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EX-32.2 - EXHIBIT 32.2 - TRIPLE-S MANAGEMENT CORPex32_2.htm
EX-32.1 - EXHIBIT 32.1 - TRIPLE-S MANAGEMENT CORPex32_1.htm
EX-31.2 - EXHIBIT 31.2 - TRIPLE-S MANAGEMENT CORPex31_2.htm
EX-31.1 - EXHIBIT 31.1 - TRIPLE-S MANAGEMENT CORPex31_1.htm
EX-3.(I)(E) - EXHIBIT 3(I)(E) - TRIPLE-S MANAGEMENT CORPex3_ie.htm
EX-3.(I)(D) - EXHIBIT 3(I)(D) - TRIPLE-S MANAGEMENT CORPex3_id.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 March 31, 2017
 
Or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from           to

COMMISSION FILE NUMBER:  001-33865
 
Triple-S Management Corporation
 
Puerto Rico
 
66-0555678
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico
 
00920
(Address of principal executive offices)
 
(Zip code)
 
(787) 749-4949
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   Yes  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 March 31, 2017
Common Stock Class A, $1.00 par value
950,968
Common Stock Class B, $1.00 par value
23,491,670
 

Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended March 31, 2017
 
Table of Contents
 
Part I – Financial Information
3
   
  Item 1. Financial Statements 3
       
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
       
   
30
   
30
   
31
   
32
   
32
   
33
   
35
   
37
   
38
   
39
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
       
  Item 4. Controls and Procedures
41
       
41
       
  Item 1. Legal Proceedings 41
       
  Item 1A. Risk Factors 41
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
       
  Item 3. Defaults Upon Senior Securities 42
       
  Item 4. Mine Safety Disclosures 42
       
  Item 5. Other Information 42
       
  Item 6. Exhibits 42
       
43
 
Part I – Financial Information
 
Item 1.
Financial Statements
Triple-S Management Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)

   
March 31,
2017
   
December 31,
2016
 
Assets
           
Investments and cash:
           
Securities available for sale, at fair value:
           
Fixed maturities
 
$
1,153,545
   
$
1,151,643
 
Equity securities
   
277,149
     
270,349
 
Securities held to maturity, at amortized cost:
               
Fixed maturities
   
2,514
     
2,836
 
Policy loans
   
8,546
     
8,564
 
Cash and cash equivalents
   
218,884
     
103,428
 
Total investments and cash
   
1,660,638
     
1,536,820
 
Premiums and other receivables, net
   
292,837
     
286,365
 
Deferred policy acquisition costs and value of business acquired
   
195,513
     
194,787
 
Property and equipment, net
   
66,756
     
66,369
 
Deferred tax asset
   
64,128
     
57,768
 
Goodwill
   
25,397
     
25,397
 
Other assets
   
53,186
     
51,493
 
Total assets
 
$
2,358,455
   
$
2,218,999
 
Liabilities and Stockholders’ Equity
               
Claim liabilities
 
$
530,304
   
$
487,943
 
Liability for future policy benefits
   
326,162
     
321,232
 
Unearned premiums
   
163,780
     
79,310
 
Policyholder deposits
   
179,599
     
179,382
 
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
37,206
     
34,370
 
Accounts payable and accrued liabilities
   
171,643
     
169,449
 
Deferred tax liability
   
19,599
     
18,850
 
Long-term borrowings
   
34,465
     
35,085
 
Liability for pension benefits
   
30,472
     
30,892
 
Total liabilities
   
1,493,230
     
1,356,513
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders’ equity
               
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 950,968 at March 31, 2017 and December 31, 2016, respectively
   
951
     
951
 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,491,670 and 23,321,163 shares at March 31, 2017 and December 31, 2016, respectively
   
23,492
     
23,321
 
Additional paid-in capital
   
63,978
     
65,592
 
Retained earnings
   
726,562
     
730,904
 
Accumulated other comprehensive income
   
50,920
     
42,395
 
Total Triple-S Management Corporation stockholders’ equity
   
865,903
     
863,163
 
Non-controlling interest in consolidated subsidiary
   
(678
)
   
