and assumptions relating to the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during the period. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of three months or less at
the date of acquisition to be cash equivalents. Cash and cash equivalents are recorded at cost,
which approximates fair value. Cash equivalents of $25,060 and $49,233 at December 31, 2019
and 2018, respectively, consist principally of money market funds and certificates of deposit with
original maturities of three months or less.
Investments
Fixed maturities
Investment in debt securities at December 31, 2019 and 2018 consists mainly of obligations of
government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government
instrumentalities, obligations of the Commonwealth of Puerto Rico and its instrumentalities, municipal
securities, corporate bonds, residential mortgage-backed securities, 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
47
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
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 has the intent to sell the
fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity
security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-
temporary and is recorded to other-than-temporary impairment losses recognized in earnings in the
Company’s consolidated statements of earnings. For impaired fixed maturity securities that the
Company does not intend to sell or it is more likely than not that such securities will not have to be
sold, but the Company expects not to fully recover the amortized cost basis, the credit component of
the other-than-temporary impairment is recognized in other-than-temporary impairment losses
recognized in earnings in the Company’s consolidated statements of earnings and the non-credit
component of the other-than-temporary impairment is recognized in other comprehensive income.
Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity
securities for which the Company expects to fully recover the amortized cost basis continue to be
recognized in accumulated other comprehensive income.
The credit component of an other-than-temporary impairment is determined by comparing the net
present value of projected future cash flows with the amortized cost basis of the fixed maturity
security. The net present value is calculated by discounting the Company’s best estimate of projected
future cash flows at the effective interest rate implicit in the fixed maturity security at the date of
acquisition.
A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is
deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair
value. The impairment is charged to earnings and a new cost basis for the security is established.
To determine whether an impairment is other-than-temporary, the Company considers whether it has
the ability and intent to hold the investment until a market price recovery and considers whether
evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.
Evidence considered in this assessment includes the reasons for the impairment, the severity and
duration of the impairment, market conditions, changes in value subsequent to year-end, forecasted
performance of the investee, and the general market condition in the geographic area or industry the
investee operates in.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or
available-for-sale security as an adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned.
The Company regularly invests in mortgaged-backed securities and other securities subject to
prepayment and call risk. Significant changes in prevailing interest rates may adversely affect the
timing and amount of cash flows on such securities. In addition, the amortization of market premium
and accretion of market discount for mortgaged-backed securities is based on historical experience
and estimates of future payment speeds on the underlying mortgage loans. Actual prepayment
speeds may differ from original estimates and may result in material adjustments to amortization or
accretion recorded in future periods.
48
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Equity investments
Investment in equity securities at December 31, 2019 and 2018 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. Following the implementation
on January 1, 2018 of Accounting Standard Update (ASU) 2016-01, Recognition and Measurement
of Financial Assets and Financial Liabilities, 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 December 31, 2019 and 2018 consist mainly of alternative investments in
partnerships which invest in several private debt and private equity funds. Portfolios are diversified
by vintage year, stage, geography, business sectors and number of investments. These investments
are not redeemable with the funds. Distributions from each fund are received as the underlying
investments of the funds are liquidated. It is estimated that the underlying assets of the funds will be
liquidated in the next 5 to 12 years. The fair values of the investments in this class have been
estimated using the net asset value (NAV) of the Company’s ownership interest in the partnerships.
Total unfunded capital commitments for these positions as of December 31, 2019 amounted to
$72,207. The remaining average commitments period is approximately three years.
Revenue Recognition
a. Managed Care
Subscriber premiums on the managed care business are billed in advance of their respective
coverage period and the related revenue is recorded as earned during the coverage period.
Managed care premiums are billed in the month prior to the effective date of the policy with a
grace period of up to two months. If the insured fails to pay, the policy can be cancelled at the
end of the grace period at the option of the Company.
Premiums for the Medicaid business are based on a bid contract with ASES and billed in
advance of coverage period. Under the risk-based Medicaid contract that expired on October
31, 2018, there is an excess profit agreement which stipulates that the profit of TSS for a
specified period within the contract term shall not exceed two and a half percentage (2.5%) of
the fixed amount paid by ASES for each member. In the event that the profit exceeds this
amount, TSS and ASES shall share the excess profit in proportions of fifty percent (50%),
subject to the compliance by TSS with certain quality metrics. ASES retains the right to
determine the outcome of the excess profit agreement that is based on audited financial
statements of the contracted services submitted annually by TSS and the validation of the
incurred-but-not-reported reserve by ASES’s actuary. We report any estimated net amounts
due to ASES within accounts payable and accrued liabilities in the consolidated balance sheets.
As of December 31, 2019 and 2018, the Company had accrued an estimated profit sharing of
$1,948 and $4,294, respectively.
The Medicaid contract that became effective November 1, 2018 includes a minimum medical
loss ratio (MLR) provision where the Company has to remit to ASES the excess of the target
MLR of 92% over the actual MLR for any given contract year and would be reflected as an
49
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
adjustment to premium revenue in current operations. The target established in the contract
follows regulation requirements of the Centers for Medicare and Medicaid Services (CMS) for
Medicaid managed care contracts codified in 42 CFR part 438. As of December 31, 2019, and
2018, there was no accrued amount due to ASES related to this provision.
Premiums for the Medicare Advantage (MA) business are based on a bid contract with CMS
and billed in advance of the coverage period. We recognize premium revenue in the period in
which we are obligated to provide services to our members. We record premiums earned but
not received as premiums receivable and record premiums received in advance of the period of
service as unearned premiums in the consolidated balance sheets. Unearned premiums are
recognized as revenue throughout the related coverage period. MA contracts are renewed
annually and provide for a risk factor to adjust premiums paid for members that represent a
higher or lower risk to the Company. Retroactive rate adjustments are made periodically based
on the aggregate health status and risk scores of the Company’s MA membership. These risk
adjustments are evaluated quarterly, based on actuarial estimates. Actual results could differ
from these estimates. We recognize periodic changes to risk-adjusted premiums as revenue
when the amounts are determinable and collection is reasonably assured, which is possible as
additional diagnosis code information is reported to CMS, when the ultimate settlements are
received from CMS, or we receive notification of such settlement amounts. The data provided
to CMS to determine members’ risk scores is subject to audit by CMS even after the annual
settlements occur, which may result in the refund of premiums to CMS. As additional information
becomes available, the recorded estimate is revised and reflected in operating results in the
period in which it becomes available.
Prescription drug coverage is offered to Medicare eligible beneficiaries as part of MA plans (MA-
PD). Premiums are based on a bid contract with CMS that considers the estimated costs of
providing prescription drug benefits to enrolled participants. MA-PD premiums are subject to
adjustment, positive or negative, based upon the application of risk corridors that compare the
estimated prescription drug costs included in the bids to CMS to actual prescription drug costs.
Variances exceeding certain thresholds may result in CMS making additional payments or in
CMS requesting a refund for a portion of the premiums collected. The Company estimates and
records adjustments to earned premiums related to estimated risk corridor payments based
upon actual prescription drug costs for each reporting period as if the annual contract were to
end at the end of each reporting period.
Administrative service fees include revenue from certain groups which have managed care
contracts that provide for the group to be at risk for all or a portion of their claims experience.
For these groups, the Company is not at risk and only handles the administration of managed
care coverage for an administrative service fee. The Company pays claims under commercial
self-funded arrangements from its own funds, and subsequently receives reimbursement from
these groups. Claims paid under self-funded arrangements are excluded from the claims
incurred in the accompanying consolidated financial statements. Administrative service fees
under the self-funded arrangements are recognized based on the group’s membership or
incurred claims for the period multiplied by an administrative fee rate plus other fees. In addition,
some of these self-funded groups purchase aggregate and/or specific stop-loss coverage. In
exchange for a premium, the group’s aggregate liability or the group’s liability on any one
episode of care is capped for the year. Premiums for the stop-loss coverage are actuarially
determined based on experience and other factors and are recorded as earned over the period
of the contract in proportion to the coverage provided. This fully insured portion of premiums is
50
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
included within the premiums earned, net in the accompanying consolidated statements of
earnings.
b. Life and Accident and Health Insurance
Premiums on life insurance policies are billed in advance of their respective coverage period
and the related revenue is recorded as earned when due. Premiums on accident and health
and other short-term policies are recognized as earned primarily on a pro rata basis over the
contract period. Premiums on credit life policies are recognized as earned in proportion to the
amounts of insurance in-force. Revenues from universal life and interest sensitive policies
represent amounts assessed against policyholders, including mortality charges, surrender
charges actually paid, and earned policy service fees. The revenues for limited payment
contracts are recognized over the period that benefits are provided rather than on collection of
premiums.
c. Property and Casualty Insurance
Premiums on property and casualty contracts are billed in advance of their respective coverage
period and they are recognized as earned on a pro rata basis over the policy term. The portion
of premiums related to the period prior to the end of coverage is recorded in the consolidated
balance sheets as unearned premiums and is transferred to premium revenue as earned.
Allowance for Doubtful Receivables
The allowance for doubtful receivables is based on management’s evaluation of the aging of
accounts and such other factors which deserve current recognition, including the continued
deterioration of the local economy, the exposure to government accounts, and the challenging
business environment in the island. This evaluation is performed individually on larger accounts and
includes the use of all available information such as the customer’s credit worthiness and other
relevant information. Actual losses could differ from these estimates. Receivables are charged-off
against their respective allowance accounts when deemed to be uncollectible.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain direct costs of acquiring business in the life and accident and health, and property and
casualty segments are deferred by the Company. Substantially all acquisition costs related to the
managed care segment are expensed as incurred.
In the life and accident and health segment, deferred policy acquisition costs (DPAC) consist of
commissions and certain expenses related to the successful acquisition of the production of life,
annuity, accident and health, and credit business. In the event that future premiums, in combination
with policyholder reserves and anticipated investment income, could not provide for all future benefits
and maintenance and settlement expenses, the amount of deferred policy acquisition costs would
be reduced to provide for such amount. The related amortization is provided over the anticipated
premium-paying period of the related policies in proportion to the ratio of annual premium revenue
to expected total premium revenue to be received over the life of the policies. Interest is considered
in the amortization of deferred policy acquisition cost and value of business acquired. For these
contracts interest is considered at a level rate at the time of issue of each contract, of 4.40% for 2019
and from 3.90% to 5.75% for 2018 and 2017, and, in the case of the value of business acquired, at
the time of any acquisition.
51
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
For certain other long-duration contracts, deferred amounts are amortized at historical and
forecasted credited interest rates. Expected premium revenue is estimated by using the same
mortality and withdrawal assumptions used in computing liabilities for future policy benefits. The
method followed in computing deferred policy acquisition costs limits the amount of such deferred
costs to their estimated net realizable value. In determining estimated net realizable value, the
computations give effect to the premiums to be earned, related investment income, losses and loss-
adjustment expenses, and certain other costs expected to be incurred as the premium is earned.
Costs deferred on universal life and interest sensitive products are amortized as a level percentage
of the present value of estimated gross profits from investment yields, mortality, expenses and
surrender charges. Estimates used are based on the Company’s experience as adjusted to provide
for possible adverse deviations. These estimates are periodically reviewed and compared with
actual experience. When it is determined that future expected experience differs significantly from
that assumed, the estimates are updated for current and future issues which may result in a change
or release of deferred policy acquisition costs amortization through the consolidated statements of
earnings.
The value of business acquired (VOBA) assigned to the life insurance in-force at the date of the
acquisition is amortized using methods similar to those used to amortize the deferred policy
acquisition costs of the life and accident and health segment.
In the property and casualty segment, acquisition costs consist of primarily commissions and other
cost incurred during the production of business and are deferred and amortized ratably over the
terms of the policies.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are expensed as incurred.
Depreciation is calculated on the straight-line method over the estimated useful lives of the assets.
Costs of computer equipment, programs, systems, installations, and enhancements are capitalized
and amortized straight-line over their estimated useful lives. The following is a summary of the
estimated useful lives of the Company’s property and equipment:
Asset Category
Buildings
Building improvements
Leasehold improvements
Office furniture
Computer software
Computer equipment, equipment,
and automobiles
Estimated
Useful Life
35 years
5 years
Lesser of lease term or 10 years
7 years
3 to 10 years
3 to 5 years
Long-Lived Assets, including Goodwill
Long-lived assets, such as property and equipment, and purchased intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized by the amount by which the
52
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
carrying amount of the asset exceeds the fair value of the asset. The assets and liabilities of a
disposal group classified as held for sale would be presented separately in the appropriate asset and
liability sections of the consolidated balance sheets. During 2019, 2018, and 2017 impairment tests
on intangible assets were performed and based on the results of the tests no impairment was
recorded.
Goodwill and intangible assets that have indefinite useful lives are tested at least annually for
impairment, and are tested for impairment more frequently if events or circumstances indicate that
the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value. For goodwill, the impairment determination is made at the reporting
unit level. The Company may perform a qualitative analysis under certain circumstances, or perform
a two-step quantitative analysis. In the qualitative analysis, the Company determines if it is more
likely than not that the fair value of a reporting unit is less than its carrying amount by assessing
current events and circumstances. If there are factors present indicating potential impairment, the
Company would proceed to the two-step quantitative analysis. The two-step impairment test is used
to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to
be recognized (if any). First, the Company determines the fair value of a reporting unit and compares
it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill
over the implied fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The
residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
The annual impairment test is based on an evaluation of estimated future discounted cash flows.
The Company also uses the market approach as part of their impairment analysis. The estimated
discounted cash flows are based on the best information available, including supportable
assumptions and projections we believe are reasonable. Our discounted cash flow estimates use
discount rates that correspond to a weighted-average cost of capital consistent with a market-
participant view. The discount rates are consistent with those used for investment decisions and take
into account the operating plans and strategies of our operating segments. Certain other key
assumptions utilized, including changes in membership, premium, health care costs, operating
expenses, fees, assessments and taxes and effective tax rates, are based on estimates consistent
with those utilized in our annual budgeting and planning process that we believe are reasonable.
