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EX-32.1 - EXHIBIT 32.1 - TRIPLE-S MANAGEMENT CORPex32_1.htm
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EX-31.1 - EXHIBIT 31.1 - TRIPLE-S MANAGEMENT CORPex31_1.htm
EX-31.2 - EXHIBIT 31.2 - TRIPLE-S MANAGEMENT CORPex31_2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

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

For the quarterly period ended June 30, 2015

or

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

For the transition period from _______ to _______
 
COMMISSION FILE NUMBER:  001-33865

Triple-S Management Corporation
 
Puerto Rico
 
66-0555678
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico
 
 
00920
(Address of principal executive offices)
 
(Zip code)
 
(787) 749-4949
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☑ Yes  ☐ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ☐
Accelerated filer  ☑
 
Non-accelerated filer  ☐
Smaller reporting company  ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ Yes  ☑ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Title of each class
 
Outstanding at June 30, 2015
Common Stock Class A, $1.00 par value
 
2,377,689
Common Stock Class B, $1.00 par value
 
23,650,247
 


 

Triple-S Management Corporation

FORM 10-Q

For the Quarter Ended June 30, 2015

Table of Contents
 
3
 
 
Item 1.
3
 
 
Item 2.
35
 
 
35
 
35
  Recent Developments 37
  Recent Accounting Standards 38
 
38
  Consolidated Operating Results 39
 
42
  Life Insurance Operating Results 45
  Property and Casualty Operating Results 46
 
48
 
 
Item 3.
50
 
 
Item 4.
50
 
50
 
 
Item 1.
50
 
 
Item 1A.
50
 
 
Item 2.
51
 
 
Item 3.
51
 
 
Item 4.
51
 
 
Item 5.
51
 
 
Item 6. 
51
 
52
 
Part I – Financial Information

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

 
   
June 30,
2015
   
December 31,
2014
 
Assets
       
Investments and cash:
       
Securities available for sale, at fair value:
       
Fixed maturities
 
$
1,079,651
   
$
1,115,899
 
Equity securities
   
155,657
     
197,756
 
Securities held to maturity, at amortized cost:
               
Fixed maturities
   
2,947
     
2,944
 
Policy loans
   
7,334
     
7,260
 
Cash and cash equivalents
   
212,504
     
110,037
 
Total investments and cash
   
1,458,093
     
1,433,896
 
Premiums and other receivables, net
   
354,090
     
315,622
 
Deferred policy acquisition costs and value of business acquired
   
186,143
     
184,100
 
Property and equipment, net
   
74,530
     
78,343
 
Deferred tax asset
   
77,819
     
68,695
 
Goodwill
   
25,397
     
25,397
 
Other assets
   
57,261
     
39,683
 
Total assets
 
$
2,233,333
   
$
2,145,736
 
Liabilities and Stockholders' Equity
               
Claim liabilities
 
$
462,186
   
$
390,086
 
Liability for future policy benefits
   
339,707
     
328,293
 
Unearned premiums
   
80,192
     
82,656
 
Policyholder deposits
   
118,921
     
118,912
 
Liability to Federal Employees' Health Benefits Program (FEHBP)
   
16,489
     
15,666
 
Accounts payable and accrued liabilities
   
206,483
     
162,458
 
Deferred tax liability
   
22,052
     
28,456
 
Long-term borrowings
   
62,647
     
74,467
 
Liability for pension benefits
   
81,200
     
86,716
 
Total liabilities
   
1,389,877
     
1,287,710
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders' equity
               
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 2,377,689 at June 30, 2015 and December 31, 2014, respectively
   
2,378
     
2,378
 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding  23,650,247 and 24,654,497 shares at June 30, 2015 and December 31, 2014, respectively
   
23,650
     
24,654
 
Additional paid-in capital
   
99,617
     
121,405
 
Retained earnings
   
695,107
     
661,345
 
Accumulated other comprehensive income
   
23,291
     
48,776
 
Total Triple-S Management Corporation stockholders' equity
   
844,043
     
858,558
 
Non-controlling interest in consolidated subsididary
   
(587
)
   
(532
)
Total stockholders' equity
   
843,456
     
858,026
 
Total liabilities and stockholders’ equity
 
$
2,233,333
   
$
2,145,736
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Earnings (Unaudited)
(Dollar amounts in thousands, except per share data)

 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Revenues:
               
Premiums earned, net
 
$
754,107
   
$
543,735
   
$
1,286,665
   
$
1,085,587
 
Administrative service fees
   
4,549
     
29,506
     
33,672
     
59,256
 
Net investment income
   
10,998
     
12,147
     
21,916
     
23,498
 
Other operating revenues
   
641
     
850
     
1,794
     
2,344
 
Total operating revenues
   
770,295
     
586,238
     
1,344,047
     
1,170,685
 
Net realized investment gains (losses):
                               
Total other-than-temporary impairment losses on securities
   
(1,660
)
   
(462
)
   
(2,862
)
   
(462
)
Net realized gains, excluding other-than-temporary impairment losses on securities
   
12,267
     
4,390
     
19,682
     
4,516
 
Total net realized investment gains
   
10,607
     
3,928
     
16,820
     
4,054
 
Other income, net
   
1,083
     
575
     
2,842
     
821
 
Total revenues
   
781,985
     
590,741
     
1,363,709
     
1,175,560
 
Benefits and expenses:
                               