(677
)
Total stockholders’ equity
   
865,225
     
862,486
 
Total liabilities and stockholders’ equity
 
$
2,358,455
   
$
2,218,999
 

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

   
Three months ended
March 31,
 
   
2017
   
2016
 
Revenues:
           
Premiums earned, net
 
$
702,273
   
$
738,534
 
Administrative service fees
   
4,379
     
5,083
 
Net investment income
   
12,016
     
11,358
 
Other operating revenues
   
965
     
812
 
Total operating revenues
   
719,633
     
755,787
 
Net realized investment gains on sale of securities
   
336
     
58
 
Other income, net
   
2,525
     
875
 
Total revenues
   
722,494
     
756,720
 
Benefits and expenses:
               
Claims incurred
   
620,863
     
626,694
 
Operating expenses
   
110,946
     
122,980
 
Total operating costs
   
731,809
     
749,674
 
Interest expense
   
1,686
     
1,882
 
Total benefits and expenses
   
733,495
     
751,556
 
(Loss) income before taxes
   
(11,001
)
   
5,164
 
Income taxes
   
(6,658
)
   
1,709
 
Net (loss) income
   
(4,343
)
   
3,455
 
Less: Net loss attributable to non-controlling interest
   
1
     
1
 
Net (loss) income attributable to Triple-S Management Corporation
 
$
(4,342
)
 
$
3,456
 
Earnings per share attributable to Triple-S Management Corporation
               
Basic net (loss) income per share
 
$
(0.18
)
 
$
0.14
 
Diluted net (loss) income per share
 
$
(0.18
)
 
$
0.14
 

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
March 31,
 
   
2017
   
2016
 
Net (loss) income
 
$
(4,343
)
 
$
3,455
 
Other comprehensive (loss) income, net of tax:
               
Net unrealized change in fair value of available for sale securities, net of taxes
   
8,472
     
19,577
 
Defined benefit pension plan:
               
Actuarial loss, net
   
53
     
722
 
Prior service credit, net
   
-
     
(88
)
Total other comprehensive income, net of tax
   
8,525
     
20,211
 
Comprehensive income
   
4,182
     
23,666
 
Comprehensive income attributable to non-controlling interest
   
1
     
1
 
Comprehensive income attributable to Triple-S Management Corporation
 
$
4,183
   
$
23,667
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollar amounts in thousands)

   
2017
   
2016
 
Balance at January 1
 
$
863,163
   
$
847,526
 
Share-based compensation
   
(1,443
)
   
1,421
 
Repurchase and retirement of common stock
   
-
     
(8,027
)
Comprehensive income
   
4,183
     
23,667
 
Total Triple-S Management Corporation stockholders’ equity
   
865,903
     
864,587
 
Non-controlling interest in consolidated subsidiary
   
(678
)
   
(671
)
Balance at March 31
 
$
865,225
   
$
863,916
 

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

   
Three months ended
March 31,
 
   
2017
   
2016
 
Cash flows from operating activities:
           
Net (loss) income
 
$
(4,343
)
 
$
3,455
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
2,990
     
3,700
 
Net amortization of investments
   
2,356
     
1,936
 
(Reductions) additions to the allowance for doubtful receivables
   
(3,209
)
   
1,531
 
Deferred tax benefit
   
(7,525
)
   
(2,435
)
Net realized investment gain on sale of securities
   
(336
)
   
(58
)
Interest credited to policyholder deposits
   
991
     
1,195
 
Share-based compensation
   
(1,443
)
   
1,085
 
(Increase) decrease in assets:
               
Premium and other receivables, net
   
(3,263
)
   
(35,687
)
Deferred policy acquisition costs and value of business acquired
   
(822
)
   
(685
)
Deferred taxes
   
(265
)
   
162
 
Other assets
   
(37
)
   