However, if we do not achieve the results reflected in the assumptions and estimates, our goodwill
impairment evaluations could be adversely affected, and we may impair a portion of our goodwill,
which would adversely affect our operating results in the period of impairment. Impairments, if any,
would be classified as an operating expense.
Claim Liabilities
Managed care claim liabilities mostly represent the Company’s estimate of medical costs incurred
but not yet paid to providers based on experience and accumulated statistical data. Loss-adjustment
expenses related to such claims are currently accrued based on estimated future expenses
necessary to process such claims. Claim liabilities are the most significant estimate included in our
consolidated financial statements. Such estimate is developed consistently using standard actuarial
methodologies based upon key assumptions, which vary by business segment. The most significant
assumptions used in the development of managed care claim liabilities include current payment
experience, trend factors, and completion factors. Managed care trend factors in our standard
actuarial methodologies include contractual requirements, historic utilization trends, the interval
between the date services are rendered and the date claims are paid, denied claims activity, disputed
53
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
claims activity, benefit changes, expected health care cost inflation, seasonality patterns, maturity of
lines of business, changes in membership and other factors.
Managed care claim liabilities also include a provision for adverse deviation, which is an estimate for
known environmental factors that are reasonably likely to affect the required level of reserves. This
provision for adverse deviation is intended to capture the potential adverse development from known
environmental factors such as our entry into new geographical markets, changes in our geographic
or product mix, the introduction of new customer populations, variation in benefit utilization, disease
outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim
submission patterns and variation in claims processing speed and payment patterns, changes in
technology that provide faster access to claims data or change the speed of adjudication and
settlement of claims, variability in claim inventory levels, non-standard claim development, and/or
exceptional situations that require judgmental adjustments in setting the reserves for claims.
The Company contracts with various independent practice associations (IPAs) for certain medical
care services provided to certain policies subscribers. The IPAs are compensated on a capitation
basis and capitation payables are included within claim liabilities. Capitation is amounts paid to the
aforementioned IPAs on a fixed-fee per member per month basis.
Claim liabilities also include unpaid claims and loss-adjustment expenses of the life and accident and
health segment based on a case-basis estimate for reported claims, and on estimates, based on
experience, for unreported claims and loss-adjustment expenses. The liability for policy and contract
claims and claims expenses has been established to cover the estimated net cost of insured claims.
Also included within the claim liabilities is the liability for losses and loss-adjustment expenses for
the property and casualty segment which represents individual case estimates for reported claims
and estimates for unreported losses, net of any salvage and subrogation based on past experience
modified for current trends and estimates of expenses for investigating and settling claims.
Claim liabilities are necessarily based on estimates and, while management believes that the
amounts are adequate, the ultimate liability may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the resulting liability are continually
reviewed, and any adjustments are reflected in the consolidated statements of earnings in the period
determined.
Future Policy Benefits
The liability for future policy benefits has been computed using the level-premium method based on
estimated future investment yield, mortality, morbidity and withdrawal experience. Mortality has been
calculated on select and ultimate tables in common usage in the industry, modified by the Company’s
experience. Morbidity has been calculated based upon industry tables, modified by the Company’s
experience; as well as, withdrawals that have been estimated principally based on industry tables,
modified by Company’s experience. Assumptions are established at the time the policy is issued
and are generally not changed during the life of the policy. The Company periodically reviews the
adequacy of reserves for these policies on an aggregate basis using actual experience. If actual
experience is significantly adverse compared to the original assumptions and a premium deficiency
is determined to exist, any remaining unamortized DPAC balance would be expensed to the extent
not recoverable and the establishment of a premium deficiency reserve may be required. The interest
rate assumption is 4.40% for 2019 and ranges from 3.90% to 5.75% for 2018 and 2017.
54
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Policyholder Deposits
Amounts received for annuity contracts are considered deposits and recorded as a liability along with
the accrued interest and reduced for charges and withdrawals. Interest incurred on such deposits,
which amounted to $2,639, $2,615, and $2,798, during the years ended December 31, 2019, 2018,
and 2017, respectively, is included within the interest expense in the accompanying consolidated
statements of earnings.
Policyholder account balances for universal life and interest sensitive products are equal to policy
account values. The policy account primarily comprises cumulative deposits received and interest
credited to the policyholder less cumulative contract benefits, surrenders, withdrawals, maturities
and contract charges for mortality or administrative expenses. Interest rates credited to policyholder
account balances during 2019 and 2018 ranged from 2.0% to 4.5% for universal life and interest
sensitive products. The universal life and interest sensitive products represented $91,694 and
$83,563 of the policyholder deposits balance on the consolidated balance sheets as of December
31, 2019 and 2018, respectively.
Reinsurance
In the normal course of business, the insurance-related subsidiaries seek to limit their exposure that
may arise from catastrophes or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or
reinsurers.
Prospective reinsurance premiums, commissions, and expense reimbursements, related to
reinsured business are accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Accordingly, reinsurance
premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract
period in proportion to the amount of insurance protection provided.
Premiums ceded and recoveries of losses and loss-adjustment expenses under prospective
reinsurance treaties have been reported as a reduction of premiums earned and losses and loss-
adjustment expenses incurred, respectively. Property and casualty commission and expense
allowances received in connection with reinsurance ceded have been accounted for as a reduction
of the related policy acquisition costs and are deferred and amortized accordingly. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim liability associated
with the reinsured policy and are presented within premium and other receivables, net in the
accompanying consolidated balance sheets. As of December 31, 2019, there were no outstanding
advances received for hurricane related claims. As of December 31, 2018, accounts payable and
accrued liabilities within the accompanying consolidated balance sheets include $2,712 of
outstanding advances received for hurricane related claims.
Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past
insurable events covered under contracts subject to the reinsurance. In certain instances,
reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and where
practical the Company bifurcates the prospective and retrospective elements of these reinsurance
contracts and accounts for each element separately. Initial gains in connection with retroactive
reinsurance contracts are deferred and amortized into income over the settlement period while losses
are recognized immediately. When changes in the estimated amount recoverable from the reinsurer
or in the timing of receipts related to that amount occur, a cumulative amortization adjustment is
recognized in earnings in the period of the change so that the deferred gain reflects the balance that
would have existed had the revised estimate been available at the inception of the reinsurance
55
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
transaction. The Company uses the recovery method to amortize any deferred gain, which is
included within the claims incurred in the accompanying consolidated statements of earnings. The
recovery method provides an amortization in proportion to the estimated recoveries made as of each
reporting date as a percentage of total estimated recoveries. No deferred gain was amortized into
operations during the years ended December 31, 2019 and 2018.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the consolidated statements of earnings in the period that
includes the enactment date. The Company recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained. Recognized income tax positions are
measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in circumstances occurs.
The Company records any interest and penalties related to unrecognized tax benefits within the
operating expenses in the consolidated statement of earnings.
Health Insurance Providers Fee
The Patient Protection and Affordable Care Act as amended by the Health Care and Education
Reconciliation Act mandates an annual Health Insurance Providers Fee (HIP Fee). The annual HIP
Fee becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S.
health risk each applicable calendar year. The initial estimated annual fee is accrued as of January
1, with a corresponding deferred cost that is amortized over 12 months on a straight-line basis. The
fee payment is due on September 30 of each year. The Company incurred approximately $50,100
of such fee in 2018, which is presented within operating expenses in the accompanying consolidated
statements of earnings. The HIP Fee was waived for all health insurance providers during the years
ended December 31, 2019 and 2017. The Taxpayer Certainty and Disaster Tax Relief Act of 2019
and the Further Consolidated Appropriations Act, 2020, signed into law on December 20, 2019,
repealed the HIP Fee effective calendar years beginning after December 31, 2020.
Insurance-Related Assessments
The Company records a liability for insurance-related assessments when the following three
conditions are met: (1) the assessment has been imposed or the information available prior to the
issuance of the consolidated financial statements indicates it is probable that an assessment will be
imposed; (2) the event obligating an entity to pay (underlying cause of) an imposed or probable
assessment has occurred on or before the date of the consolidated financial statements; and (3) the
amount of the assessment can be reasonably estimated. A related asset is recognized when the
paid or accrued assessment is recoverable through either premium taxes or policy surcharges. As
of December 31, 2019, the Company had accrued $1,629 within accounts payable and accrued
liabilities in the consolidated balance sheets. As of December 31, 2018, there was no accrued
balance related to insurance assessments.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and
other sources are recorded when it is probable that a liability has been incurred and the amount of
56
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection
with loss contingencies are expensed as incurred. Recoveries of costs from third parties, which are
probable of realization, are separately recorded as assets, and are not offset against the related
liability.
Share-Based Compensation
Share-based compensation is measured at the fair value of the award and recognized as an expense
in the consolidated financial statements over the vesting period.
Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding for the
period, excluding non-vested restricted stocks. Diluted earnings per share is computed in the same
manner as basic earnings per share except that the number of shares is increased to include the
number of additional common shares that would have been outstanding if the potentially dilutive
common shares had been issued. Dilutive common shares are included in the diluted earnings per
share calculation using the treasury stock method.
Recently Adopted Accounting Standards
On February 25, 2016, the Financial Accounting Standards Board (FASB) issued guidance to
increase transparency and comparability among organizations by requiring the recognition of a lease
right-of-use (ROU) asset and a lease liability, initially measured at the present value of the lease
payment on the balance sheet, for both finance and operating leases with lease terms of more than
12 months. The classification of finance or operating will determine whether lease expense is
recognized based on an effective interest method or on a straight-line basis over the term of the
lease, respectively. Lessors are required to account for leases using an approach that is
substantially equivalent to existing guidance for sales-type leases, direct financing leases and
operating leases. In July 2018, the FASB issued the following guidance “Leases – Targeted
Improvements” and “Codification Improvement to Leases” to assist in the implementation of leases
and address certain technical corrections and improvement to the recently issued lease standard.
Amendments include an additional transition method that allows entities to apply the new standard
on the adoption date and recognize a cumulative effect adjustment to the opening balance of retained
earnings, as well as a new practical expedient for lessors and other implementation considerations.
For public companies, the amended guidance is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The Company adopted the standard
effective January 1, 2019 recognizing approximately $8,800 in ROU assets and lease liabilities for
its operating leases in its consolidated balance sheet. ROU assets are included within the other
assets and the lease liabilities are included within the accounts payable and accrued liabilities line
items in the accompanying consolidated balance sheet. No cumulative effect adjustment to opening
balance of retained earnings on the adoption date was required. Most of the operating leases are
related to real estate. The Company adopted the following two accounting policies as a result of the
adoption of the standard: (1) to not separate lease components from non-lease components and (2)
to not apply the recognition requirements of ASC 842 to short-term leases. In addition, the Company
implemented control processes and procedures, as necessary, based on changes resulting from the
new standard.
On March 5, 2019, the FASB issued guidance for Leases (Topic 842): Codification Improvements.
The amendments in this update include issues brought to the FASB’s attention through interactions
with stakeholders in order to clarify its intent when applying the guidance. The issues were: (1)
determining the fair value of the underlying asset by lessors that are not manufacturers or dealers;
57
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
(2) presentation on the statement of cash flows of sales type and direct financing leases; and (3)
transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The
amendments in this update for Issue 1 affect all lessors that are not manufacturers or dealers. Issue
2 affects all lessors that are depository and lending entities within the scope of Topic 942, and Issue
3 affect all entities that are lessees or lessors. For public companies, the amendments for Issue 1
and Issue 2, will be effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. The amendments for Issue 3 are effective to the original transition
requirements on Topic 842 and were implemented in January 1, 2019. The adoption of this guidance
did not have a material impact on the presentation of the Company’s consolidated result of
operations.
Future Adoptions of Accounting Standards
On June 16, 2016, the 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 ASU
2019-04: Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815,
Derivatives and Hedging, and Topic 825, Financial Instruments. The amendment 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
will not have a material impact from the implementation of this guidance in the consolidated financial
statements.
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. Upon adoption of this standard, if the carrying
amount of any of the reporting units exceed its fair value, the Company would be required to record
an impairment charge for the difference up to the amount of the goodwill.
On August 15, 2018, the FASB issued guidance for Financial Services – Insurance: Targeted
Improvements to the Accounting for Long-Duration Contracts which provides meaningful
improvements to the existing revenue recognition, measurement, presentation, and disclosure
requirements for long-duration contracts issued by an insurance entity. The amendments improve
58
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
the timeliness of recognizing changes in the liability for future policy benefits and modify rate used to
discount future cash flows, simplify and improve the accounting for certain market-based options or
guarantees associated with deposit contracts, simplify the amortization of deferred acquisition costs,
and improves the effectiveness of the required disclosures. Specifically, this guidance requires an
insurance entity to review and update, if needed, the assumptions used to measure cash flows and
discount rate at each reporting date, measure all market risk benefits associated with deposit and
disclose liability rollforwards and information about significant inputs, judgments, assumptions, and
methods used in measurement, including changes thereto and the effect of those changes on
measurement. Additionally, the amendment simplifies the amortization of deferred acquisition costs
and other balances amortized in proportion to premiums, gross profits, or gross margins, and
requires that those balances be amortized on a constant level basis over the expected term of the
related contracts. For public companies, these amendments will be applied for fiscal years beginning
after December 15, 2021. We are currently evaluating the impact the adoption of this guidance may
have on the Company’s consolidated financial statements.
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 it modifies and adds certain other disclosures (the 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 adoption of this guidance will not have a material impact on the presentation and disclosures of
the Company’s consolidated financial statements.
On August 28, 2018, the FASB issued guidance for Compensation – Retirement Benefits – Defined
Benefit Plans – General which addresses changes to the disclosure requirement for defined benefit
plans. The amendments in this guidance modify the disclosure requirements for employers that
sponsor defined benefit pension or other postretirement plans. Specifically certain disclosure
requirements are removed (i.e. the amounts of accumulated other comprehensive income expected
to be recognized as components of net periodic benefit cost over the next fiscal year, related party
disclosures concerning the amount of future annual benefits covered by an insurance and annuity
contracts and significant transactions between the employer and related parties and the plan) while
certain other disclosures are added (i.e. the weighted-average interest crediting rates for cash
balance plans and other plans with promised interest crediting rates, an explanation for the reasons
for significant gains and losses related to changes in the benefit obligation for the period). For public
companies, these amendments, will be applied for fiscal years beginning after December 15, 2020.