Claims incurred
   
637,898
     
428,641
     
1,070,328
     
877,748
 
Operating expenses
   
126,824
     
123,589
     
254,199
     
248,956
 
Total operating costs
   
764,722
     
552,230
     
1,324,527
     
1,126,704
 
Interest expense
   
2,074
     
2,396
     
4,256
     
4,701
 
Total benefits and expenses
   
766,796
     
554,626
     
1,328,783
     
1,131,405
 
Income before taxes
   
15,189
     
36,115
     
34,926
     
44,155
 
Income tax expense (benefit)
   
(3,712
)
   
8,662
     
1,219
     
9,773
 
Net income
   
18,901
     
27,453
     
33,707
     
34,382
 
Less: Net loss attributable to non-controlling interest
   
25
     
23
     
55
     
49
 
Net income attributable to Triple-S Management Corporation
 
$
18,926
   
$
27,476
   
$
33,762
   
$
34,431
 
Earnings per share attributable to Triple-S Management Corporation
                               
Basic net income per share
 
$
0.73
   
$
1.01
   
$
1.29
   
$
1.27
 
Diluted net income per share
 
$
0.73
   
$
1.01
   
$
1.28
   
$
1.26
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollar amounts in thousands)

 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net income
 
$
18,901
   
$
27,453
   
$
33,707
   
$
34,382
 
Other comprehensive income (loss), net of tax:
                               
Net unrealized change in fair value of available for sale securities, net of taxes
   
(29,044
)
   
19,080
     
(27,250
)
   
41,382
 
Defined benefit pension plan:
                               
Actuarial loss, net
   
1,016
     
649
     
1,903
     
1,354
 
Prior service credit, net
   
(77
)
   
(70
)
   
(138
)
   
(144
)
Total other comprehensive income (loss), net of tax
   
(28,105
)
   
19,659
     
(25,485
)
   
42,592
 
Comprehensive income (loss)
   
(9,204
)
   
47,112
     
8,222
     
76,974
 
Comprehensive loss attributable to non-controlling interest
   
25
     
23
     
55
     
49
 
Comprehensive income (loss) attributable to Triple-S Management Corporation
 
$
(9,179
)
 
$
47,135
   
$
8,277
   
$
77,023
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(Dollar amounts in thousands)

 
   
2015
   
2014
 
Balance at January 1
 
$
858,558
   
$
785,381
 
Share-based compensation
   
3,199
     
1,221
 
Stock issued upon the exercise of stock options
   
179
     
2,885
 
Repurchase and retirement of common stock
   
(26,170
)
   
(9,044
)
Comprehensive income
   
8,277
     
77,023
 
Total Triple-S Management Corporation stockholders' equity
   
844,043
     
857,466
 
Non-controlling interest in consolidated subsididary
   
(587
)
   
(227
)
Balance at June 30
 
$
843,456
   
$
857,239
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)

   
Six months ended
June 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
       
Net income
 
$
33,707
   
$
34,382
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
8,138
     
10,578
 
Net amortization of investments
   
3,187
     
3,031
 
Additions to the allowance for doubtful receivables
   
11,626
     
6,388
 
Deferred tax benefit
   
(6,423
)
   
(2,119
)
Net realized investment gain on sale of securities
   
(16,820
)
   
(4,054
)
Share-based compensation
   
3,199
     
1,221
 
(Increase) decrease in assets:
               
Premium and other receivables, net
   
(56,003
)
   
(70,556
)
Deferred policy acquisition costs and value of business acquired
   
(2,043
)
   
(2,826
)
Deferred taxes
   
(4,876
)
   
259
 
Other assets
   
(16,596
)
   
(1,888
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
72,100
     
(5,713
)
Liability for future policy benefits
   
11,414
     
11,693
 
Unearned premiums
   
(2,464
)
   
(3,841
)
Policyholder deposits
   
1,742
     
1,685
 
Liability to FEHBP
   
823
     
(3,523
)
Accounts payable and accrued liabilities
   
36,017
     
28,292
 
Net cash provided by operating activities
   
76,728
     
3,009
 
 
(Continued)
 
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)
 
   
Six months ended
June 30,
 
   
2015
   
2014
 
Cash flows from investing activities:
       
Proceeds from investments sold or matured:
       
Securities available for sale:
       
Fixed maturities sold
 
$
241,476
   
$
95,759
 
Fixed maturities matured/called
   
34,906
     
17,066
 
Equity securities sold
   
65,621
     
40,745
 
Securities held to maturity - fixed maturities matured/called
   
100
     
2,418
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(259,984
)
   
(137,783
)
Equity securities
   
(12,165
)
   
(20,650
)
Securities held to maturity - fixed maturities
   
(103
)
   
(350
)
Other investments
   
(2,522
)
   
(424
)
Net outflows from policy loans
   
(74
)
   
(172
)
Net capital expenditures
   
(3,003
)
   
(2,791
)
Net cash used in (provided by) investing activities
   
64,252
     
(6,182
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
1,028
     
(3,593
)
Repayments of long-term borrowings
   
(11,820
)
   
(992
)
Repurchase and retirement of common stock
   
(25,988
)
   
(5,995
)
Proceeds from policyholder deposits
   
4,538
     
3,305
 
Surrenders of policyholder deposits
   
(6,271
)
   
(4,559
)
Net cash used in financing activities
   
(38,513
)
   
(11,834
)
Net increase (decrease) in cash and cash equivalents
   
102,467
     
(15,007
)
Cash and cash equivalents:
               
Beginning of period
   
110,037
     
74,356
 
End of period
 
$
212,504
   
$
59,349
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
(1) Basis of Presentation

The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited.  In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries.  The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements.  These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included.  The results of operations for the three months and six months ended June 30, 2015 are not necessarily indicative of the results for the full year ending December 31, 2015.