(26,485
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
42,361
     
33,301
 
Liability for future policy benefits
   
4,930
     
17,395
 
Unearned premiums
   
84,470
     
(4,387
)
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
2,836
     
1,663
 
Accounts payable and accrued liabilities
   
11,274
     
35,574
 
Net cash provided by operating activities
   
130,965
     
31,260
 
(Continued)
               
 
Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)


   
Three months ended
March 31,
 
   
2017
   
2016
 
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
26,023
   
$
90,328
 
Fixed maturities matured/called
   
5,001
     
699
 
Equity securities sold
   
10,272
     
11,257
 
Securities held to maturity:
               
Fixed maturities matured/called
   
703
     
-
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(33,738
)
   
(118,039
)
Equity securities
   
(5,482
)
   
(92,956
)
Securities held to maturity:
               
Fixed maturities
   
(382
)
   
-
 
Increase in other investments
   
(2,044
)
   
(182
)
Net change in policy loans
   
18
     
(231
)
Net capital expenditures
   
(3,295
)
   
(1,465
)
Net cash used in investing activities
   
(2,924
)
   
(110,589
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
(11,401
)
   
1,916
 
Repayments of long-term borrowings
   
(24,676
)
   
(410
)
Proceeds from long-term borrowings
   
24,266
     
-
 
Repurchase and retirement of common stock
   
-
     
(8,027
)
Proceeds from policyholder deposits
   
4,116
     
3,403
 
Surrenders of policyholder deposits
   
(4,890
)
   
(2,905
)
Net cash used in financing activities
   
(12,585
)
   
(6,023
)
Net increase (decrease) in cash and cash equivalents
   
115,456
     
(85,352
)
Cash and cash equivalents:
               
Beginning of period
   
103,428
     
197,818
 
End of period
 
$
218,884
   
$
112,466
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(1)
Basis of Presentation
 
The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited.  In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries.  The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements.  These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.
 
In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included.  The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results for the full year ending December 31, 2017.
 
(2)
Recent Accounting Standards
 
On March 10, 2017, the FASB issued guidance to improve the presentation of defined benefit costs in the income statement.  In particular, the guidance requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  Additionally, this guidance allows only the service cost component to be eligible for capitalization, when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset).  For public companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Since, we do not present a subtotal of income from operations, the adoption of this guidance should not have a material impact on the presentation of the Company’s consolidated result of operations.
 
On January 26, 2017, the FASB issued guidance to simplify the manner in which an entity is required to evaluate goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Instead, under the amendments in this guidance, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, this guidance removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.  For public companies, these amendments, which should be applied on a prospective basis, are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  We are currently evaluating the impact the adoption of this guidance may have on the Company’s consolidated financial statements.
 
Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the three months ended March 31, 2017 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(3)
Investment in Securities
 
The amortized cost for debt securities and cost for 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 March 31, 2017 and December 31, 2016, were as follows:
 
   
March 31, 2017
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
                       
Fixed maturities:
                       
Obligations of government-sponsored enterprises
 
$
41,485
   
$
61
   
$
-
   
$
41,546
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
72,723
     
169
     
(14
)
   
72,878
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
18,248
     
857
     
(37
)
   
19,068
 
Municipal securities
   
651,091
     
34,191
     
(304
)
   
684,978
 
Corporate bonds
   
279,540
     
12,457
     
(367
)
   
291,630
 
Residential mortgage-backed securities
   
638
     
29
     
-
     
667
 
Collateralized mortgage obligations
   
42,919
     
83
     
(224
)
   
42,778
 
Total fixed maturities
   
1,106,644
     
47,847
     
(946
)
   
1,153,545
 
Equity securities - Mutual funds
   
236,356
     
40,910
     
(117
)
   
277,149
 
Total
 
$
1,343,000
   
$
88,757
   
$
(1,063
)
 
$
1,430,694
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
December 31, 2016
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
                       
Fixed maturities:
                       
Obligations of government-sponsored enterprises
 
$
41,442
   
$
87
   
$
(15
)
 