The adoption of this guidance should not have a material impact on the presentation and disclosures
of the Company’s consolidated financial statements.
59
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
On August 29, 2018, the FASB issued guidance for Intangibles – Goodwill and Other – Internal-Use
Software. Guidance addresses customer’s 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 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 adoption of this guidance will not have a material impact on the results of the Company’s
consolidated financial statements.
On December 18, 2019, the FASB issued Accounting Standard Update (ASU) 2019-12: Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update
simplify the accounting for income taxes by removing certain exceptions to the general principles in
Topic 740. Also, the amendments simplify the accounting for income taxes by requiring the following:
(1) that an entity recognize a franchise tax that is partially based on income in accordance with Topic
740 and account for any incremental amount incurred as a non-income-based tax; (2) that an entity
evaluate when a step up in the tax basis of goodwill should be considered part of the business
combination in which the book goodwill was originally recognized and when it should instead be
considered a separate transaction; and (3) that an entity reflect the effect of an enacted change in
tax laws or rates in the annual effective tax rate computation in the interim period that included the
enactment date. For public companies, these amendments are effective for fiscal years beginning
after December 15, 2020, including interim periods within those fiscal years. We are currently
evaluating the impact the adoption of this guidance may have on the Company’s consolidated
financial statements.
On January 16, 2020, the FASB issued guidance to clarify the interaction between the accounting
standards on recognition and measurement of financial instruments in Topic 321: Investments –
Equity Securities, the one on equity method investments in Topic 323: Investments – Equity Method
and Joint Ventures, and forward contracts and purchased options in Topic 815: Derivatives and
Hedging. The amendments clarify that a company upon an increase or decrease in level of ownership
or degree of influence should remeasured the interest held in the investee to take into account
observable transactions immediately before applying or discontinuing the equity method of
accounting under Topic 323. The guidance also clarifies that an entity should not consider whether,
upon the settlement of the forward contract or exercise of the purchase option, individually of with
existing investments, the underlying securities would be accounted for under the equity method in
Topic 323 or the fair value option. For public companies, these amendments are effective for fiscal
years beginning after December 15, 2020, including interim periods within those fiscal years. We are
currently evaluating the impact the adoption of this guidance may have on the Company’s
consolidated financial statements.
Other than the accounting pronouncements disclosed above, there were no other new accounting
pronouncements issued during the year that could have a material impact on the Corporation’s
financial position, operating results or financials statement disclosures.
60
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
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 as of December 31, were as follows:
Fixed maturities available for sale
Obligations of government-
sponsored enterprises
U.S. Treasury securities and
obligations of U.S.
government instrumentalities
Municipal securities
Corporate bonds
Residential mortgage-backed securities
Collateralized mortgage obligations
2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
17,209
$
477
$
-
$
17,686
102,230
595,051
187,096
262,783
8,674
4,779
34,735
21,721
8,073
471
-
(22)
(74)
(320)
-
107,009
629,764
208,743
270,536
9,145
Total fixed maturities available for sale
$
1,173,043
$
70,256
$
(416)
$
1,242,883
Fixed maturities available for sale
Obligations of government-
sponsored enterprises
U.S. Treasury securities and
obligations of U.S.
government instrumentalities
Obligations of the
Commonwealth of Puerto Rico
and its instrumentalities
Municipal securities
Corporate bonds
Residential mortgage-backed securities
Collateralized mortgage obligations
2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
21,470
$
120
$
(1)
$
21,589
174,675
2,349
-
177,024
8,295
692,205
186,085
75,373
10,266
-
18,112
9,724
1,298
208
-
(538)
(239)
-
-
8,295
709,779
195,570
76,671
10,474
Total fixed maturities available for sale
$
1,168,369
$
31,811
$
(778)
$
1,199,402
61
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
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 instrumentalties
Residential mortgage-backed securities
Certificates of deposits
Total
Fixed maturities held to maturity
U.S. Treasury securities and
obligations of U.S.
government instrumentalties
Residential mortgage-backed securities
Certificates of deposits
Total
$
$
$
615
165
1,080
1,860
158
1
-
159
-
$
-
-
$
-
773
166
1,080
2,019
$
$
$
2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$
617
190
1,685
2,492
125
2
-
127
-
$
-
-
$
-
742
192
1,685
2,619
$
$
$
Other invested assets - Alternative investments
$
97,575
$
3,721
$
(788)
cost
gains
losses
fair value
$
100,508
Amortized
unrealized
unrealized
Estimated
2019
Gross
Gross
Other invested assets - Alternative investments
$
72,627
$
2,042
cost
gains
losses
$
(654)
fair value
$
74,015
Amortized
unrealized
unrealized
Estimated
2018
Gross
Gross
62
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
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 December 31, were as follows:
Less than 12 months
12 months or longer
Gross
Gross
Total
Gross
Estimated Unrealized Number of
Estimated Unrealized Number of
Estimated Unrealized Number of
Fair Value
Loss
Securities
Fair Value
Loss
Securities
Fair Value
Loss
Securities
2019
Fixed maturities available for sale
Municipal securities
Corporate bonds
Residential mortgage-backed
securities
Total fixed maturities
$
10,656
5,047
$
(22)
(74)
3
1
-
$
-
-
$
-
79,902
(320)
$
95,605
$
(416)
16
20
-
-
$
-
$
-
-
-
-
-
$
10,656
5,047
$
(22)
(74)
79,902
(320)
$
95,605
$
(416)
Other invested assets - Alternative investments
$
24,437
$
(605)
8
$
10,580
$
(183)
1
$
35,017
$
(788)
3
1
16
20
9
2018
Less than 12 months
12 months or longer
Gross
Gross
Total
Gross
Estimated Unrealized Number of Estim ated Unrealized Number of Estimated Unrealized Number of
Fair Value
Loss
Securities Fair Value
Loss
Securities Fair Value
Loss
Securities
Fixed maturities available for sale
Obligations of government-
sponsored enterprises
Municipal securities
Corporate bonds
$
1,469
$
(1)
62,328
52,539
(349)
(239)
Total fixed maturities
$
116,336
$
(589)
1
10
18
29
$
-
$
-
17,648
(189)
-
-
$
17,648
$
(189)
Other invested assets - Alternative investments
$
7,399
$
(351)
3
$
10,447
$
(303)
-
3
-
3
2
$
1,469
$
(1)
79,976
52,539
(538)
(239)
$
133,984
$
(778)
$
17,846
$
(654)
1
13
18
32
5
The Company regularly monitors and evaluates the difference between the amortized cost and
estimated fair value of fixed maturity securities. For fixed maturity securities with a fair value below
amortized cost, the process includes evaluating: (1) the length of time and the extent to which the
estimated fair value has been less than amortized cost, (2) the financial condition, near-term and
long-term prospects for the issuer, including relevant industry conditions and trends, and implications
of rating agency actions, (3) the Company’s intent to sell or the likelihood of a required sale prior to
recovery, (4) the recoverability of principal and interest, and (5) other factors, as applicable. This
process is not exact and requires further consideration of risks such as credit and interest rate risks.
Consequently, if an investment’s cost exceeds its estimated fair value solely due to changes in
interest rates, other-than temporary impairment may not be appropriate.
Due to the subjective nature of the Company’s analysis, along with the judgment that must be applied
in the analysis, it is possible that the Company could reach a different conclusion whether or not to
impair a security if it had access to additional information about the investee. Additionally, it is
possible that the investee’s ability to meet future contractual obligations may be different than what
the Company determined during its analysis, which may lead to a different impairment conclusion in
future periods.
If after monitoring and analyzing impaired securities, the Company determines that a decline in the
estimated fair value of any available-for-sale or held-to-maturity security below cost is other-than-
temporary, the carrying amount of the security is reduced to its fair value in accordance with current
accounting guidance. The new cost basis of an impaired security is not adjusted for subsequent
increases in estimated fair value. In periods subsequent to the recognition of an other-than-
63
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
temporary impairment, the impaired security is accounted for as if it had been purchased on the
measurement date of the impairment. The discount (or reduced premium) based on the new cost
basis may be accreted into net investment income in future periods based on prospective changes
in cash flow estimates, to reflect adjustments to the effective yield.
The Company’s process for identifying and reviewing available for sale and other invested assets for
other-than-temporary impairments during any quarter includes the following:
•
Identification and evaluation of securities that have possible indications of other-than-temporary
impairment, which includes an analysis of all investments with gross unrealized investment
losses that represent 20% or more of their cost and all investments with an unrealized loss greater
than $100;
• For any securities with a gross unrealized investment loss we might review and evaluate
investee’s current financial condition, liquidity, near-term recovery prospects, implications of
rating agency actions, the outlook for the business sectors in which the investee operates and
other factors;
• Consideration of evidential matter, including an evaluation of factors or triggers that may or may
not cause individual investments to qualify as having other-than-temporary impairments; and
• Determination of the status of each analyzed security as other-than-temporary or not, with
documentation of the rationale for the decision.
The Company reviews the available for sale and other invested assets portfolios under the
Company’s impairment review policy. Given market conditions and the significant judgments
involved, there is a continuing risk that declines in fair value may occur and material other-than-
temporary impairments may be recorded in future periods. The Company from time to time may sell
investments as part of its asset/liability management process or to reposition its investment portfolio
based on current and expected market conditions.
Municipal Securities: The unrealized losses of these securities were mainly caused by fluctuations
in interest rates and general market conditions. The contractual terms of these investments do not
permit the issuer to settle the securities at a price less than the par value of the investment. In
addition, these investments have investment grade ratings. Because the decline in fair value is
attributable to changes in interest rates and not credit quality; because the Company does not intend
to sell the investments and it is not more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost basis, which may be maturity; and because the
Company expects to collect all contractual cash flows, these investments are not considered other-
than-temporarily impaired.
Corporate Bonds: The unrealized losses of these bonds were principally caused by fluctuations in
interest rates and general market conditions. All corporate bonds with an unrealized loss have
investment grade ratings. Because the decline in estimated fair value is principally attributable to
changes in interest rates; because the Company does not intend to sell the investments and it is not
more likely than not that the Company will be required to sell the investments before recovery of their
amortized cost basis, which may be maturity; and because the Company expects to collect all
contractual cash flows, these investments are not considered other-than-temporarily impaired.
Residential mortgage-backed securities: 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),
64
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of
our securities reflects the seniority of the securities that the Company owns. The Company does not
consider these investments other-than-temporarily impaired because the decline in fair value is
attributable to changes in interest rates and not credit quality; the Company does not intend to sell
the investments and it is more likely than not that the Company will not be required to sell the
investments before recovery of their amortized cost basis, which may be maturity; and because the
Company expects to collect all contractual cash flows.
Alternative Investments: As of December 31, 2019, alternative investments with unrealized losses
are not considered other-than-temporarily impaired based on market conditions and the length of
time the funds have been in a loss position.
Maturities of investment securities classified as available for sale and held to maturity at December
31, 2019 were as follows:
Securities available for sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed securities
Collateralized mortgage obligations
Securities held to maturity
Due in one year or less
Due after five years through ten years
Residential mortgage-backed securities
Amortized
Cost
Estimated
Fair Value
$
5,420
441,969
241,081
213,116
262,783
8,674
$
5,539
459,711
257,294
240,658
270,536
9,145
$
1,173,043
$
1,242,883
$
1,080
615
165
$
1,080
773
166
$
1,860
$
2,019
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 $6,940 and $7,982 (fair value of $7,274 and $8,217) at
December 31, 2019 and 2018, respectively, were deposited with the Commissioner of Insurance to
comply with the deposit requirements of the Insurance Code of the Commonwealth of Puerto Rico
(the Insurance Code).
Investments with an amortized cost of $145,981 and a fair value of $152,916 at December 31, 2019
are pledged with the Federal Home Loan Bank of New York (FHLBNY) to secure short-term
borrowings.
65
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
4.
Realized and Unrealized Gains
Information regarding realized and unrealized gains and losses from investments for the years ended
December 31, is as follows:
2019
2018
2017
Realized gains (losses)
Fixed maturity securities:
Securities available for sale
Gross gains
Gross losses
$
3,844
(387)
$
3,730
(18,627)
$
1,460
(2,176)
Total fixed maturity securities
3,457
(14,897)
(716)
Equity investments:
Gross gains
Gross losses
Gross losses from other-than-temporary
impairments
Total equity investments
Other invested assets:
Gross gains
Gross losses
Total other invested assets
3,056
(1,669)
-
1,387
1,055
(56)
999
16,045
(2,290)
-
13,755
1,492
(52)
1,440
12,154
(558)
(49)
11,547
-
-
-
Net realized gains on securities
$
5,843
$
298
$
10,831
2019
2018
2017
Changes in unrealized gains (losses)
Recognized in accumulated other
comprehensive income (loss)
Fixed maturities – available for sale
Other invested assets
Equity securities
Not recognized in the consolidated
financial statements
$
38,807
1,545
-
$
(14,104)
1,073
-
$
(2,203)
-
20,514
Fixed maturities – held to maturity
$
32
$
(29)
$
(20)
The change in deferred tax asset (liability) on unrealized gains (losses) recognized in accumulated
other comprehensive income during the years 2019, 2018, and 2017 was $(8,206) $2,292, and
$(3,846), respectively.
As of December 31, 2019 and 2018 no individual investment in securities exceeded 10% of
stockholders’ equity.
66
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
5.
Net Investment Income
Interest and/or dividend income for the years ended December 31 were are as follows:
Fixed maturities
Equity securities
Other invested assets
Policy loans
Cash equivalents and
interest-bearing deposits
Other
2019
2018
2017
$
42,005
12,453
3,436
761
$
43,873
12,261
1,679
754
$
38,414
10,728
-
709
1,602
1,750
1,407
1,935
798
966
Total
$
62,007
$
61,909
$
51,615
6.