(2) Recent Accounting Standards

On April 7, 2015, the Financial Accounting Standards Board (FASB) issued guidance addressing the different balance sheet presentation requirements for debt issuance costs and debt discount and premiums.  This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs is not significantly affected.  This guidance is effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2015.  We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial position or results of operations.

On May 1, 2015, the FASB issued guidance addressing the current diversity in practice regarding the manner in which certain investments measured at net asset value with redemption dates in the future, including periodic redemption dates, are categorized within the fair value hierarchy.  This guidance eliminates the requirement to categorize within the fair value hierarchy investments for which fair values are measured at net asset value using the practical expedient.  Additionally, it eliminates the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value practical expedient.  This guidance is effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2015.  We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial position or results of operations.

On May 21, 2015, the FASB issued guidance to make targeted improvements to short-duration insurance contracts requiring insurance entities to disclose for annual reporting periods, among other information about the liability for unpaid claims and claim adjustment expenses, (1) incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years, including the most recent reporting period presented in the statement of financial position). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary information; and (2) for each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies).  This guidance is effective for public companies for fiscal years beginning after December 31, 2015, and interim periods within such fiscal years beginning after December 15, 2016.  We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial position or results of operations.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the three months and six months ended June 30, 2015 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.

(3) Investment in Securities

The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at June 30, 2015 and December 31, 2014, were as follows:
 
   
June 30, 2015
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
               
Fixed maturities:
               
Obligations of government-sponsored enterprises
 
$
107,362
   
$
1,047
   
$
(6
)
 
$
108,403
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
155,385
     
954
     
-
     
156,339
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
26,650
     
-
     
(23
)
   
26,627
 
Municipal securities
   
588,989
     
36,023
     
(316
)
   
624,696
 
Corporate bonds
   
119,190
     
12,003
     
-
     
131,193
 
Residential mortgage-backed securities
   
1,023
     
67
     
-
     
1,090
 
Collateralized mortgage obligations
   
30,195
     
1,108
     
-
     
31,303
 
Total fixed maturities
   
1,028,794
     
51,202
     
(345
)
   
1,079,651
 
Equity securities - mutual funds
   
121,573
     
34,141
     
(57
)
   
155,657
 
Total
 
$
1,150,367
   
$
85,343
   
$
(402
)
 
$
1,235,308
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
   
December 31, 2014
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
               
Fixed maturities:
               
Obligations of government-sponsored enterprises
 
$
129,649
   
$
1,014
   
$
(19
)
 
$
130,644
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
94,480
     
648
     
(28
)
   
95,100
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
35,115
     
138
     
-
     
35,253
 
Municipal securities
   
585,088
     
49,181
     
(50
)
   
634,219
 
Corporate bonds
   
147,224
     
17,744
     
(134
)
   
164,834
 
Residential mortgage-backed securities
   
6,808
     
311
     
-
     
7,119
 
Collateralized mortgage obligations
   
46,921
     
1,809
     
-
     
48,730
 
Total fixed maturities
   
1,045,285
     
70,845
     
(231
)
   
1,115,899
 
Equity securities - mutual funds
   
150,799
     
47,049
     
(92
)
   
197,756
 
Total
 
$
1,196,084
   
$
117,894
   
$
(323
)
 
$
1,313,655
 

   
June 30, 2015
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
 
   
   
   
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
621
   
$
177
   
$
-
   
$
798
 
Residential mortgage-backed securities
   
217
     
22
     
-
     
239
 
Certificates of deposit
   
2,109
     
-
     
-
     
2,109
 
Total
 
$
2,947
   
$
199
   
$
-
   
$
3,146
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
   
December 31, 2014
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
               
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
622
   
$
198
   
$
-
   
$
820
 
Residential mortgage-backed securities
   
217
     
21
     
-
     
238
 
Certificates of deposit
   
2,105
     
-
     
-
     
2,105
 
Total
 
$
2,944
   
$
219
   
$
-
   
$
3,163
 
 
Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2015 and December 31, 2014 were as follows:
 
   
June 30, 2015
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number
of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number
of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number
of
Securities
 
Securites available for sale:
                                   
Fixed maturities:
                                   
Obligations of government-sponsored enterprises
 
$
6,393
   
$
(6
)
   
1
   
$
-
   
$
-
     
-
   
$
6,393
   
$
(6
)
   
1
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
16,507
     
(23
)
   
6
     
-
     
-
     
-
     
16,507
     
(23
)
   
6
 
Municipal securities
   
31,228
     
(316
)
   
9
     
-
     
-
     
-
     
31,228
     
(316
)
   
9
 
Total fixed maturities
   
54,128
     
(345
)
   
16
     
-
     
-
     
-
     
54,128
     
(345
)
   
16
 
Equity securities - mutual funds
   
3,599
     
(57
)
   
1
     
-
     
-
     
-
     
3,599
     
(57
)
   
1
 
Total for securities available for sale
 
$
57,727
   
$
(402
)
   
17
   
$
-
   
$
-
     
-
   
$
57,727
   
$
(402
)
   
17
 

   
December 31, 2014
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
Securites available for sale:
                                   
Fixed maturities:
                                   
Obligations of government-sponsored enterprises
 
$
43,105
   
$
(19
)
   
2
   
$
-
   
$
-
     
-
   
$
43,105
   
$
(19
)
   
2
 
U.S. Treasury securities  and obligations of U.S. governmental instrumentalities
   
39,966
     
(28
)
   
2
     
-
     
-
     
-
     
39,966
     
(28
)
   
2
 
Municipal securities
   
6,749
     
(24
)
   
3
     
6,693
     
(26
)
   