$
41,514
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
85,652
     
157
     
(9
)
   
85,800
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
17,930
     
2,189
     
(68
)
   
20,051
 
Municipal securities
   
650,175
     
34,187
     
(559
)
   
683,803
 
Corporate bonds
   
263,351
     
12,182
     
(661
)
   
274,872
 
Residential mortgage-backed securities
   
684
     
34
     
-
     
718
 
Collateralized mortgage obligations
   
45,069
     
58
     
(242
)
   
44,885
 
Total fixed maturities
   
1,104,303
     
48,894
     
(1,554
)
   
1,151,643
 
Equity securities - Mutual funds
   
240,699
     
30,101
     
(451
)
   
270,349
 
Total
 
$
1,345,002
   
$
78,995
   
$
(2,005
)
 
$
1,421,992
 
 
   
March 31, 2017
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
619
   
$
160
   
$
-
   
$
779
 
Residential mortgage-backed securities
   
191
     
18
     
-
     
209
 
Certificates of deposit
   
1,704
     
-
     
-
     
1,704
 
Total
 
$
2,514
   
$
178
   
$
-
   
$
2,692
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
December 31, 2016
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
619
   
$
158
   
$
-
   
$
777
 
Residential mortgage-backed securities
   
191
     
18
     
-
     
209
 
Certificates of deposit
   
2,026
     
-
     
-
     
2,026
 
Total
 
$
2,836
   
$
176
   
$
-
   
$
3,012
 
 
Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016 were as follows:

   
March 31, 2017
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Securities available for sale
                                                     
Fixed maturities
                                                     
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
 
$
12,940
   
$
(14
)
   
1
   
$
-
   
$
-
     
-
   
$
12,940
   
$
(14
)
   
1
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
12,704
     
(37
)
   
6
     
-
     
-
     
-
     
12,704
     
(37
)
   
6
 
Municipal securities
   
64,518
     
(304
)
   
9
     
-
     
-
     
-
     
64,518
     
(304
)
   
9
 
Corporate bonds
   
84,093
     
(367
)
   
18
     
-
     
-
     
-
     
84,093
     
(367
)
   
18
 
Collateralized mortgage obligations
   
26,043
     
(222
)
   
6
     
665
     
(2
)
   
1
     
26,708
     
(224
)
   
7
 
Total fixed maturities
   
200,298
     
(944
)
   
40
     
665
     
(2
)
   
1
     
200,963
     
(946
)
   
41
 
Equity securities-Mutual funds
   
2,831
     
(49
)
   
4
     
2,006
     
(68
)
   
1
     
4,837
     
(117
)
   
5
 
Total for securities available for sale
 
$
203,129
   
$
(993
)
   
44
   
$
2,671
   
$
(70
)
   
2
   
$
205,800
   
$
(1,063
)
   
46
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
December 31, 2016
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Securites available for sale
                                                     
Fixed maturities
                                                     
Obligations of government-sponsored enterprises
 
$
9,483
   
$
(15
)
   
1
   
$
-
   
$
-
     
-
   
$
9,483
   
$
(15
)
   
1
 
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
   
12,937
     
(9
)
   
1
     
-
     
-
     
-
     
12,937
     
(9
)
   
1
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
7,758
     
(68
)
   
5
     
-
     
-
     
-
     
7,758
     
(68
)
   
5
 
Municipal securities
   
84,252
     
(559
)
   
13
     
-
     
-
     
-
     
84,252
     
(559
)
   
13
 
Corporate bonds
   
105,054
     
(661
)
   
22
     
-
     
-
     
-
     
105,054
     
(661
)
   
22
 
Collateralized mortgage obligations
   
32,120
     
(239
)
   
8
     
784
     
(3
)
   
1
     
32,904
     
(242
)
   
9
 
Total fixed maturities
   
251,604
     
(1,551
)
   
50
     
784
     
(3
)
   
1
     
252,388
     
(1,554
)
   
51
 
Equity securities-Mutual funds
   
22,615
     
(451
)
   
4
     
-
     
-
     
-
     
22,615
     
(451
)
   
4
 
Total for securities available for sale
 
$
274,219
   
$
(2,002
)
   
54
   
$
784
   
$
(3
)
   
1
   
$
275,003
   
$
(2,005
)
   
55
 

The Corporation reviews the investment portfolios under the Corporation’s impairment review policy.  Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material other-than-temporary impairments may be recorded in future periods.  The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.
 