Premium and Other Receivables, Net
Premium and other receivables, net as of December 31 were as follows:
Premium
Self-funded group receivables
FEHBP
Agent balances
Accrued interest
Reinsurance recoverable
Other
Less allowance for doubtful receivables:
Premium
Other
2019
2018
$
188,861
28,672
13,894
30,784
11,307
239,767
110,952
$
94,613
31,184
14,030
30,224
12,426
399,202
88,807
624,237
670,486
36,622
19,923
56,545
32,487
9,555
42,042
Premium and other receivables, net
$
567,692
$
628,444
As of December 31, 2019 and 2018, the Company had premiums and other receivables of $49,176
and $54,329, respectively, from the Government of Puerto Rico, including its agencies, municipalities
and public corporations. The related allowance for doubtful receivables as of December 31, 2019
and 2018 were $22,091 and $20,984, respectively.
Reinsurance recoverable as of December 31, 2019 and 2018 includes $189,621 and $350,353
related to expected catastrophe losses covered by the Property and Casualty segment’s reinsurance
program, reflecting the anticipated gross losses related to Hurricanes Irma and Maria, which made
landfall in Puerto Rico during the month of September 2017.
67
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
7.
Deferred Policy Acquisition Costs and Value of Business Acquired
The change in deferred policy acquisition costs (DPAC) and value of business acquired (VOBA) for
the years ended December 31 is summarized as follows:
Balance, December 31, 2016
$
168,625
$
26,162
$
194,787
DPAC
VOBA
Total
Additions
VOBA interest at an average rate of 5.17%
Amortization
Net change
Balance, December 31, 2017
Additions
VOBA interest at an average rate of 5.11%
Amortization
Net change
Balance, December 31, 2018
Additions
VOBA interest at an average rate of 4.53%
Amortization
Net change
48,701
-
(39,605)
9,096
177,721
51,144
-
(35,005)
16,139
193,860
59,399
-
(37,496)
21,903
-
1,253
(4,348)
(3,095)
23,067
-
1,120
(2,888)
(1,768)
48,701
1,253
(43,953)
6,001
200,788
51,144
1,120
(37,893)
14,371
21,299
215,159
-
1,031
(3,208)
(2,177)
59,399
1,031
(40,704)
19,726
Balance, December 31, 2019
$
215,763
$
19,122
$
234,885
A portion of the amortization of the DPAC and VOBA is recorded as an amortization expense and
included within the operating expenses in the accompanying consolidated statements of earnings.
The remaining portion of the DPAC and VOBA amortization includes the unrealized investment gains
and losses that would have been amortized if such gains and losses had been realized, which for
the years ended December 31, 2019 and 2018 amounted to $(2,028) and $2,113, respectively, and
is included within the unrealized gains on securities component of other comprehensive income.
The estimated amount of the year-end VOBA balance expected to be amortized during the next five
years is as follows:
Year ending December 31:
2020
2021
2022
2023
2024
$
2,766
1,996
1,773
1,575
1,407
68
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
8.
Property and Equipment, Net
Property and equipment, net as of December 31 are composed of the following:
Land
Buildings and leasehold improvements
Office furniture and equipment
Computer equipment and software
Automobiles
Less accumulated depreciation and amortization
2019
2018
$
10,976
92,752
27,878
133,922
761
266,289
177,701
$
10,976
68,424
39,421
137,183
795
256,799
174,876
Property and equipment, net
$
88,588
$
81,923
The Company recognized depreciation expense on property and equipment of $13,880, $12,583,
and $11,930 for the years ended December 31, 2019, 2018, and 2017, respectively.
9.
Goodwill
Certain business combination transactions have resulted in goodwill, which represents the excess of
the acquisition cost over the fair value of net assets acquired, and is assigned to reporting units.
Goodwill recorded as of December 31, 2019 and 2018 was $28,599 and $25,397, respectively, which
mostly all is attributable to the Medicare Advantage reporting unit within the Managed Care segment.
In an effort to expand the health clinics reporting unit, the Company purchased on April 1, 2019
various health clinics across different municipalities in Puerto Rico, resulting in a recognition of
goodwill of $3,202 in 2019. The fair values initially assigned to the assets acquired and liabilities
assumed are preliminary and are subject to refinement for up to one year after the closing date of
the acquisition as new information becomes available.
As required by accounting guidance, annual goodwill impairment tests were performed and based
on the results of the tests no impairment charge was required during the years ended December 31,
2019, 2018, and 2017. If the Company does not achieve its earnings objectives or the cost of capital
raises significantly, the assumptions and estimates underlying these impairment tests could be
adversely affected and result in future impairment charges that would negatively impact its operating
results. Cumulative goodwill impairment charges were $2,369 as of December 31, 2019 and 2018,
all related to the health clinics reporting unit.
69
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
10. Fair Value Measurements
Assets recorded at fair value in the consolidated balance sheets are categorized based upon the
level of judgment associated with the inputs used to measure their fair value. Level inputs, as
defined by current accounting guidance for fair value measurements and disclosures, are as
follows:
Level Input Definition:
Level 1
Level 2
Level 3
Inputs are unadjusted, quoted prices for identical assets or liabilities in active
markets at the measurement date.
Inputs other than quoted prices included in Level 1 that are observable for the asset
or liability through corroboration with market data at the measurement date.
Unobservable inputs that reflect management’s best estimate of what market
participants would use in pricing the asset or liability at the measurement date.
The Corporation uses observable inputs when available. Fair value is based upon quoted market
prices when available. The Corporation limits valuation adjustments to those deemed necessary to
ensure that the security’s fair value adequately represents the price that would be received or paid
in the marketplace. Valuation adjustments may include consideration of counterparty credit quality
and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and
may involve uncertainties and matters of significant judgment for certain financial instruments.
Changes in the underlying assumptions used in estimating fair value could affect the results. The
fair value measurement levels are not indicative of risk of investment.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s
best estimate of what a market participant would use to determine a current transaction price,
become more or less significant to the fair value measurement. Transfers between levels, if any, are
recorded as of the actual date of the event or change in circumstance that caused the transfer. There
were no transfers between Levels 1 and 2 during the years ended December 31, 2019 and 2018.
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 years ended December 31 is as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance as of January 1,
Unrealized gain in other accumulated
comprehensive income
Purchases
Balance as of December 31,
2019
2018
$
3,805
$
-
154
1,250
-
3,805
$
5,209
$
3,805
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.
70
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The following table summarizes fair value measurements by level at December 31, for assets
measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Total
2019
Fixed maturity securities available for sale
Obligations of government-sponsored
enterprises
U.S. Treasury securities and obligations
of U.S. government instrumentalities
Municipal securities
Corporate bonds
Residential agency mortgage-backed securities
Collaterized mortgage obligations
Total fixed maturities
$
-
$
17,686
$
-
$
17,686
107,009
-
-
-
-
107,009
$
-
629,764
208,743
270,536
9,145
1,135,874
$
-
-
-
-
-
107,009
629,764
208,743
270,536
9,145
1,242,883
$
$
-
Equity investments
$
177,136
$
105,180
$
5,209
$
287,525
Level 1
Level 2
Level 3
Total
2018
Fixed maturity securities available for sale
Obligations of government-sponsored
enterprises
U.S. Treasury securities and obligations
of U.S. government instrumentalities
Obligations of the Commonwealth of
Puerto Rico and its instrumentalities
Municipal securities
Corporate bonds
Residential agency mortgage-backed securities
Collaterized mortgage obligations
Total fixed maturities
$
-
$
21,589
$
-
$
21,589
177,024
-
-
-
-
-
-
177,024
$
8,295
709,779
195,570
76,671
10,474
1,022,378
$
-
-
-
-
-
-
177,024
8,295
709,779
195,570
76,671
10,474
1,199,402
$
$
-
Equity investments
$
147,348
$
128,011
$
3,805
$
279,164
The fair value of fixed maturity and equity securities included in the Level 2 category were based on
market values obtained from independent pricing services, which use previously evaluated pricing
models that vary by asset class and incorporate available trade, bid and other market information
and for structured securities, cash flow and when available loan performance data. Because many
fixed income securities do not trade on a daily basis, the models used by independent pricing service
providers to prepare evaluations apply available information, such as benchmark curves,
benchmarking of like securities, sector groupings, and matrix pricing. For certain equity securities,
quoted market prices for the identical security are not always available and the fair value is estimated
by reference to similar securities for which quoted prices are available. The independent pricing
service providers monitor market indicators, industry and economic events, and for broker-quoted
only securities, obtain quotes from market makers or broker-dealers that they recognize to be market
participants. The fair value of an equity security included in level 3 was based using the NAV of the
Company’s ownership interest in the partnership.
71
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance
sheets, accounting guidance also requires the disclosure of fair values for certain other financial
instruments for which it is practicable to estimate fair value, whether or not such values are
recognized in the consolidated balance sheets.
Non-financial instruments such as property and equipment, other assets, deferred income taxes and
intangible assets, and certain financial instruments such as claim liabilities are excluded from the fair
value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our
underlying economic value.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents,
receivables, accounts payable and accrued liabilities, and short-term borrowings approximate fair
value because of the short-term nature of these items.
The following methods, assumptions and inputs were used to estimate the fair value of each class
of these Level 2 financial instruments:
(i) Policy Loans
Policy loans have no stated maturity dates and are part of the related insurance contract. The
carrying amount of policy loans approximates fair value because their interest rate is reset
periodically in accordance with current market rates.
(ii) Policyholder Deposits
The fair value of policyholder deposits is the amount payable on demand at the reporting date, and
accordingly, the carrying value amount approximates fair value.
(iii) Long-term Borrowings
The carrying amount of the loans payable to bank approximates fair value due to its floating interest-
rate structure.
72
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
11. Claim Liabilities and Claim Adjustment Expenses
A reconciliation of the beginning and ending balances of claim liabilities in 2019, 2018 and 2017 is
as follows:
2019
Other
Business
Segments *
Managed
Care
Consolidated
Claim liabilities at beginning of year
Reinsurance recoverable on claim liabilities
$
394,226
-
$
542,563
(315,543)
$
936,789
(315,543)
Net claim liabilities at beginning of year
394,226
227,020
621,246
Claims incurred
Current period insured events
Prior period insured events
Total
Payments of losses and loss-adjustment
expenses
Current period insured events
Prior period insured events
Total
Net claim liabilities at end of year
Reinsurance recoverable on claim liabilities
2,556,027
(29,344)
2,526,683
110,513
(5,191)
105,322
2,666,540
(34,535)
2,632,005
2,293,251
286,381
2,579,632
341,277
-
61,966
39,412
101,378
230,964
137,017
2,355,217
325,793
2,681,010
572,241
137,017
Claim liabilities at end of year
$
341,277
$
367,981
$
709,258
73
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
2018
Other
Business
Segments *
Managed
Care
Consolidated
Claim liabilities at beginning of year
Reinsurance recoverable on claim liabilities
$
367,357
-
$
739,519
(633,099)
$
1,106,876
(633,099)
Net claim liabilities at beginning of year
367,357
106,420
473,777
Claims incurred
Current period insured events
Prior period insured events
Total
Payments of losses and loss-adjustment
expenses
Current period insured events
Prior period insured events
Total
Net claim liabilities at end of year
Reinsurance recoverable on claim liabilities
2,308,516
(36,015)
2,272,501
1,982,372
263,260
2,245,632
394,226
-
103,368
120,961
224,329
57,260
46,469
103,729
227,020
315,543
2,411,884
84,946
2,496,830
2,039,632
309,729
2,349,361
621,246
315,543
Claim liabilities at end of year
$
394,226
$
542,563
$
936,789
2017
Other
Business
Segments *
Managed
Care
Consolidated
Claim liabilities at beginning of year
Reinsurance recoverable on claim liabilities
$
349,047
-
$
138,896
(38,998)
$
487,943
(38,998)
Net claim liabilities at beginning of year
349,047
99,898
448,945
Claims incurred
Current period insured events
Prior period insured events
Total
Payments of losses and loss-adjustment
expenses
Current period insured events
Prior period insured events
Total
Net claim liabilities at end of year
Reinsurance recoverable on claim liabilities
2,231,052
(12,782)
2,218,270
118,012
(8,975)
109,037
2,349,064
(21,757)
2,327,307
1,940,410
259,550
2,199,960
367,357
-
64,051
38,536
102,587
106,348
633,171
2,004,461
298,086
2,302,547
473,705
633,171
Claim liabilities at end of year
$
367,357
$
739,519
$
1,106,876
* Other Business Segments include the Life Insurance and Property and Casualty segments,
as well as intersegment eliminations.
74
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
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 2019 and 2017 are primarily due to better than expected utilization trends in the
Managed Care segment. The unfavorable developments in the claims incurred and loss-adjustment
expenses for prior period insured events in 2018 is driven by an adverse development of
approximately $128,678 in the Property and Casualty segment losses related to Hurricane Maria,
partially offset by better than expected utilization trends in the Managed Care segment. Reinsurance
recoverable on unpaid claims is reported within the premium and other receivables, net in the
accompanying consolidated financial statements.
The claims incurred disclosed in this table exclude the portion of the change in the liability for future
policy benefits amounting to $34,251, $30,783, and $25,794 that is included within the consolidated
claims incurred during the years ended December 31, 2019, 2018 and 2017, respectively.
The following is information about incurred and paid claims development, net of reinsurance, as of
December 31, 2019, as well as cumulative claim frequency. Additional information presented
includes total incurred-but-not-reported liabilities plus expected development on reported claims
which is included within the net incurred claims amounts.
The information about incurred and paid claims development for the year ended December 31, 2015
and previous years are presented as supplementary information and are unaudited where indicated.
The average annual percentage payout of incurred claims by age as of December 31, 2019, is
presented as required supplementary information.