3
     
13,442
     
(50
)
   
6
 
Corporate bonds
   
17,053
     
(50
)
   
4
     
20,405
     
(84
)
   
4
     
37,458
     
(134
)
   
8
 
Total fixed maturities
   
106,873
     
(121
)
   
11
     
27,098
     
(110
)
   
7
     
133,971
     
(231
)
   
18
 
Equity securities - mutual funds
   
7,773
     
(92
)
   
2
     
-
     
-
     
-
     
7,773
     
(92
)
   
2
 
Total for securities available for sale
 
$
114,646
   
$
(213
)
   
13
   
$
27,098
   
$
(110
)
   
7
   
$
141,744
   
$
(323
)
   
20
 
 
The Corporation regularly monitors and evaluates the difference between the amortized cost and estimated fair value of investments.  For investments 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 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 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.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
Due to the subjective nature of the Corporation’s analysis, along with the judgment that must be applied in the analysis, it is possible that the Corporation 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 Corporation determined during its analysis, which may lead to a different impairment conclusion in future periods.

If after monitoring and analyzing impaired securities, the Corporation 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-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.

The Corporation’s process for identifying and reviewing 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.

Review and evaluation of any other security based on the 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.  This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of their cost.

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.

Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision; and

Equity securities are considered to be impaired when a position is in an unrealized loss for a period longer than 6 months.

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

Obligations of Government-Sponsored Enterprises and Municipal Securities: One position in this category met the requirements for detailed evaluation, which is a bond issued by the University of Massachusetts Building Authority with a maturity date of May 1, 2039. This bond is rated Aa2/AA- and the revenue stream is College and University revenues. The unrealized loss of this position is $118, which represents 2.1% of its book value. The position was acquired in April 2015 and the unrealized loss is due to general market movements, as interest rates have increased between April and June. We do not consider this position other-than-temporarily impaired as of June 30, 2015, because: (a) the unrealized loss percentage is small, (b) the unrealized loss is due to general market movements, (c) we do not have the intent to sell this investment, and (d) it is not more likely than not that we will be required to sell this investment before recovery of its amortized cost basis (which may be maturity).

Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $16,507 and a gross unrealized loss of $23, and (2) bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $10,120 and no unrealized gain or loss after the other-than-temporary impairment.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
Besides holdings in escrowed bonds, which are backed by US Government securities and therefore have an implicit AA+/Aaa rating, our exposure is in senior lien bonds issued by Cofina.  Below we will discuss the Cofina structure and security, recent events and our impairment conclusion.

Cofina bonds are backed by a sales tax levied on the island, which was increased to 11.5% from an original rate of 7%, effective July 1, 2015.  The revenue of the incremental rate of 4.5% flows directly into the General Fund of the Commonwealth.  The revenue of the original rate of 7% follows the flow of funds as described below.

Of the original 7% tax rate, 1.5% is a separated revenue stream for municipalities. Of the remaining 5.5%, the larger of 2.75% or a base amount is pledged to the sales tax bonds. In terms of flow of funds, the 5.5% remaining revenue is first used for debt service on senior lien bonds, then for debt service on subordinate bonds and the excess flows into the General Fund.  Effective government fiscal year 2015/16, the flow of funds has been somewhat revised to benefit Cofina. The municipality portion of 0.5% is first directed to Cofina in order to satisfy the above mentioned base amount.  Once this base amount is reached, the municipality portion catches up by receiving the amounts which were previously diverted towards Cofina.

Sales tax revenues are dependent on the Puerto Rico economic situation and the sales tax base amount mentioned above would need to grow over time to cover debt service, especially to cover the longer maturities. However, the Company mostly owns shorter Cofina senior bonds, for which debt service coverage based on current revenues is ample.

According to the Government Development Bank, legal opinions from the Puerto Rico’s Secretary of Justice, Bond Counsel and Underwriters’ Counsel, pledged sales tax revenues do not constitute available resources of the Commonwealth. In other words, these revenues are not subject to the so called Puerto Rico general obligations (GO) debt “clawback” under the Commonwealth’s constitution, which provides that certain revenues used to support various bond issues are available to be applied first to the payment of GO debt if needed . This suggests that Cofina bonds could be somewhat isolated from the other Puerto Rico credits.
 
General Obligation bonds and Cofina are generally considered to have the strongest legal protections.  However, it seems that the Puerto Rico government is moving towards a consolidated debt restructuring across all issuers (see below).  Cofina could either directly be included in this restructuring or the GO bond holders could challenge the separation of the sales tax revenue stream.
 
During the last year, the Puerto Rico Government has tried to find several solutions to improve its fiscal situation.  Among other initiatives, the Government has (1) sought to provide a legal framework for restructuring its public corporation debt, (2) has planned a bond sale backed by a new fuel tax and (3) has increased sales tax revenue.
 
Intended to provide a legal framework for restructuring public corporation debt, the Puerto Rico Public Corporations Debt Enforcement and Recovery Act (the Recovery Act) was passed by the Legislature in June 2014. The Central Government, municipalities and related agencies (including bonds issued by Cofina) would explicitly not be eligible, i.e. these could be restructured under this new act.  However, the U.S. District Court of Puerto Rico ruled the Recovery Act unconstitutional in February 2015.  On July 6, 2005, the First Circuit Court of Appeals confirmed the decision of the District Court.  The Government of Puerto Rico has announced it is considering taking the controversy to the U.S. Supreme Court.  As a response to the District Court decision (later confirmed by the First Circuit), the Resident Commissioner of Puerto Rico, a non-voting member of the U.S. House of Representatives, filed a bill seeking to allow the public corporations to restructure their debt under Chapter 9 of the federal bankruptcy code, if needed.  Currently, this bill is still being debated in the U.S. Congress.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
In December 2014, the Puerto Rico legislature approved a new fuel tax of 15%.  This new tax was supposed to back a $2,900,000 bond sale by the Highway Authority, which would be used to pay off a $2,200,000 debt of that agency with the Government Development Bank.  However, this bond deal was not brought to market.  Effective March 15, 2015, the tax on petroleum products increased approximately 7%.
 