Obligations of U.S. Government Instrumentalities and Municipal Securities:  The unrealized losses on the Corporation’s investments in U.S. Government Instrumentalities and Municipal Securities were mainly caused by fluctuations in interest rates and general market conditions.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.  In addition, these investments have investment grade ratings. Because the decline in fair value is attributable to changes in interest rates and not credit quality; because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
 
Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $7,848 and a gross unrealized loss of $37, and (2) senior lien bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $11,220 and a gross unrealized gain of $857.  As of March 31, 2017, investments in escrow bonds are not considered other-than-temporarily impaired based on the length of time the funds have been in a loss position, the decline in estimated fair value is principally attributable to changes in interest rates, and the fact that these bonds are backed by US Government securities, and therefore have an implicit AA+/Aaa rating. 
 
There was no impairment on Cofina during the three months ended March 31, 2017 and 2016.
 
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.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Collateralized mortgage obligations: The unrealized losses on investments collateralized mortgage obligations (“CMOs”) were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities, other than private CMOs, are guaranteed by a U.S. government-sponsored enterprise. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Corporation owns. The Corporation does not consider these investments other-than-temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality; the Corporation does not intend to sell the investments and it is more likely than not that the Corporation will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows.
 
Mutual Funds:  As of March 31, 2017, investments in mutual funds with unrealized losses are not considered other-than-temporarily impaired based on market conditions and the length of time the funds have been in a loss position.  There were no impairment on mutual funds during the three months ended March 31, 2017 and 2016.
 
Maturities of investment securities classified as available for sale and held to maturity were as follows:
 
   
March 31, 2017
 
   
Amortized
cost
   
Estimated
fair value
 
Securities available for sale:
           
Due in one year or less
 
$
48,742
   
$
48,946
 
Due after one year through five years
   
322,122
     
325,519
 
Due after five years through ten years
   
131,128
     
137,138
 
Due after ten years
   
561,095
     
598,497
 
Residential mortgage-backed securities
   
638
     
667
 
Collateralized mortgage obligations
   
42,919
     
42,778
 
   
$
1,106,644
   
$
1,153,545
 
Securities held to maturity:
               
Due in one year or less
 
$
1,704
   
$
1,704
 
Due after ten years
   
619
     
779
 
Residential mortgage-backed securities
   
191
     
209
 
   
$
2,514
   
$
2,692
 

Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Information regarding realized and unrealized gains and losses from investments is as follows:

   
Three months ended
March 31,
 
   
2017
   
2016
 
Realized gains (losses):
           
Fixed maturity securities:
           
Securities available for sale:
           
Gross gains from sales
 
$
17
   
$
961
 
Gross losses from sales
   
(119
)
   
(1,359
)
Total fixed maturity securities
   
(102
)
   
(398
)
Equity securities:
               
Securities available for sale:
               
Gross gains from sales
   
438
     
587
 
Gross losses from sales
   
-
     
(131
)
Total equity securities
   
438
     
456
 
Net realized gains on securities available for sale
 
$
336
   
$
58
 
 
   
Three months ended
March 31,
 
   
2017
   
2016
 
Changes in net unrealized gains (losses):
           
Recognized in accumulated other comprehensive income:
           
Fixed maturities – available for sale
 
$
(439
)
 
$
22,589
 
Equity securities – available for sale
   
11,143
     
6,769
 
   
$
10,704
   
$
29,358
 
Not recognized in the consolidated financial statements:
               
Fixed maturities – held to maturity
 
$
2
   
$
36
 

The change in deferred tax liability on unrealized gains recognized in accumulated other comprehensive income during the three months ended March 31, 2017 and 2016 was $2,136 and $9,781, respectively.
 