Managed Care
The Company estimates its liabilities for unpaid claims following a detailed actuarial process that
entails using both historical claim payment patterns as well as emerging medical cost trends to
project a best estimate of claim liabilities. This process includes comparing the historical claims
incurred dates to the actual dates on claims payment. Completion factors are applied to claims paid
through the consolidated financial statements date to estimate the claim expense incurred for the
current period. The liability for claim adjustment expenses consists of adjustments made by our
actuaries based on their knowledge and their estimate of emerging impacts to benefit costs and
payment speed.
75
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
76
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Property and Casualty
Claims liability for Property and Casualty represents individual case estimates for reported claims
and estimates for unreported losses, net of any salvage and subrogation based on past experience
modified for current trends and estimates of expense for investigating and setting claims.
The following table includes the average annual percentage payout of incurred claims by age, net of
reinsurance, for the Property and Casualty segment, presented as required supplementary
information as of December 31, 2019:
77
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The reconciliation of the net incurred and paid claims development tables, by segment, to the liability
for claims and claim adjustment expenses in the consolidated balance sheets is as follows:
Claim liabilities as of December 31, 2019 and 2018 include approximately $241,663 and $415,900,
respectively, of gross losses related to the impact of Hurricanes Irma and Maria which made landfall
in Puerto Rico in September 2017.
12. Federal Employees’ Health Benefits (FEHBP) and Federal Employees’ (FEP) Programs
FEHBP
In prior years, TSS entered into a contract, renewable annually, with the Office of Personnel
Management (OPM) as authorized by the Federal Employees’ Health Benefits Act of 1959, as
amended, to provide health benefits under the FEHBP. The FEHBP covers postal and federal
employees residing in the Commonwealth of Puerto Rico and the USVI as well as retirees and eligible
dependents. The FEHBP is financed through a negotiated contribution made by the federal
government and employees’ payroll deductions.
The accounting policies for the FEHBP are the same as those described in the Company’s summary
of significant accounting policies. Premium rates are determined annually by TSS and approved by
the federal government. Claims are paid to providers based on the guidelines determined by the
federal government. Operating expenses are allocated from TSS’s operations to the FEHBP based
on applicable allocation guidelines (such as, the number of claims processed for each program) and
are subject to contractual expense limitations.
The operations of the FEHBP do not result in any excess or deficiency of revenue or expense as this
program has a special account available to compensate any excess or deficiency on its operations
to the benefit or detriment of the federal government. Any transfer to/from the special account
necessary to cover any excess or deficiency in the operations of the FEHBP is recorded as a
reduction/increment to the premiums earned. The contract with OPM provides that the cumulative
excess of the FEHBP earned income over health benefits charges and expenses represents a
restricted fund balance denoted as the special account. Upon termination of the contract and
78
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
satisfaction of all the FEHBP’s obligations, any unused remainder of the special reserve would revert
to the Federal Employees Health Benefit Fund. In the event that the contract terminates and the
special reserve is not sufficient to meet the FEHBP’s obligations, the FEHBP contingency reserve
will be used to meet such obligations. If the contingency reserve is not sufficient to meet such
obligations, the Company is at risk for the amount not covered by the contingency reserve.
The contract with OPM allows for the payment to the Company of service fees as negotiated between
TSS and OPM.
The Company also has funds available related to the FEHBP amounting to $65,309 and $60,959 as
of December 31, 2019 and 2018, respectively, and are included within cash and cash equivalents in
the accompanying consolidated balance sheets. Such funds are used to cover health benefits
charges, administrative expenses and service charges required by the FEHBP.
A contingency reserve is maintained by the OPM at the U.S. Treasury, and is available to the
Company under certain conditions as specified in government regulations. Accordingly, such
reserve is not reflected in the consolidated balance sheets. The balance of such reserve as of
December 31, 2019 and 2018 was $76,380 and $62,911, respectively. The Company received $27,
of payments made from the contingency reserve fund of OPM during 2017. The Company did not
receive contingency reserve payments during 2019 and 2018. During the year ended December 31,
2019 and 2018 the Company returned excess reserves of $6,006 and $23,030 to the contingency
reserve fund, respectively.
The claim payments and operating expenses charged to the FEHBP are subject to audit by the
U.S. government. Management is of the opinion that an adjustment, if any, resulting from such audits
will not have a significant effect on the accompanying consolidated financial statements. The claim
payments and operating expenses reimbursed in connection with the FEHBP have been audited
through 2011 by OPM.
FEP
In prior years, TSS entered into a contract with the BCBSA as per Contract No. C.S. 1039 with OPM
to provide health benefits under one Government-wide Service Benefit Plan as contemplated in Title
5, Chapter 89, United States Code. The FEP covers employees and annuitants residing in the
Commonwealth of Puerto Rico and the USVI as well as eligible dependents. The FEP is financed
through a negotiated contribution made by the federal government and employees’ payroll
deductions. The accounting methodology and operations of the FEP are similar to those of the
FEHBP as described before.
The claims payments and operating expenses charged to the FEP are subject to audit by the BCBSA.
Management is of the opinion that the adjustments, if any, resulting from such audits will not have a
significant effect in the accompanying consolidated financial statements. Operating expenses
reimbursed in connection with the FEP have been audited through 2013 by BCBSA.
.
79
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
13. Borrowings
Long-Term Borrowings
A summary of the borrowings entered by the Company as of December 31 is as follows:
Aggregate maturities of the Company’s borrowings as of December 31, 2019 are summarized as
follows:
Year ending December 31
2020
2021
2022
2023
2024
$
3,236
3,236
3,236
2,942
13,229
$
25,879
The Credit Agreement includes certain 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 December 31, 2019.
This credit agreement is guaranteed by a first mortgage held by the bank on the Company’s land,
building, and substantially all leasehold improvements, as collateral for the term of the loan under a
continuing general security agreement.
80
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The Company may, at its option, upon notice, as specified in the credit agreement, redeem and
prepay prior to maturity, all or any part of the loan and from time to time upon the payment of a
penalty fee of 3% during the first year, 2% during the second year and 1% during the third year, and
thereafter, at par, as specified in the credit agreement, together with accrued and unpaid interest, if
any, to the date of redemption specified by the Company.
Interest expense on the above borrowings amounted to $1,320, $1,375, and $1,196, for the years
ended December 31, 2019, 2018, and 2017, respectively.
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 the FHLBNY, repurchase
agreements, and a revolving credit facility.
•
In August 2019, TSS and 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 to the Commissioner of Insurance but
is constrained by the amount of collateral held at the FHLBNY (see Note 3). As of December
31, 2019, the borrowing capacity is approximately $82,200 for TSS and $48,900 for TSV.
The outstanding balance as of December 31, 2019 for TSS and TSV is $25,000 and $29,000,
respectively. The average interest rate of the outstanding balance as of December 31, 2019
is 1.79%.
• As of December 31, 2019, TSS has $60,000 of available credit under repurchase
agreements with broker-dealers, which are short term borrowing facilities using securities as
collateral. There are no outstanding short-term borrowings under these facilities as of
December 31, 2019.
• 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 25 basis points and contains certain
financial and non-financial covenants that are customary for this type of facility. This line of
credit matures on April 30, 2020 and has no outstanding balance as of December 31, 2019.
14. Reinsurance Activity
The effect of reinsurance on premiums earned and claims incurred is as follows:
Premiums Earned
2019
2018
2017
2019
Claims Incurred(1)
2018
2017
Gross
Ceded
Assumed
Net
$
$
3,316,802
(66,320)
2,398
3,252,880
3,009,830
(73,591)
2,352
2,938,591
$
$
2,893,765
(71,295)
4,462
2,826,932
$
$
2,645,599
(15,924)
2,330
2,632,005
$
$
2,657,639
(163,898)
3,089
2,496,830
$
$
3,010,728
(687,520)
4,099
2,327,307
$
$
(1) The claims incurred disclosed in this table exclude the portion of the change in the liability for
future policy benefits amounting to $34,251, $30,783, and $25,794 that is included within the
consolidated claims incurred during the years ended December 31, 2019, 2018 and 2017,
respectively.
81
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
TSS, TSA, TSP and TSV, in accordance with general industry practices, annually purchase
reinsurance to protect them from the impact of large unforeseen losses and prevent sudden and
unpredictable changes in net income and stockholders’ equity of the Company. Reinsurance
contracts do not relieve any of the subsidiaries from their obligations to policyholders. In the event
that all or any of the reinsuring companies might be unable to meet their obligations under existing
reinsurance agreements, the subsidiaries would be liable for such defaulted amounts. During 2019,
2018, and 2017 TSP placed 21.50%, 16.45%, and 14.88% of its reinsurance business with one
reinsurance company.
TSS has excess of loss reinsurance treaties whereby it cedes a portion of its premiums to third
parties. Reinsurance contracts are primarily for periods of one year and are subject to modifications
and negotiations at each renewal date. Premiums ceded under these contracts amounted to $1,446,
$1,524, and $2,168 in 2019, 2018 and 2017, respectively. Claims ceded amounted to $1,215, $320,
and $463, in 2019, 2018, and 2017, respectively. Principal reinsurance agreements include an organ
transplant excess of loss treaty, which covers:
• For group policies, 80% of the claims up to a maximum of $800 (80% of $1,000), per person, per
life. For other group policies with other options, the agreement covers 80% of the claims up to a
maximum of $400 (80% of $500), per person, per life, or 80% of the claims up to a maximum of
$200 (80% of $250), per person, per life.
• For policies provided to the active and retired employees of the Commonwealth of Puerto Rico
and its instrumentalities, the treaty covers 100% of the claims up to a maximum of $1,000 per
person, per life with major medical coverage, only if the covered person uses providers that are
members of TSS network.
• For policies provided to the municipalities of Puerto Rico, the treaty covers 100% of the claims
up to a maximum of $250, per person, per life, with plans with lifetime limits and all other plans
100% of the claims up to a maximum of $1,000, per person, per life.
TSA has an excess of loss reinsurance treaty whereby it cedes a portion of its premiums to a third
party. This reinsurance contract is for a period of one year and is subject to modifications and
negotiations in each renewal date. Premiums ceded under this contract amounted to $2,850, $2,300,
and $1,224 in 2019, 2018, and 2017 respectively. Claims ceded amounted to $3,186, $1,804, and
1,360 in 2019, 2018, and 2017, respectively. This reinsurance agreement includes an excess of loss
reinsurance coverage for certain hospital inpatient, hospital outpatient, ambulance, and physician
services as well as pharmaceutical drugs. This agreement covers a maximum of $2,000 per person,
per agreement term.
TSP utilized 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 $52,355,
$60,354, and $62,268, in 2019, 2018, and 2017, respectively. In 2019 and 2018, TSP ceded claims
incurred amounting to $(3,368) and $152,704, respectively, related to losses caused by Hurricanes
Irma and Maria.
During 2018, as part of the catastrophe program, TSP signed a multiyear reinsurance contract
providing for retroactive and prospective reinsurance coverage. The retroactive coverage resulted in
a deferred gain on retroactive reinsurance of $25,000, which is presented within the accounts payable
82
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
and accruals in the accompanying consolidated balance sheets as of December 31, 2019 and 2018.
The deferred gain on the retroactive reinsurance will be amortized using the recovery method. The
recovery method provides for the amortization in proportion to the estimated recoveries made as of
the reporting date as a percentage of total estimated recoveries.
Ceded unearned reinsurance premiums arising from TSP reinsurance transactions amounted to
$10,427 and $11,760 as of December 31, 2019 and 2018, respectively, and are reported as other
assets in the accompanying consolidated balance sheets.
Most principal reinsurance contracts are for a period of one year and are subject to modifications and
negotiations in each renewal. Current property and catastrophe reinsurance program was renewed
effective April 1, 2019 for the twelve-month period ending March 31, 2020. Other contracts were
renewed as expiring on January 1, 2020.
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 $375 in $30,000 risks.
• Catastrophe protection is purchased limiting losses to $5,000 per event with losses up to
approximately $775,000. After this, the retention of $24,500 from the next $70,000, for a total
protection of $815,000 in an $845,000 event.
TSV also cedes insurance with various reinsurance companies under a number of pro rata, excess
of loss and catastrophe treaties. Under these treaties, TSV ceded premiums of $8,337, $8,780, and
$8,826, in 2019, 2018, and 2017, respectively. Principal reinsurance agreements are as follows:
• Group life insurance facultative agreement, reinsuring risk in excess of $25 of certain group life
policies and a combined pro rata and excess of loss agreement effective July 1, 2008, reinsuring
50% of the risk up to $200 and ceding the excess.
•
•
•
Facultative pro rata agreements for the long-term disability insurance, reinsuring 65% of the
risk.
Several reinsurance agreements, mostly on an excess of loss basis up to a maximum retention
of $50.
Excess of loss agreement for the major medical business in Costa Rica reinsuring 100% of all
claims over $25.
TSV participates in various retrocession reinsurance agreements. The retrocessions are based on
group life and health reinsurance business pools for which TSV has participations ranging from 6.7%
to 10% of the total reinsurance facility. TSV share of the reinsurer’s gross liability is limited to a
maximum that ranges depending on the agreement from $50 to $500 per covered life. The
83
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
agreements cover new and renewal business for a period of twelve months and may be cancelled
subject to ninety days written notice at any anniversary date.
15.
Income Taxes
The Company and its subsidiaries are subject to Puerto Rico income taxes. Under Puerto Rico
income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries. The
Company’s insurance subsidiaries are also subject to U.S. federal income taxes for foreign source
dividend income. The Company is potentially subject to income tax audits in the Commonwealth of
Puerto Rico for the taxable year 2015 and after, until the applicable statute of limitations expires. Tax
audits by their nature are often complex and can require several years to complete.
Managed Care and Property and Casualty corporations are taxed essentially the same as other
corporations, with taxable income primarily determined on the basis of the statutory annual
statements filed with the insurance regulatory authorities. The corporations are also subject to an
alternative minimum income tax, which is calculated based on the formula established by existing
tax laws. Any alternative minimum income tax paid may be used as a credit against the excess, if
any, of regular income tax over the alternative minimum income tax in future years up to a limit of
25% of the excess.