In an attempt to raise additional revenue, the Puerto Rico Government proposed a 16 percent value-added tax on goods and services in February 2015. This new tax would replace the 7 percent sales and use tax and would be combined with lower income tax rates. However, on April 29, 2015 the House of Representatives rejected the proposal. In a second attempt to raise revenue, in May 2015, the legislature passed a bill to increase the sales tax from 7% to 11.5%, effective July 1, 2015, and to introduce a 4% sales tax on services provided between businesses and on professional services, effective October 1, 2015.

Despite the initiatives above, more recently the Puerto Rico Government has changed its historical position and indicated that it is unable to support its debt burden. A study of the financial situation by former officials at the International Monetary Fund and the World Bank, published in June 2015, concluded that the debt load is unsustainable and that a debt restructuring can no longer be avoided. Subsequently, Puerto Rico’s Governor said that the debt was “not payable” and that the Puerto Rico Government would probably seek significant concessions from all of the island’s creditors, which could include deferring some debt payments for a number of years. The Governor also appointed a working group, which is asked to devise fiscal reforms and work on a debt restructuring.

At the end of June 2015, the legislature passed a $9,800,000 budget for the next fiscal year. However, legislation was also passed that would allow suspending monthly General Obligation debt service deposits. These deposits would be suspended until next fiscal year unless the Government can raise funds through the issuance of tax revenue anticipation notes (TRANs) or other borrowings.

As a first step towards debt restructuring, the Government held a meeting with creditors on July 14, 2015, but offered no specifics with regards to which obligations might be restructured. Officials acknowledged the need for capital market access, indicated that liquidity would be very tight in the beginning of the new fiscal year and mentioned that certain measures had been taken, including the issuance of $400,000 TRANs to certain Government entities and advances from Puerto Rico’s retirement system. Despite these measures, on August 1, 2015, the Puerto Rico Public Finance Corporation failed to remit enough cash to its paying agent to satisfy its entire debt service obligation.  This is the first time that Puerto Rico has defaulted on any of its bonded debt obligations, showing its constrained liquidity position.

This quarter, S&P and Moody’s have continued to downgrade Puerto Rico credits. On June 29, 2015, S&P downgraded General Obligation bonds and Cofina senior to CCC-, maintaining a negative outlook. S&P states that the potential for a restructuring of some or all of the Commonwealth’s debt is a significant possibility over the next six months. On July 1, 2015, Moody’s downgraded General Obligation bonds and Cofina senior to Caa3, maintaining a negative outlook. Moody’s notes that even those Puerto Rico securities with strong legal protections face a significant loss.

We considered our unrealized loss position in Cofina to be other-than-temporarily impaired as of June 30, 2015, because: (a) the financial position of the Commonwealth has deteriorated further, evidenced by a lack of liquidity and market access, and (b) the Puerto Rico government is moving towards a consolidated debt restructuring, which could include Cofina or could jeopardize the separation of the sales tax revenue stream.  As a result, during the three months and six months ended June 30, 2015, we recorded an other-than-temporary impairment for the Cofina positions amounting to $1,660 and $2,862, respectively.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
Maturities of investment securities classified as available for sale and held to maturity at June 30, 2015 were as follows:
 
   
June 30, 2015
 
   
Amortized
cost
   
Estimated
fair value
 
Securities available for sale:
       
Due in one year or less
 
$
48,258
   
$
48,990
 
Due after one year through five years
   
330,556
     
336,761
 
Due after five years through ten years
   
111,151
     
117,524
 
Due after ten years
   
507,611
     
543,983
 
Residential mortgage-backed securities
   
1,023
     
1,090
 
Collateralized mortgage obligations
   
30,195
     
31,303
 
   
$
1,028,794
   
$
1,079,651
 
Securities held to maturity:
               
Due in one year or less
 
$
2,109
   
$
2,109
 
Due after ten years
   
621
     
798
 
Residential mortgage-backed securities
   
217
     
239
 
   
$
2,947
   
$
3,146
 
 
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.

Information regarding realized and unrealized gains and losses from investments for the three months and six months ended June 30, 2015 and 2014 is as follows:
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2015
   
2014
   
2015
   
2014
 
Realized gains (losses):
               
Fixed maturity securities:
               
Securities available for sale:
               
Gross gains from sales
 
$
2,328
   
$
380
   
$
6,337
   
$
1,703
 
Gross losses from sales
   
(129
)
   
(112
)
   
(404
)
   
(1,957
)
Gross losses from other-than-temporary impairments
   
(1,660
)
   
(462
)
   
(2,862
)
   
(462
)
Total debt securities
   
539
     
(194
)
   
3,071
     
(716
)
Equity securities:
                               
Securities available for sale:
                               
Gross gains from sales
   
10,138
     
2,697
     
13,874
     
4,616
 
Gross losses from sales
   
(70
)
   
-
     
(125
)
   
(1,271
)
Total equity securities
   
10,068
     
2,697
     
13,749
     
3,345
 
Net realized gains on securities available for sale
   
10,607
     
2,503
     
16,820
     
2,629
 
Gross gain from other investment
   
-
     
1,425
     
-
     
1,425
 
Net realized investment gains
 
$
10,607
   
$
3,928
   
$
16,820
   
$
4,054
 
 
The other-than-temporary impairments on fixed maturity securities are attributable to credit losses.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2015
   