As of March 31, 2017 and December 31, 2016, no individual investment in securities exceeded 10% of stockholders’ equity.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(4)
Premiums and Other Receivables, Net
 
Premiums and other receivables, net were as follows:

   
March 31,
2017
   
December 31,
2016
 
Premium
 
$
100,691
   
$
91,528
 
Self-funded group receivables
   
50,643
     
57,728
 
FEHBP
   
14,274
     
14,321
 
Agent balances
   
27,468
     
25,495
 
Accrued interest
   
11,338
     
13,668
 
Reinsurance recoverable
   
54,854
     
58,295
 
Other
   
65,152
     
62,637
 
     
324,420
     
323,672
 
Less allowance for doubtful receivables:
               
Premium
   
23,584
     
27,320
 
Other
   
7,999
     
9,987
 
     
31,583
     
37,307
 
Total premium and other receivables, net
 
$
292,837
   
$
286,365
 

As of March 31, 2017 and December 31, 2016, the Company had premiums and other receivables of $51,533 and $57,750, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of March 31, 2017 and December 31, 2016 were $14,050 and $18,812, respectively.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)

(5)
Fair Value Measurements
 
Our condensed consolidated balance sheets include the following financial instruments: securities available for sale, policy loans, policyholder deposits, and long-term borrowings.  We consider the carrying amounts of policy loans, policyholder deposits, and long-term borrowings to approximate their fair value due to the short period of time between the origination of these instruments and the expected realization or payment. Certain assets are measured at fair value on a recurring basis and are disclosed below. These assets are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2016 Form 10-K.
 
The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
 
   
March 31, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
  $ -    
$
41,546
   
$
-
    $ 41,546  
U.S. Treasury securities and obligations of U.S government instrumentalities
72,878
-
     
-
     
72,878
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
-
19,068
     
-
     
19,068
 
Municipal securities
   
-
     
684,978
     
-
     
684,978
 
Corporate bonds
   
-
     
291,630
     
-
     
291,630
 
Residential agency mortgage-backed securities
   
-
     
667
     
-
     
667
 
Collateralized mortgage obligations
   
-
     
42,778
     
-
     
42,778
 
Total fixed maturities
   
72,878
     
1,080,667
     
-
     
1,153,545
 
Equity securities - Mutual funds
   
174,593
     
78,803
     
23,753
     
277,149
 
Total
 
$
247,471
   
$
1,159,470
   
$
23,753
   
$
1,430,694
 
 
   
December 31, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
41,514
   
$
-
   
$
41,514
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
85,800
     
-
     
-
     
85,800
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
20,051
     
-
     
20,051
 
Municipal securities
   
-
     
683,803
     
-
     
683,803
 
Corporate bonds
   
-
     
274,872
     
-
     
274,872
 
Residential agency mortgage-backed securities
   
-
     
718
     
-
     
718
 
Collateralized mortgage obligations
   
-
     
44,885
     
-
     
44,885
 
Total fixed maturities
   
85,800
     
1,065,843
     
-
     
1,151,643
 
Equity securities - Mutual funds
   
166,595
     
76,222
     
27,532
     
270,349
 
Total
 
$
252,395
   
$
1,142,065
   
$
27,532
   
$
1,421,992
 

There were no transfers in and/or out of Level 3 and between Levels 1 and 2 during the three months ended March 31, 2017 and 2016.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31 is as follows:

   
Fair Value Measurements
Using Significant
Unobservable Inputs (Level 3)
 
   
2017
   
2016
 
Beginning balance
 
$
27,532
   
$
7,958
 
Realized gains
   
119
     
151
 
Unrealized in other accumulated comprehensive income
   
(64
)
   
(649
)
Purchases
   
5,260
     
8
 
Capital distributions
   
(9,094
)
   
(471
)
Ending balance
 
$
23,753
   
$
6,997
 

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 March 31, 2017 and December 31, 2016 are as follows:
 