The Company, through one of its Managed Care corporations, has a branch in the USVI that is
subject to a 5% premium tax on policies underwritten therein. As a qualified foreign insurance
company, the Company is subject to income taxes in the USVI, which has implemented a mirror tax
law based on the U.S. Internal Revenue Code. The branch operations in the USVI had certain net
operating losses for USVI tax purposes for which a valuation allowance has been recorded.
Companies within our Life Insurance segment operate as qualified domestic life insurance
companies and are subject to the alternative minimum tax and taxes on its capital gains.
On December 22, 2017, U.S Government enacted PL 115-97, better known as the Tax Cut and Jobs
Act (TCJA). The TCJA incorporates a series of changes in tax rates at the federal level applicable
for taxable years beginning after December 31, 2017 and before January 1, 2026. The U.S. federal
maximum corporate income tax rate is reduced from 35% to a 21% flat rate, this change did not have
a significant impact for the Company and its insurance subsidiaries are only taxed in that jurisdiction
for passive income earned on investments, which continue to be subject to withholding at source at
its gross level. In addition, the TCJA incorporates restrictions on insurance business exception to
passive foreign investment company (PFIC) rules, that were taxed under the PFIC’s earnings,
subject to an exception for certain income derived in the active conduct of an insurance business. At
the moment, no significant impact for the Company has been identified. We annually test our
compliance with the new guidelines for Section 1297 PFIC test, at the insurance subsidiary level.
On December 10, 2018, the Puerto Rico Government signed into Law by, P C 1544, better known
as the Puerto Rico Tax Reform, now Act 257 of 2018. With this Law, additional amendments are
incorporated to the Puerto Rico Internal Revenue Code. Approved changes include: (i) a decrease
in the maximum corporate tax rate from 39% to 37.5%; (ii) an increase from 80% to a 90% in the
amount of net operating loss carryover deduction available to be claimed against current year net
income for regular tax purposes; (iii) an increase in the withholding at source for services rendered
from 7% to 10% ; (iv) a limitation in the amounts of net operating losses generated by a corporate
shareholder allowed to be netted against net income distributed from a flow-through investment, not
permitted for taxable years beginning after December 31, 2019; and (v) a revised large taxpayer
84
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
definition to include flow-through entities and extend the determination of audited financial statement
requirements at the group level. The Puerto Rico Tax Reform also adds requirements for the
deductibility of certain expenses as well as disclosure requirements related to any uncertain tax
position (UTP) recorded following GAAP. All of these changes are effective for taxable years
beginning January 1, 2019.
Federal income taxes recognized by the Company’s insurance subsidiaries amounted to
approximately $2,209, $1,147, and $985, in 2019, 2018, and 2017, respectively.
All other corporations within the group are subject to Puerto Rico income taxes as regular
corporations, as defined in the P.R. Internal Revenue Code, as amended.
The components of income tax expense (benefit) consisted of the following:
Current income tax expense
Deferred income tax expense (benefit)
$
35,714
3,661
$
2,212
(32,078)
$
34,412
(9,916)
Total income tax expense (benefit)
$
39,375
$
(29,866)
$
24,496
2019
2018
2017
85
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The income tax expense (benefit) differs from the amount computed by applying the Puerto Rico
statutory income tax rate to the income before income taxes as a result of the following:
86
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Deferred income taxes reflect the tax effects of temporary differences between carrying amounts of
assets and liabilities for financial reporting purposes and income tax purposes. The net deferred tax
asset at December 31, 2019 and 2018 of the Company and its subsidiaries is composed of the
following:
The net deferred tax asset shown in the table above at December 31, 2019 and 2018 is reflected in
the consolidated balance sheets as $77,294 and $79,010, respectively, in deferred tax assets and
$10,257 and $3,245, in deferred tax liabilities, respectively, reflecting the aggregate deferred tax
assets or liabilities of individual tax-paying subsidiaries of the Company.
In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods
87
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
in which those temporary differences become deductible. Management believes that it is more likely
than not that the Company will realize the benefits of these deductible differences. The valuation
allowance is mostly related to the net operating losses generated by the Company’s USVI operations
and the health clinic’s operations based on the available evidence are not considered to be realizable
at the reporting dates.
At December 31, 2019, the Company and its subsidiaries have net operating loss carry-forwards for
Puerto Rico income tax purposes of approximately $156,026, which are available to offset future
taxable income for up to December 2029. The carryforwards generally expire in 2026 through 2029.
Except for the valuation allowance described in the previous paragraph, the Company concluded
that as of December 31, 2019, it is more likely than not that the entities that have these net operating
loss carry-forwards will generate sufficient taxable income within the applicable net operating loss
carry-forward periods to realize its deferred tax asset. This conclusion is based on the historical
results of each entity, adjusted to exclude non-recurring conditions, and the forecast of future
profitability. Management will continue to evaluate, on a quarterly basis, if there are any significant
events that will affect the Company’s ability to utilize these deferred tax assets.
88
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
16. Pension Plans
Non-contributory Defined-Benefit Pension Plan
The Company sponsors a non-contributory defined-benefit pension plan for its employees and for
the employees of certain subsidiaries. Pension benefits begin to vest after five years of vesting
service, as defined, and are based on years of service and final average salary, as defined. The
funding policy is to contribute to the plan as necessary to meet the minimum funding requirements
set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional
amounts as the Company may determine to be appropriate from time to time. The measurement
date used to determine pension benefit for the pension plan is December 31.
In December 2016, the Company announced that effective January 31, 2017, it would freeze the pay
and service amounts used to calculate pension benefits for active employees who participated in the
pension plan. Therefore, as of the effective date, active employees in the pension plan do not accrue
additional benefits for future service and eligible compensation received.
The following table sets forth the plan’s benefit obligations, fair value of plan assets, and funded
status as of December 31, 2019 and 2018, accordingly:
The amounts recognized in the consolidated balance sheets as of December 31, 2019 and 2018
consist of the following:
Pension liability
Net actuarial loss recognized in accumulated other
comprehensive loss, net of a deferred tax of $12,692 and
$10,469 in 2019 and 2018, respectively
89
2019
2018
$
26,997
$
24,520
27,907
23,691
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The following assumptions were used on a weighted average basis to determine benefits obligations
of the plan as of December 31, 2019 and 2018.
Discount rate
Expected return on plan assets
Rate of compensation increase
2019
2018
3.25%
6.25%
N/A
4.50%
6.50%
N/A
The components of net periodic benefit cost and other amounts recognized in other comprehensive
income for 2019, 2018, and 2017 were as follows:
2019
2018
2017
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Actuarial loss
Settlement loss
-
$
6,992
(8,835)
392
-
$
-
6,853
(9,020)
961
2,110
$
223
7,186
(8,740)
369
-
Net periodic benefit (income) cost
$
(1,451)
$
904
$
(962)
Net periodic benefit (income) cost includes settlement charges as a result of retirees selecting lump-
sum distributions. Settlement charges may increase in the future if the number of eligible participants
deciding to receive distributions and the amount of their benefits increases.
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss
into net periodic pension benefits cost during the next twelve months is $1,092.
The following assumptions were used on a weighted average basis in computing the periodic benefit
cost for the years ended December 31, 2019, 2018, and 2017:
2019
2018
2017
Discount rate
Expected return on plan assets
Rate of compensation increase
4.50%
6.50%
N/A
3.75%
6.50%
N/A
4.50%
6.50%
N/A
The basis of the overall expected long-term rate of return on assets assumption is a forward-looking
approach based on the current long-term capital market outlook assumptions of the assets categories
in which the trust invests and the trust’s target asset allocation. At December 31, 2019, the assumed
target asset allocation for the program is: 45% to 55% in equity securities, 36% to 44% in debt
securities, and 6% to 14% in other securities. Using a mean-variance model to project returns over a
30-year horizon under the target asset allocation, the 35 to 65 percentile range of annual rates of
return is 5.5% to 6.9%. The Company selected a rate from within this range of 6.50% for 2019 and
6.50% for 2018, which reflects the Company’s best estimate for this assumption based on the data
90
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
described above, information on the historical returns on assets invested in the pension trust, and
expected future conditions. This rate is net of both investment related expenses and a 0.15%
reduction for other administrative expenses charged to the trust.
Plan Assets
Plan assets recorded at fair value are categorized based upon the level of judgment associated with
the inputs used to measure their fair value. For level inputs and input definition, see Note 10.
The following table summarizes fair value measurements by level at December 31, 2019 and 2018
for assets measured at fair value on a recurring basis:
Government obligations
Non-agency backed securities
Corporate obligations
Limited Liability Corporations
Real estate
Registered investments
Common/Collective trusts
Common stocks
Preferred stocks
Interest-bearing cash
$
-
-
-
-
-
3,754
-
1,885
-
300
5,939
$
Government obligations
Non-agency backed securities
Corporate obligations
Limited Liability Corporations
Real estate
Registered investments
Common/Collective trusts
Hedge funds
Common stocks
Preferred stocks
Forward foreign currency contracts
Interest-bearing cash
Derivatives
$
-
-
-
-
-
2,328
-
-
1,566
6
-
700
-
4,600
$
Level 1
Level 2
Total
NAV
$
$
$
$
Level 1
Level 2
Total
NAV
$
$
2019
Level 3
$
-
-
-
-
-
-
-
-
-
-
$
-
2018
Level 3
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
6,782
656
9,353
-
-
382
7,527
-
14
-
24,714
6,856
759
10,490
-
-
1,610
4,231
-
-
23
42
-
44
24,055
6,782
656
9,353
-
-
4,136
7,527
1,885
14
300
30,653
6,856
759
10,490
-
-
3,938
4,231
-
1,566
29
42
700
44
28,655
$
-
-
-
126,989
6,720
-
-
-
-
-
133,709
$
$
-
-
-
97,660
7,975
-
1,898
-
-
-
-
-
-
107,533
$
$
$
The Company’s plan assets are invested in the National Retirement Trust. The National Retirement
Trust was formed to provide financial and legal resources to help members of the BCBSA offer
retirement benefits to their employees.
91
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The investment program for the National Retirement Trust is based on the precepts of capital market
theory that are generally accepted and followed by institutional investors, who by definition are
long-term oriented investors. This philosophy holds that:
•
Increasing risk is rewarded with compensating returns over time, and therefore, prudent risk
taking is justifiable for long-term investors.
• Risk can be controlled through diversification of asset classes and investment approaches, as
well as diversification of individual securities.
• Risk is reduced by time, and over time the relative performance of different asset classes is
reasonably consistent. Over the long-term, equity investments have provided and should
continue to provide superior returns over other security types. Fixed-income securities can
dampen volatility and provide liquidity in periods of depressed economic activity. Lengthening
duration of fixed income securities may reduce surplus volatility.
• The strategic or long-term allocation of assets among various asset classes is an important driver
of long-term returns.
• Relative performance of various asset classes is unpredictable in the short-term and attempts to
shift tactically between asset classes are unlikely to be rewarded.
Investments will be made for the sole interest of the participants and beneficiaries of the programs
participating in the National Retirement Trust. Accordingly, the assets of the National Retirement
Trust shall be invested in accordance with these objectives:
• To ensure assets are available to meet current and future obligations of the participating
programs when due.
• To earn the maximum return that can be realistically achieved in the markets over the long-term
at a specified and controlled level of risk in order to minimize future contributions.
• To invest assets with consideration of the liability characteristics in order to better align assets
and liabilities.
• To invest the assets with the care, skill, and diligence that a prudent person acting in a like
capacity would undertake. In the process, the Administration of the Trust has the objective of
controlling the costs involved with administering and managing the investments of the National
Retirement Trust.
92
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Cash Flows
The Company expects to contribute $2,000 to its pension program in 2020.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
Year ending December 31
2020
2021
2022
2023
2024
2025 – 2029
$
10,531
9,593
9,685
9,732
9,800
51,688
Non-contributory Supplemental Pension Plan
In addition, the Company sponsors a non-contributory supplemental pension plan. This plan covers
employees with qualified defined benefit retirement plan benefits limited by the U.S. Internal Revenue
Code maximum compensation and benefit limits. At December 31, 2019 and 2018, the Company
has recorded a pension liability of $7,468 and $6,754, respectively. The charge to accumulated other
comprehensive loss related to the non-contributory pension plan at December 31, 2019 and 2018
amounted to $562 and $35, respectively, net of a deferred tax asset of $359 and $61, respectively.
17. Catastrophe Loss Reserve and Trust Fund
In accordance with Chapter 25 of the Puerto Rico Insurance Code, as amended, TSP is required to
record a catastrophe loss reserve. This catastrophe loss reserve is supported by a trust fund for the
payment of catastrophe losses. The reserve increases by amounts determined by applying a
contribution rate, not in excess of 5%, to catastrophe written premiums as instructed annually by the
Commissioner of Insurance, unless the level of the reserve exceeds 8% of catastrophe exposure, as
defined. The reserve also increases by an amount equal to the resulting return in the supporting trust
fund and decreases by payments on catastrophe losses or authorized withdrawals from the trust
fund. Additions to the catastrophe loss reserve are deductible for income tax purposes.
This trust may invest its funds in securities authorized by the Insurance Code, but not in investments
whose value may be affected by hazards covered by the catastrophic insurance losses. The interest
earned on these investments and any realized gains (losses) on investment transactions are part of
the trust fund and are recorded as income (expense) of the Company. An amount equal to the
investment return is recorded as an addition to the trust fund.
During the year ended December 31, 2018, TSP received the approval of the Commissioner of
Insurance and withdrew $10,000 from the catastrophe fund following the payment for catastrophe
losses related to the impact of Hurricane Maria in September 2017.
The interest earning assets in this fund, which amounted to $41,047 and $38,978 as of December 31,
2019 and 2018, respectively, are to be used solely and exclusively to pay catastrophe losses covered
under policies written in Puerto Rico.
TSP is required to contribute to the trust fund, if needed or necessary, on or before January 31 of
the following year. Contributions are determined by a rate determined or established by the
Commissioner of Insurance for the catastrophe policies written in that year. No contribution was
93
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
required for 2019 and 2018 since the level of the catastrophe reserve exceeds 8% of the catastrophe
exposure.