2014
   
2015
   
2014
 
Changes in net unrealized gains (losses):
 
   
   
   
 
Recognized in accumulated other comprehensive income:
 
   
   
   
 
Fixed maturities – available for sale
 
$
(23,848
)
 
$
16,162
   
$
(19,757
)
 
$
39,917
 
Equity securities – available for sale
   
(11,595
)
   
6,292
     
(12,873
)
   
8,947
 
   
$
(35,443
)
 
$
22,454
   
$
(32,630
)
 
$
48,864
 
Not recognized in the consolidated financial statements:
                               
Fixed maturities – held to maturity
 
$
(37
)
 
$
11
   
$
(20
)
 
$
13
 
 
The deferred tax asset (liability) on unrealized gains change recognized in accumulated other comprehensive income during the six months ended June 30, 2015 and 2014 was $5,380 and ($7,842), respectively.

As of June 30, and December 31, 2014, no individual investment in securities exceeded 10% of stockholders’ equity.

The components of net investment income were as follows:
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2015
   
2014
   
2015
   
2014
 
Fixed maturities
 
$
8,592
   
$
9,569
   
$
17,941
   
$
19,239
 
Equity securities
   
1,777
     
2,270
     
3,124
     
3,616
 
Policy loans
   
135
     
133
     
266
     
258
 
Cash equivalents and interest-bearing deposits
   
33
     
14
     
63
     
26
 
Other
   
461
     
161
     
522
     
359
 
Total
 
$
10,998
   
$
12,147
   
$
21,916
   
$
23,498
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
(4) Premiums and Other Receivables, Net

Premiums and other receivables, net as of June 30, 2015 and December 31, 2014 were as follows:
 
   
June 30,
2015
   
December 31,
2014
 
Premiums
 
$
159,874
   
$
131,496
 
Self-insured group receivables
   
76,467
     
62,189
 
FEHBP
   
13,811
     
12,384
 
Agent balances
   
30,779
     
25,300
 
Accrued interest
   
12,276
     
11,737
 
Reinsurance recoverable
   
48,358
     
50,686
 
Unsettled sales
   
4,547
     
10,456
 
Other
   
47,706
     
47,742
 
     
393,818
     
351,990
 
Less allowance for doubtful receivables:
               
Premiums
   
31,272
     
28,983
 
Other
   
8,456
     
7,385
 
     
39,728
     
36,368
 
Total premiums and other receivables, net
 
$
354,090
   
$
315,622
 
 
As of June 30, 2015 and December 31, 2014, the Company had premiums and other receivables of $94,604 and $89,904, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of June 30, 2015 and December 31, 2014 were $19,447 and $11,614, respectively.
 
(5) Fair Value Measurements

Assets recorded at fair value in the condensed 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:
Input Definition:
Level 1
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2
 
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.
Level 3
 
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.

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.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
The following tables summarize fair value measurements by level at June 30, 2015 and December 31, 2014 for assets measured at fair value on a recurring basis:
 
   
June 30, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
               
Fixed maturity securities
               
Obligations of government-sponsored enterprises
 
$
-
   
$
108,403
   
$
-
   
$
108,403
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
156,339
     
-
     
-
     
156,339
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
26,627
     
-
     
26,627
 
Municipal securities
   
-
     
624,696
     
-
     
624,696
 
Corporate bonds
   
-
     
131,193
     
-
     
131,193
 
Residential agency mortgage-backed securities
   
-
     
1,090
     
-
     
1,090
 
Collateralized mortgage obligations
   
-
     
31,303
     
-
     
31,303
 
Total fixed maturities
   
156,339
     
923,312
     
-
     
1,079,651
 
Equity securities - mutual funds
   
128,305
     
18,269
     
9,083
     
155,657
 
                                 
Total
 
$
284,644
   
$
941,581
   
$
9,083
   
$
1,235,308
 

   
December 31, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
               
Fixed maturity securities
               
Obligations of government-sponsored enterprises
 
$
-
   
$
130,644
   
$
-
   
$
130,644
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
95,100
     
-
     
-
     
95,100
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
35,253
     
-
     
35,253
 
Municipal securities
   
-
     
634,219
     
-
     
634,219
 
Corporate bonds
   
-
     
164,834
     
-
     
164,834
 
Residential agency mortgage-backed securities
   
-
     
7,119
     
-
     
7,119
 
Collateralized mortgage obligations
   
-
     
48,730
     
-
     
48,730
 
Total fixed maturities
   
95,100
     
1,020,799
     
-
     
1,115,899
 
Equity securities - mutual funds
   
160,461
     
23,946
     
13,349
     
197,756
 
                                 
Total
 
$
255,561
   
$
1,044,745
   
$
13,349
   
$
1,313,655
 
 
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 utilize 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 the investments in partnerships included in the Level 3 category was based on the net asset value (NAV) which is affected by the changes in the fair market value of the investments held in these partnerships.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
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 in and/or out of Level 3 and between Levels 1 and 2 during the three months and six months ended June 30, 2015 and 2014.