   
March 31, 2017
 
    
Carrying
Value
    
Fair Value
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
8,546
   
$
-
   
$
8,546
   
$
-
   
$
8,546
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
179,599
   
$
-
   
$
179,599
   
$
-
   
$
179,599
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
34,465
     
-
     
34,465
     
-
     
34,465
 
Total long-term borrowings
   
34,465
     
-
     
34,465
     
-
     
34,465
 
Total liabilities
 
$
214,064
   
$
-
   
$
214,064
   
$
-
   
$
214,064
 
 
   
December 31, 2016
 
    
Carrying
Value
    
Fair Value
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
8,564
   
$
-
   
$
8,564
   
$
-
   
$
8,564
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
179,382
   
$
-
   
$
179,382
   
$
-
   
$
179,382
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
11,187
     
-
     
11,187
     
-
     
11,187
 
6.6% senior unsecured notes payable
   
24,000
     
-
     
24,000
     
-
     
24,000
 
Total long-term borrowings
   
35,187
     
-
     
35,187
     
-
     
35,187
 
Total liabilities
 
$
214,569
   
$
-
   
$
214,569
   
$
-
   
$
214,569
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(6)
Claim Liabilities
 
A reconciliation of the beginning and ending balances of claim liabilities is as follows:

   
Three months ended
March 31, 2017
 
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
                   
Claim liabilities at beginning of year
 
$
349,047
   
$
138,896
   
$
487,943
 
Reinsurance recoverable on claim liabilities
   
-
     
(38,998
)
   
(38,998
)
Net claim liabilities at beginning of year
   
349,047
     
99,898
     
448,945
 
Claims incurred
                       
Current period insured events
   
602,620
     
28,226
     
630,846
 
Prior period insured events
   
(15,340
)
   
(1,333
)
   
(16,673
)
Total
   
587,280
     
26,893
     
614,173
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
350,450
     
7,965
     
358,415
 
Prior period insured events
   
192,352
     
17,945
     
210,297
 
Total
   
542,802
     
25,910
     
568,712
 
Net claim liabilities at end of year
   
393,525
     
100,881
     
494,406
 
Reinsurance recoverable on claim liabilities
   
-
     
35,898
     
35,898
 
Claim liabilities at end of year
 
$
393,525
   
$
136,779
   
$
530,304
 
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
Three months ended
March 31, 2016
 
   
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
                   
Claim liabilities at beginning of year
 
$
348,297
   
$
143,468
   
$
491,765
 
Reinsurance recoverable on claim liabilities
   
-
     
(40,714
)
   
(40,714
)
Net claim liabilities at beginning of year
   
348,297
     
102,754
     
451,051
 
Claims incurred
                       
Current period insured events
   
614,754
     
25,890
     
640,644
 
Prior period insured events
   
(18,464
)
   
(2,248
)
   
(20,712
)
Total
   
596,290
     
23,642
     
619,932
 
Payments of losses and loss-adjustment expenses
                       
Current period insured events
   
365,039
     
5,096
     
370,135
 
Prior period insured events
   
198,100
     
17,553
     
215,653
 
Total
   
563,139
     
22,649
     
585,788
 
Net claim liabilities at end of year
   
381,448
     
103,747
     
485,195
 
Reinsurance recoverable on claim liabilities
   
-
     
39,871
     
39,871
 
Claim liabilities at end of year
 
$
381,448
   
$
143,618
   
$
525,066
 

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

As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.
 
The favorable developments in the claims incurred and loss-adjustment expenses for prior period insured events for the three months ended March 31, 2017 and 2016 are due primarily to better than expected utilization trends.  Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements.
 
The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $6,690 and $6,762 during the three months ended March 31, 2017 and 2016, respectively.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
The following is information about total incurred but not reported (IBNR) liabilities plus expected development on reported claims included in the liability for unpaid claims adjustment expenses for the Managed Care segment as of March 31, 2017.
 