The amount in the trust fund may be withdrawn or released in the case that TSP ceases to underwrite
risks subject to catastrophe losses. Also, authorized withdrawals are allowed when the catastrophe
loss reserve exceeds 8% of the catastrophe exposure, as defined.
TSP retained earnings are restricted in the accompanying consolidated balance sheets by the total
catastrophe loss reserve balance, which as of December 31, 2019 and 2018 amounted to $39,425
and $37,749, respectively.
18. Stockholders’ Equity
a. Common Stock
On July 29, 2019, the Company issued 48,602 Class A shares to the heirs of a former
shareholder, as a result of a litigation settlement. During July 2019, the Board of Directors
authorized and approved the conversion (Conversion) of the Company’s remaining issued and
outstanding Class A common shares into Class B common shares. Effective on August 7, 2019,
all Class A holders of record received one Class B share for each Class A share held. Upon the
Conversion, all remaining outstanding Class A shares were automatically cancelled and
extinguished, and the Company now maintains a single class of common shares.
b. Preferred Stock
Authorized capital stock includes 100,000,000 of preferred stock with a par value of $1.00 per
share. As of December 31, 2019 and 2018, there are no issued and outstanding preferred
shares.
c. Liquidity Requirements
As members of the BCBSA, the Company, TSS, and TSA are required by membership
standards of this association to maintain liquidity as defined by BCBSA. That is, to maintain total
adjusted capital at or above 375% of Health Risk-Based Capital (HRBC) Authorized Control
Level (ACL) as defined by the National Association of Insurance Commissioners (NAIC) for the
for Primary Licensee (TSM) and Larger BCBS Controlled Affiliate (TSS) and 100% HRBC ACL
for the Smaller BCBS Controlled Affiliate (TSA).
d. Dividends
As a holding company, the Company’s most significant assets are the common shares of its
subsidiaries. The principal sources of funds available to the Company are rental income and
dividends from its subsidiaries, which are used to fund our debt service and operating expenses.
The Company is subject to the provisions of the General Corporation Law of Puerto Rico, which
restricts the declaration and payment of dividends by corporations organized pursuant to the
laws of Puerto Rico. These provisions provide that Puerto Rico corporations may only declare
dividends charged to their retained earnings or, in the absence of retained earnings, net profits
of the fiscal year in which the dividend is declared and/or the preceding fiscal year.
94
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The Company’s ability to pay dividends is dependent, among other factors, on its ability to collect
cash dividends from its subsidiaries, which are subject to regulatory requirements, which may
restrict their ability to declare and pay dividends or distributions. In addition, an outstanding
secured term loan restricts our ability to pay dividends in the event of default (see Note 13).
The accumulated earnings of TSS, TSA, TSV, TSB and TSP are restricted as to the payment
of dividends by statutory limitations applicable to domestic insurance companies. Under Puerto
Rico insurance regulations, the regulated subsidiaries are permitted, without requesting prior
regulatory approval, to pay dividends as long as the aggregate amount of all such dividends in
any calendar year does not exceed the lesser of: (i) 10% of its surplus as of the end of the
immediately preceding calendar year; or (ii) its statutory net gain from operations for the
immediately preceding calendar year (excluding realized capital gains). Regulated subsidiaries
will be permitted to pay dividends in excess of the lesser of such two amounts only if notice of
its intent to declare such a dividend and the amount thereof is filed with the Commissioner of
Insurance and such dividend is not disapproved within 30 days of its filing. As of December 31,
2019, the dividends permitted to be distributed in 2020 by the regulated subsidiaries without
prior regulatory approval from the Commissioner of Insurance amounted to approximately
$68,000.
The issuance of 48,602 Class A shares entitled all Class B shareholders to certain anti-dilution
rights; therefore, all holders of Class B shares at the close of business on July 26, 2019 (Record
Date) received a share dividend of 0.051107 Class B shares for every Class B share they owned
as of that time. On August 6, 2019, the Company paid the Class B share dividend which
amounted to $24,655; cash of $11 was paid in lieu of fractional shares so that shareholders
receive a whole number of shares of common stock.
19. Stock Repurchase Programs
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.
The stock repurchase activity under active stock repurchase programs for the years ended
December 31 is summarized as follows:
2019
Average
Share
Price
Shares
Repurchased
Amount
Shares
Repurchased Repurchased
2018
Average
Share
Price
Amount
Repurchased
Shares
Repurchased
2017
Average
Share
Price
Amount
Repurchased
2017 $30,000 program
527,881
$
18.92
$
9,989
903,888
$
24.76
$
22,390
861,415
$
23.38
$
20,220
95
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
20. Comprehensive Income
The accumulated balances for each classification of other comprehensive income are as follows:
Unrealized
Gains on
Securities
Liability
for Pension
Benefits
Accumulated
Other
Comprehensive
Income
Beginning balance at December 31, 2018
Net current period change
Reclassification adjustments for gains and
$
27,308
34,224
$
(24,246)
(4,468)
$
3,062
29,756
losses reclassified in income
(3,702)
247
(3,455)
Ending balance at December 31, 2019
$
57,830
$
(28,467)
$
29,363
The related deferred tax effects allocated to each component of other comprehensive income in the
accompanying consolidated statements of stockholders’ equity and comprehensive income in 2019,
2018 and 2017 are as follows:
2019
Deferred Tax
(Expense)
Benefit
Net-of-Tax
Amount
Before-Tax
Amount
Unrealized holding gains on securities
arising during the period
$
42,780
$
(8,556)
$
34,224
Less reclassification adjustment for
gains and losses realized in income
Net change in unrealized gain
Liability for pension benefits:
Reclassification adjustment for
amortization of net losses from past
experience and prior service costs
Net change arising from assumptions
and plan changes and experience
Net change in liability for
(4,456)
38,324
754
(7,802)
(3,702)
30,522
396
(149)
247
(7,149)
2,681
(4,468)
pension benefits
Net current period change
(6,753)
31,571
$
2,532
(5,270)
$
(4,221)
26,301
$
96
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
2018
Deferred Tax
(Expense)
Benefit
Net-of-Tax
Amount
Before-Tax
Amount
Unrealized holding gains on securities
arising during the period
$
(24,375)
$
4,875
$
(19,500)
Less reclassification adjustment for
gains and losses realized in income
Net change in unrealized gain
Liability for pension benefits:
Reclassification adjustment for
amortization of net losses from past
experience and prior service costs
Net change arising from assumptions
and plan changes and experience
Net change in liability for
13,457
(10,918)
(3,005)
1,870
10,452
(9,048)
(995)
2,190
373
(830)
(622)
1,360
pension benefits
Net current period change
1,195
(9,723)
$
$
(457)
1,413
738
(8,310)
$
2017
Deferred Tax
(Expense)
Benefit
Net-of-Tax
Amount
Before-Tax
Amount
Unrealized holding gains on securities
arising during the period
$
28,544
$
(5,708)
$
22,836
Less reclassification adjustment for
gains and losses realized in income
Net change in unrealized gain
Liability for pension benefits:
Reclassification adjustment for
amortization of net losses from past
experience and prior service costs
Net change arising from assumptions
and plan changes and experience
Net change in liability for
(10,831)
17,713
1,862
(3,846)
(8,969)
13,867
5
(2)
3
(8,215)
3,204
(5,011)
pension benefits
Net current period change
(8,210)
9,503
$
3,202
(644)
$
(5,008)
8,859
$
97
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
21. Share-Based Compensation
In December 2007, the Company adopted the 2007 Incentive Plan (the 2007 plan), which permits
the Board to grant stock options, restricted stock awards and performance awards to eligible officers,
directors and employees. The 2007 plan authorized the granting of up to 4,700,000 of Class B
common shares of authorized but unissued stock. The 2007 plan was terminated in April 2017, when
the 2017 Incentive Plan (the 2017 plan) was adopted. The 2017 plan permits the Board to grant
stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, performance
awards, and other stock-based awards, to our officers and employees. In addition, the 2017 plan
authorizes the grant of equity-based compensation incentives to our directors and to any
independent contractor and consultants. The 2017 plan authorizes the granting of up to 1,700,000
of Class B common shares plus the number of shares that were subject to any outstanding awards
under the 2007 plan that are forfeited, cancelled, expire, terminate or otherwise lapse, in whole or in
part, without the delivery of the shares. At December 31, 2019, there were 782,738 shares available
for the Company to grant under the 2017 Plan.
Stock options and SARs can be granted with an exercise price, which shall not be less than the
stock’s fair market value at the grant date. The term of each stock options and SARs shall be fixed
by the Board of Directors but shall not exceed 10 years from the date of grant. The restricted stock,
restricted stock units, and performance awards are issued at the fair value of the stock on the grant
date. Restricted stock awards and restricted stock units vest in installments, as stipulated in each
restricted stock agreement. Performance awards vest on the last day of the performance period,
provided that at least minimum performance standards are achieved.
There was no stock option activity during the years ended December 31, 2019, 2018 and 2017. No
options were granted during the three years ended December 31, 2019, 2018 and 2017. No cash
was received from stock options exercises during the years ended December 31, 2019, 2018 and
2017. During the years ended December 31, 2019 and 2018, 6,124 and 29,779 shares were
repurchased and retired as the result of non-cash tax withholding upon vesting of shares. No shares
were repurchased and retired as a result of non-cash exercise of stock options or non-cash tax
withholding upon vesting of shares during year ended December 31, 2017.
98
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
A summary of the status of the Company’s non-vested restricted and performance shares as of
December 31, 2019, and changes during the year ended December 31, 2019, are presented below:
Restricted Awards
Performance Awards
Weighted
Average
Fair
Value
Weighted
Average
Exercise
Price
Number of
Shares
Number of
Shares
205,873
221,342
(113,230)
(5,598)
$
24.67
24.53
25.83
23.90
559,838
282,293
(447,038)
(18,146)
$
21.86
24.82
18.21
23.34
Outstanding balance at January 1, 2019
Granted
Lapsed
Forfeited (due to termination)
Quantity adjusted (due to performance
payout more than 100%), net of forfeited
-
-
138,741
18.21
Outstanding balance at December 31, 2019
308,387
$
24.16
515,688
$
25.60
The weighted average grant date fair value of restricted shares granted during the year 2019, 2018
and 2017 were $24.53, $28.49, and $17.78, respectively. Total fair value of restricted stock vested
during the year ended December 31, 2019, 2018 and 2017 was $2,861, $2,390 and $1,948,
respectively.
At December 31, 2019, there was $10,811 of total unrecognized compensation cost related to non-
vested share-based compensation arrangements granted under the Plan. That cost is expected to
be recognized over a weighted average period of 0.99 years. The Company currently uses
authorized and unissued Class B common shares to satisfy share award exercises.
99
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
22. Net Income Available to Stockholders and Basic Net Income per Share
The following table sets forth the computation of basic and diluted earnings per share for the three-
year period ended December 31:
2019
2018
2017
Numerator for earnings per share
Net income (loss) attributable to TSM available to stockholders
$
92,894
$
(63,302)
$
54,486
Denominator for basic earnings per share –
Weighted average of common shares
Effect of dilutive securities
23,318,742
22,975,385
23,996,503
66,551
-
71,083
Denominator for diluted earnings per share
23,385,293
22,975,385
24,067,586
Basic net income (loss) per share attributable to TSM
$
3.98
$
(2.76)
$
2.27
Diluted net income (loss) per share attributable to TSM
$
3.97
$
(2.76)
$
2.26
The Company excluded the effect of dilutive securities during the year ended December 31, 2018
because their effect would have been anti-dilutive given the net loss attributable to stockholders
during this year. If the Company had generated income from continuing operations during the year
ended December 31, 2018, the effect of the restricted stock awards on the diluted shares calculation
would have been an increase in shares of 81,023 shares.
23. Commitments
The Company leases its regional offices, certain equipment, and warehouse facilities under non-
cancelable operating leases. 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 was
5.8 years as of December 31, 2019. 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
was 5.3% as of December 31, 2019.
Minimum annual rental commitments at December 31, 2019 under existing agreements are
summarized as follows:
Year ending December 31
2020
2021
2022
2023
2024
Thereafter
Total
$
4,713
3,790
3,200
2,171
1,710
2,707
18,291
$
Rental expense for 2019, 2018, and 2017 was $9,843, $8,924, and $7,991 respectively.
100
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Pursuant to the provisions of the Puerto Rico Insurance Code and Regulations, TSP is a member of
the Compulsory Vehicle Liability Insurance Joint Underwriting Association (JUA). As a participant,
TSP shares the risk, proportionately with other members, based on a formula established by the
Puerto Rico Insurance Code, of the results and financial condition of the JUA, and accordingly, may
be subject to assessments to cover obligations of the JUA or may receive refund distributions for
good experience. The Company received $172 and $215 in 2019 and 2018, respectively, as an
ordinary dividend. No assessments were received in 2017. During the year ended December 31,
2017, the JUA declared a $70,000 extraordinary dividend to its members, subject to a special tax
rate of 50% as allowed by Act No. 26 of April 29, 2017. There were no extraordinary dividends
declared by the JUA in 2019 and 2018. The Company receives dividends from the JUA net of
applicable tax. During the year ended December 31, 2017, TSP recorded a special distribution of
$2,363, net of tax, which is included as other income in the accompanying consolidated statements
of earnings.
24. Contingencies
The Company’s business is subject to numerous laws and regulations promulgated by Federal,
Puerto Rico, USVI, Costa Rica, BVI, and Anguilla governmental authorities. Compliance with these
laws and regulations can be subject to government review and interpretation, as well as regulatory
actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as
well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities,
regularly make inquiries and conduct audits concerning the Company's compliance with such laws
and regulations. Penalties associated with violations of these laws and regulations may include
significant fines and exclusion from participating in certain publicly funded programs and may require
the Company to comply with corrective action plans or changes in our practices.