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2015 and 2014 is as follows:
 
   
Three months ended
 
   
June 30, 2015
   
June 30, 2014
 
   
Fixed
Maturity
Securities
   
Equity
Securities
   
Total
   
Fixed
Maturity
Securities
   
Equity
Securities
   
Total
 
Beginning balance
 
$
-
   
$
10,191
   
$
10,191
   
$
-
   
$
18,868
   
$
18,868
 
Realized gains
   
-
     
-
     
-
     
-
             
-
 
Unrealized loss in other accumulated comprehensive income
   
-
     
(700
)
   
(700
)
   
-
     
(353
)
   
(353
)
Capital distributions
   
-
     
(519
)
   
(519
)
   
-
     
(2,001
)
   
(2,001
)
Purchases
   
-
     
111
     
111
     
-
     
345
     
345
 
Transfers in and/or out of Level 3
   
-
     
-
     
-
     
-
     
-
     
-
 
Ending balance
 
$
-
   
$
9,083
   
$
9,083
   
$
-
   
$
16,859
   
$
16,859
 

   
Six months ended
 
   
June 30, 2015
   
June 30, 2014
 
   
Fixed
Maturity
Securities
   
Equity
Securities
   
Total
   
Fixed
Maturity
Securities
   
Equity
Securities
   
Total
 
Beginning balance
 
$
-
   
$
13,349
   
$
13,349
   
$
-
   
$
17,910
   
$
17,910
 
Realized gains
   
-
     
1,412
     
1,412
     
-
     
-
     
-
 
Unrealized gain (loss) in other accumulated comprehensive income
   
-
     
(3,302
)
   
(3,302
)
   
-
     
605
     
605
 
Capital distributions
   
-
     
(2,565
)
   
(2,565
)
   
-
     
(2,001
)
   
(2,001
)
Purchases
   
-
     
189
     
189
     
-
     
345
     
345
 
Transfers in and/or out of Level 3
   
-
     
-
     
-
     
-
     
-
     
-
 
Ending balance
 
$
-
   
$
9,083
   
$
9,083
   
$
-
   
$
16,859
   
$
16,859
 
 
In addition to the preceding disclosures on assets recorded at fair value in the condensed 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 condensed 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 condensed 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.  These assets and liabilities are not listed in the table below.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:

(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 – variable approximates fair value due to its floating interest-rate structure.  The fair value of the senior unsecured notes payable was determined using broker quotations.

(iv) Repurchase Agreement

The value of the repurchase agreement with a long term maturity is based on the discounted value of the contractual cash flows using current estimated market discount rates for instruments with similar terms.

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on our condensed consolidated balance sheets at June 30, 2015 and December 31, 2014 are as follows:
 
 
 
June 30, 2015
 
 
 
Carrying
   
Fair Value
 
 
 
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
 
   
   
   
   
 
Policy loans
 
$
7,334
   
$
-
   
$
7,334
   
$
-
   
$
7,334
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
118,921
   
$
-
   
$
118,921
   
$
-
   
$
118,921
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
13,647
     
-
     
13,647
     
-
     
13,647
 
6.6% senior unsecured notes payable
   
24,000
     
-
     
25,173
     
-
     
25,173
 
Repurchase agreement
   
25,000
     
-
     
27,140
     
-
     
27,140
 
Total long-term borrowings
   
62,647
     
-
     
65,960
     
-
     
65,960
 
Total liabilities
 
$
181,568
   
$
-
   
$
184,881
   
$
-
   
$
184,881
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
 
 
December 31, 2014
 
 
 
Carrying
   
Fair Value
 
 
 
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
 
   
   
   
   
 
Policy loans
 
$
7,260
   
$
-
   
$
7,260
   
$
-
   
$
7,260
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
118,912
   
$
-
   
$
118,912
   
$
-
   
$
118,912
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
14,467
     
-
     
14,467
     
-
     
14,467
 
6.6% senior unsecured notes payable
   
35,000
     
-
     
33,513
     
-
     
33,513
 
Repurchase agreement
   
25,000
     
-
     
25,337
     
-
     
25,337
 
Total long-term borrowings
   
74,467
     
-
     
73,317
     
-
     
73,317
 
Total liabilities
 
$
193,379
   
$
-
   
$
192,229
   
$
-
   
$
192,229
 
 
(6) Claim Liabilities

The activity in the total claim liabilities for the three months and six months ended June 30, 2015 and 2014 is as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Claim liabilities at beginning of period
 
$
401,642
   
$
446,710
   
$
390,086
   
$
420,421
 
Reinsurance recoverable on claim liabilities
   
(39,958
)
   
(40,615
)
   
(40,635
)
   
(37,557
)
Net claim liabilities at beginning of period
   
361,684
     
406,095
     
349,451
     
382,864
 
Incurred claims and loss-adjustment expenses:
                               
Current period insured events
   
628,900
     
431,328
     
1,080,137
     
901,699
 
Prior period insured events
   
3,783
     
(8,764
)
   
(21,901
)
   
(35,283
)
Total
   
632,683
     
422,564
     
1,058,236
     
866,416
 
Payments of losses and loss-adjustment expenses:
                               
Current period insured events
   
539,085
     
416,046
     
783,813
     
657,917
 
Prior period insured events
   
32,252
     
37,737
     
200,844
     
216,487
 
Total
   
571,337
     
453,783
     
984,657
     
874,404
 
Net claim liabilities at end of period
   
423,030
     
374,876
     
423,030
     
374,876
 
Reinsurance recoverable on claim liabilities
   
39,156
     
39,832
     
39,156
     
39,832
 
Claim liabilities at end of period
 
$
462,186
   
$
414,708
   
$
462,186
   
$
414,708
 
 
As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.