As of December 31, 2019, 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 in excess of established
reserves is, in the aggregate, from $0 to approximately $40,000 at December 31, 2019. The outcome
of legal proceedings is inherently uncertain and pending matters for which accruals have not been
established have not progressed sufficiently to enable us to estimate a range of possible loss, if any.
Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or
more of these matters could have a material effect on the consolidated financial condition, operating
results and/or cash flows of the Company.
Additionally, we may face various potential litigation claims that have not been asserted to date,
including claims from persons purporting to have rights to acquire shares of the Company on
favorable terms pursuant to agreements previously entered by our predecessor managed care
subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS), with physicians or dentists
who joined our provider network to sell such new provider shares of SSS at a future date (Share
101
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Acquisition Agreements) or to have inherited such shares notwithstanding applicable transfer and
ownership restrictions.
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 the 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.
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.
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.
On November 7, 2019, the summary judgment dismissing all claims entered by the Court of First
Instance in favor of the Company in Montilla López, et al. v. Seguros de Servicios de Salud, et al.
became final.
Joint Underwriting Association Litigation
On August 19, 2011, plaintiffs, purportedly a class of motor vehicle owners, filed an action in the
United States District Court for the District of Puerto Rico against the JUA and TSP, alleging
violations under the Puerto Rico Insurance Code, the Puerto Rico Civil Code, the Racketeer
Influenced and Corrupt Organizations Act (RICO) and the local statute against organized crime and
money laundering. JUA is a private association created by law to administer a compulsory public
liability insurance program for motor vehicles in Puerto Rico (CLI). As required by its enabling act,
JUA is composed of all the insurers that underwrite private motor vehicle insurance in Puerto Rico
and exceed the minimum underwriting percentage established in such act. TSP is a member of JUA.
102
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
In this lawsuit, entitled Noemí Torres Ronda, et al v. JUA et al., plaintiffs allege that the defendants
illegally charged and misappropriated a portion of the CLI premiums paid by motor vehicle owners
in violation of the Puerto Rico Insurance Code. Specifically, they claim that because the defendants
did not incur in acquisition or administration costs allegedly totaling 12% of the premium dollar,
charging for such costs constitutes the illegal traffic of premiums. Plaintiffs also claim that the
defendants, as members of JUA, violated RICO through various inappropriate actions designed to
defraud motor vehicle owners located in Puerto Rico and embezzle a portion of the CLI premiums
for their benefit.
Plaintiffs seek the reimbursement of funds for the class amounting to $406,600 treble damages under
RICO, and equitable relief, including a permanent injunction and declaratory judgment barring
defendants from their alleged conduct and practices, along with costs and attorneys’ fees.
Since 2011, TSP has been defending this claim and, jointly with other defendants, has filed several
pleas in connection with the certification of the class and the dismissal of the claim. On October 7,
2019, defendants’ petition for summary judgment was granted. On December 18, 2019 plaintiffs filed
an appeal to contest the Court’s judgment dismissing their complaint.
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.
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.
103
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
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.
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, ASES 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.
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.
25. Statutory Accounting
TSS, TSA, TSV, TSP and TSB (collectively known as the regulated subsidiaries) are regulated by
the Commissioner of Insurance. The regulated subsidiaries are required to prepare financial
statements using accounting practices prescribed or permitted by the Commissioner of Insurance,
which uses a comprehensive basis of accounting other than GAAP. Specifically, the Commissioner
of Insurance has adopted the NAIC’s Statutory Accounting Principles (NAIC SAP) as the basis of its
statutory accounting practices, as long as they do not contravene the provisions of the Puerto Rico
Insurance Code, its regulations and the Circular Letters issued by the Commissioner of Insurance.
The Commissioner of Insurance may permit other specific practices that may deviate from prescribed
practices and NAIC SAP. Statutory accounting principles that are established by state laws and
permitted practices mandated by the Commissioner of Insurance may cause the statutory capital
and surplus of the regulated subsidiaries to differ from that calculated under the NAIC SAP.
Prescribed statutory accounting practices in Puerto Rico allow TSP to disregard a deferred tax
liability resulting from additions to the catastrophe loss reserve trust fund that would otherwise be
required under NAIC SAP. The use of prescribed and permitted accounting practices, both
individually and in the aggregate, did not change significantly the combined statutory capital and
surplus that would have been reported following NAIC SAP, which as of December 31, 2019 and
2018 is approximately 1.7% and 2.1%, respectively, lower than the combined reported statutory
capital and surplus.
The regulated subsidiaries are required by the NAIC and the Commissioner of Insurance to submit
risk-based capital (RBC) reports following the NAIC’s RBC Model Act and accordingly, are subject
to certain regulatory actions if their capital levels do not meet minimum specific RBC requirements.
104
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
RBC is a method developed by the NAIC to determine the minimum amount of statutory capital
appropriate for an insurance company to support its overall business operations in consideration of
its size and risk profile. The RBC is calculated by applying capital requirement factors to various
assets, premiums and reserve items. The factor is higher for those items with greater underlying risk
and lower for less risky items. The adequacy of an organization’s actual capital can then be measured
by a comparison to its RBC as determined by the formula.
The RBC Model Act requires increasing degrees of regulatory oversight and intervention as an
organization’s risk-based capital declines. The level of regulatory oversight ranges from requiring
organizations to inform and obtain approval from the domiciliary insurance commissioner of a
comprehensive financial plan for increasing its RBC, to mandatory regulatory intervention requiring
an insurance company to be placed under regulatory control, in a rehabilitation or liquidation
proceeding.
The Commissioner of Insurance adopted in 2009 an RBC policy that requires that the regulated
entities maintain statutory reserves at or above the “Company Action Level,” in order to avoid
regulatory monitoring and intervention. The Company action level is currently set at 200% of the
RBC for TSA, since it is organized as a health service organization and 300% of the RBC for TSS,
TSV, and TSB. The RBC requirement for TSP is 300% but compliance with certain trend analysis
can lower this requirement to 200%. As of December 31, 2019 and 2018, all regulated subsidiaries
comply with minimum statutory reserve requirements.
The following table sets forth the combined net admitted assets, capital and surplus, RBC
requirement, which is our statutory capital and surplus requirement, and net income (loss) for the
regulated subsidiaries at December 31, 2019, 2018 and 2017:
(dollar amounts in millions)
2019
2018
2017
Net admitted assets
Capital and surplus
RBC requirement
Net income (loss)
$
2,394
$
2,089
$
2,102
767
546
68
602
312
(32)
647
301
87
As more fully described in Note 17, a portion of the accumulated earnings and admitted assets of
TSP are restricted by the catastrophe loss reserve and the trust fund balance as required by the
Insurance Code. The total catastrophe loss reserve and trust fund amounted to $39,425 and $41,047
as of December 31, 2019, respectively. The total catastrophe loss reserve and trust fund amounted
to $37,749 and $38,978 as of December 31, 2018, respectively. In addition, the admitted assets of
the regulated subsidiaries are restricted by the investments deposited with the Commissioner of
Insurance to comply with requirements of the Insurance Code (see Note 3). Investments with an
amortized cost of $6,940 and $7,982 (fair value of $7,274 and $8,217) at December 31, 2019 and
2018, respectively, were deposited with the Commissioner of Insurance. As a result, the combined
restricted assets for our regulated subsidiaries were $47,987 and $46,960 as of December 31, 2019
and 2018, respectively.
105
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
26. Supplementary Information on Cash Flow Activities
2019
2018
2017
Supplementary information
Noncash transactions affecting cash
flow activities
Change in net unrealized (gain) loss on
securities available for sale,
including deferred income tax
liability (asset) of $7,802, ($1,870), and
$3,846 in 2019, 2018, and 2017
respectively
Change in liability for pension
benefits, and deferred income
tax liability (asset) of ($2,532), $457,
($3,202), in 2019, 2018, and 2017,
respectively
Repurchase and retirement of common stock
Stock dividend
Issuance of common stocks
Capitalization of lease right of use asset
Other
Income taxes paid
Interest paid
27. Segment Information
$
(30,522)
$
9,048
$
(13,867)
$
$
$
$
$
4,221
(119)
(24,655)
1,200
10,438
$
(738)
(748)
$
$
-
$
-
$
-
$
5,008
$
(89)
$
-
$
-
$
-
$
$
3,147
7,672
$
$
8,978
6,903
$
$
10,363
6,794
The operations of the Company are conducted principally through three reportable business
segments: Managed Care, Life Insurance, and Property and Casualty Insurance. Reportable
business segments were identified according to the type of insurance products offered and consistent
with the information provided to the chief operating decision maker. These segments and a
description of their respective operations are as follows:
• Managed Care segment – This segment is engaged in the sale of managed care products to
the Commercial, Medicare and Medicaid market sectors. The Commercial accounts sector
includes corporate accounts, U.S. federal government employees, individual accounts, local
government employees, and Medicare supplement. The following represents a description of
the major contracts by sector:
–
–
The segment is a qualified contractor to provide health coverage to federal government
employees within Puerto Rico and the USVI. Earned premiums revenue related to this
contract amounted
the years ended
to $161,716, $150,232, and $156,417
December 31, 2019, 2018, and 2017, respectively (see Note 12).
for
Under its commercial business, the segment also provides health coverage to certain
employees of the Commonwealth of Puerto Rico and its instrumentalities. Earned premium
revenue related to such health plans amounted to $16,805, $24,186, and $28,149 for years
ended December 31, 2019, 2018, and 2017, respectively.
106
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
–
–
The segment provides services through its Medicare health plans pursuant to a limited
number of contracts with CMS. Earned premium revenue related to the Medicare business
amounted to $1,408,039, $1,130,226, and $1,035,285 for the years ended December 31,
2019, 2018, and 2017, respectively.
The segment also participates in the Medicaid program to provide health coverage to
medically indigent citizens in Puerto Rico, as defined by the laws of the government of
Puerto Rico. Earned premium revenue related to this business amounted to $778,263,
$776,038, and $751,393 for the years ended December 31, 2019, 2018, and 2017,
respectively.
• Life Insurance segment – This segment offers primarily life and accident and health insurance
coverage, and annuity products. The premiums for this segment are mainly subscribed through
an internal sales force and a network of independent brokers and agents.
• Property and Casualty Insurance segment – The predominant insurance products of this
segment are commercial package, commercial auto, and personal package. The premiums for
this segment are originated through a network of independent insurance agents and brokers.
Agents or general agencies collect the premiums from the insureds, which are subsequently
remitted to the segment, net of commissions. Remittances are generally due 60 days after the
closing date of the general agent’s account current.
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 and net
investment income. Operating costs include claims incurred and operating expenses. The Company
calculates operating income or loss as operating revenues less operating costs.
The accounting policies for the segments are the same as those described in the summary of significant
accounting policies included in the notes to consolidated financial statements. The financial data of each
segment is accounted for separately; therefore, no segment allocation is necessary. However, certain
operating expenses are centrally managed, therefore requiring an allocation to each segment. Most of these
expenses are distributed to each segment based on different parameters, such as payroll hours, processed
claims, or square footage, among others. In addition, some depreciable assets are kept by one segment,
while allocating the depreciation expense to other segments. The allocation of the depreciation expense is
based on the proportion of assets used by each segment. Certain expenses are not allocated to the
segments and are kept within TSM’s operations.
107
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
The following tables summarize the operations by operating segment for each of the years in the three-year
period ended December 31:
108
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Operating income (loss)
Managed care
Life
Property and casualty
Other segments*
Total business segments
TSM operating revenues from external sources
TSM unallocated operating expenses
Elimination of TSM charges
Consolidated operating income (loss)
Consolidated net realized investment gains
Consolidated net unrealized investment gains (losses) on
equity securities
Consolidated interest expense
Consolidated other income, net
2019
2018
2017
$
61,907
21,912
14,492
(3,054)
$
26,468
19,901
(110,119)
8
$
55,040
19,434
(6,034)
(391)
95,257
1,443
(8,588)
9,612
97,724
5,843
32,151
(7,672)
4,206
(63,742)
1,624
(8,815)
9,600
(61,333)
298
(36,546)
(6,903)
11,312
68,049
545
(9,787)
9,600
68,407
10,831
-
(6,794)
6,533
Consolidated income (loss) before taxes
$
132,252
$
(93,172)
$
78,977
Depreciation and amortization expense
Managed care
Life
Property and casualty
Other segments*
Total business segments
TSM depreciation expense
2019
2018
2017
$
11,527
1,081
385
910
$
10,525
1,134
384
705
$
10,007
1,203
528
673
13,903
697
12,748
787
12,411
787
Consolidated depreciation and amortization expense
$
14,600
$
13,535
$
13,198
* Includes segments that are not required to be reported separately, primarily the data processing services
organization and the health clinics.
109
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019, 2018, and 2017
(dollar amounts in thousands, except per share and share information)
Assets
Managed care
Life
Property and casualty
Other segments*
Total business segments
Unallocated amounts related to TSM
Cash, cash equivalents, and investments
Property and equipment, net
Other assets
2019
2018
2017
$
1,190,538
981,370
592,758
28,346
$
1,078,262
863,470
747,583
20,705
$
1,092,715
853,289
1,094,773
19,027
2,793,012
2,710,020
3,059,804
28,167
25,623
37,176
90,966
57,818
21,733
22,521
81,169
22,257
22,763
102,072
126,189
Elimination entries – intersegment receivables and others
(65,152)
(51,844)
(69,228)
Consolidated total assets
$
2,818,826
$
2,760,248
$
3,116,765
Significant noncash items
Net change in unrealized gain (loss) on securities available for sale
Managed care
Life
Property and casualty
Other segments*
Total business segments
Amount related to TSM
2019
2018
2017
$
9,687
17,442
3,023
-
$
2,585
(11,285)
(583)
-
$
3,932
7,142
2,691
-
30,152
370
(9,283)
13,765
235
102
Consolidated net change in unrealized (loss) gain
on securities available for sale
$
30,522
$
(9,048)
$
13,867
* Includes segments that are not required to be reported separately, primarily the data processing services
organization and the health clinics.
28. Subsequent Events
The Company evaluated subsequent events through the date the consolidated 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.
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