The amount in the incurred claims and loss-adjustment expenses for prior period insured events for the three month ended June 30, 2015 is due primarily to higher than anticipated utilization trends.  The credit in the incurred claims and loss-adjustment expenses for prior period insured events for the six months ended June 30, 2015 and the three months and six months ended June 30, 2014 is due primarily to better than expected cost and utilization trends.  Reinsurance recoverable on unpaid claims is reported within the premium and other receivables, net in the accompanying consolidated financial statements.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $5,215 and $12,092 during the three months and six months ended June 30, 2015, respectively.  The change in the liability for future policy benefits during the three months and six months ended June 30, 2014 amounted to $6,077 and $11,332.

(7) Income Taxes

Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns with its subsidiaries.  The Corporation and its subsidiaries are subject to Puerto Rico income taxes.  The Corporation’s insurance subsidiaries are also subject to U.S. federal income taxes for foreign source dividend income.

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.

The Corporation, through one of its Managed Care corporations, has a branch in the U.S. Virgin Islands 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 U.S. Virgin Islands, which has implemented a mirror tax law based on the U.S. Internal Revenue Code.  The branch operations in the U.S. Virgin Islands had certain net operating losses for U.S. Virgin Islands 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.

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 holding company within the Triple-S Advantage, Inc. (TSA) group of companies is a U.S.-based corporation and is subject to U.S. federal income taxes.  This U.S.-based corporation within our group has not provided U.S. deferred taxes on an outside basis difference created as a result of the business combination of TSA and cumulative earnings of its Puerto Rico-based subsidiaries that are considered to be indefinitely reinvested.  The total outside basis difference at December 31, 2014 is estimated at $54,000.  We do not intend to repatriate earnings to fund U.S. and Puerto Rico operations nor do any transaction that would cause a reversal of that outside basis difference.  Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability if such outside basis difference was reversed.

On July 1, 2014, the Governor of Puerto Rico signed into law Act No. 77 including multiple amendments to the Puerto Rico tax code that had a direct impact on the tax liabilities of individual and corporate taxpayers.  The amendments to the Puerto Rico tax code include, among others, changes to the corporate tax rate on long-term capital gains, which was increased from 15% to 20% for all transactions occurring after June 30, 2014.

Act No. 77 of 2014 also included changes to the gross receipts tax, (1) eliminating the additional gross receipts tax as a component of the corporate alternative minimum tax commencing on January 1, 2014 and thereafter, and (2) adding a new gross receipts tax.  Although the new gross receipts tax will be an additional tax on the Corporation’s gross income, it will be deductible for purposes of computing taxable income, but only to the extent that the new gross receipts tax is paid on or before the filing date of the income tax return.  On December 22, 2014, the Governor of Puerto Rico signed into law Act No. 238, which amended the Puerto Rico tax code to include, among others, that this gross receipt tax is not applicable for fiscal years beginning after December 31, 2014.  The impact of the amendments to the gross receipts tax was not significant to the results of operations.

Act No. 77 also allowed corporations to elect, during the period running from July 1, 2014 to October 31, 2014, to prepay at a reduced income tax rate of 12% on the increase in value of long-term capital assets.  On December 22, 2014 and March 30, 2015, the Governor of Puerto Rico signed into law Act No. 238 and Act No. 44, respectively, providing further amendments to the provisions set forth by Act No. 77, extending the period to prepay at the reduced tax rate of 12% on the increase in value of long-term capital assets until April 30, 2015.  In connection with this law, on April 15, 2015, the group of corporations that comprise TSM entered into a Closing Agreement with the Puerto Rico Department of Treasury.  The Closing Agreement, among other matters, was related with the payment of the preferential tax rate on the increase in value of some of its long-term capital assets, as permitted by Act No. 238 of 2014 and Act No. 44 of 2015.  The agreement also covered certain tax attributes of the Corporation.  During the three months ended June 30, 2015, as a result of the aforementioned tax laws and the Closing Agreement, the Company: (1) obtained a benefit from the lower tax rate provided under these statutes, (2) reassessed the realizability of some of its deferred taxes and (3) recorded a tax benefit of $3,129.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  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.  Quarterly income taxes are calculated using the effective tax rate determined based on the income forecasted for the full fiscal year.

(8) Pension Plan

The components of net periodic benefit cost for the three months and six months ended June 30, 2015 and 2014 were as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Components of net periodic benefit cost:
               
Service cost
 
$
1,160
   
$
923
   
$
2,057
   
$
1,950
 
Interest cost
   
2,322
     
2,132
     
4,222
     
4,393
 
Expected return on assets
   
(2,350
)
   
(1,928
)
   
(4,214
)
   
(4,001
)
Amortization of prior service benefit
   
(126
)
   
(116
)
   
(226
)
   
(237
)
Amortization of actuarial loss
   
1,665
     
1,064
     
3,119
     
2,220
 
Net periodic benefit cost
 
$
2,671
   
$
2,075
   
$
4,958
   
$
4,325
 
 
Employer Contributions:  As of June 30, 2015, the Corporation has contributed $8,000 to the pension program in 2015.

(9) Stock Repurchase Program

In October 2014 the Company’s Board of Directors authorized a $50,000 repurchase program of its Class B common stock.  Repurchases are 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 three months ended June 30, 2015, the Company repurchased and retired under this program 528,488 shares at an average per share price of $21.22, for an aggregate cost of $10,990.  During the six months ended June 30, 2015, the Company repurchased and retired under this program 1,211,661 shares at an average per share price of $21.72, for an aggregate cost of $25,988.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
(10) Comprehensive Income

The accumulated balances for each classification of other comprehensive income, net of tax, are as follows:
 
   
Net
Unrealized
gain on
securities
   
Liability for
Pension
benefits
   
Accumulated
Other
Comprehensive
income
 
Balance at January 1, 2015
 
$
101,467
   
$
(52,691