Incurred
Year
 
Total of IBNR Liabilities Plus Expected
Development on Reported Claims
   
2015
   
60,717
   
2016
   
80,062
   
2017
   
252,163
   

(7)
Long-Term Borrowings
 
A summary of the borrowings entered by the Company is as follows:
 
   
March 31,
2017
   
December 31,
2016
 
             
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%.
 
$
-
   
$
24,000
 
Secured loan payable of $11,187, payable in monthly installments of $137 through October 1, 2023, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.79% at March 31, 2017.)
   
10,777
     
11,187
 
Secured loan payable of $20,150, payable in monthly installments of $84 through January 1, 2024, plus interest at a rate reset periodically of 275 basis points over selected LIBOR maturity (which was 3.77% at March 31, 2017.)
   
19,982
     
-
 
Secured loan payable of $4,116, payable in monthly installments of $49 through January 1, 2024, plus interest at a rate reset periodically of 325 basis points over selected LIBOR maturity (which was 4.27% at March 31, 2017.)
   
4,018
     
-
 
Total borrowings
   
34,777
     
35,187
 
                 
Less unamortized debt issuance costs
   
312
     
102
 
   
$
34,465
   
$
35,085
 

On December 28, 2016, TSM entered into a $35,500 credit agreement with a commercial bank in Puerto Rico. The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11,187, (ii) Term Loan B in the principal amount of $20,150 and (iii) Term Loan C in the principal amount of $4,116.  Term Loan A was used to refinance the previous $41,000 secured loan payable with the same commercial bank in Puerto Rico.  Proceeds from Term Loans B and C were received on January 11, 2017 and were used to prepay the outstanding principal amount plus accrued interest of the 6.6% Senior Unsecured Notes due January 2021 ($24,000), and fund a portion of a debt service reserve for the Loan (approximately $200).  Interest payable commenced on January 1, 2017, in the case of Term Loan A, and on February 1, 2017, in the case of Term Loan B and Term Loan C.  The Credit Agreement includes certain financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
On March 11, 2016 Triple-S Salud, Inc. (TSS) entered into a $30,000 revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit had an interest rate of LIBOR plus 220 basis points and contained certain financial and non-financial covenants that are customary for this type of facility. This revolving loan agreement matured on March 11, 2017, and was not renewed.
 
On April 18, 2017, Triple-S Advantage, Inc. (TSA) entered into a $10,000 revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit has an interest rate of 30-day LIBOR plus 25 basis points, matures on April 17, 2018, and includes certain financial and non-financial covenants that are customary for this type of facility.
 
(8)
Pension Plan
 
The components of net periodic benefit cost for the three months ended March 31 were as follows:
 
   
Three months ended
March 31,
 
   
2017
   
2016
 
Components of net periodic benefit cost:
           
Service cost
 
$
-
   
$
1,250
 
Interest cost
   
1,798
     
2,762
 
Expected return on assets
   
(2,199
)
   
(2,926
)
Amortization of prior service benefit
   
-
     
(144
)
Amortization of actuarial loss
   
86
     
1,183
 
Net periodic benefit cost
 
$
(315
)
 
$
2,125
 

Effective January 31, 2017, the Company froze 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 will not accrue additional benefits for future service and eligible compensation received.
 
Employer Contributions:  The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 2016 that it expected to contribute $4,000 to the pension program in 2017.  As of March 31, 2017, the Corporation has not made contributions to the pension program.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(9)
Comprehensive Income
 
The accumulated balances for each classification of other comprehensive income, net of tax, are as follows:
 
   
Three months ended
March 31,
 
   
2017
   
2016
 
             
Net Unrealized Gain on Securities Beginning Balance
 
$
62,371
   
$
62,478
 
Other comprehensive income before reclassifications
   
8,741
     
19,623
 
Amounts reclassified from accumulated other comprehensive income
   
(269
)
   
(46
)
Net current period change
   
8,472
     
19,577
 
Ending Balance
   
70,843
     
82,055
 
Liability for Pension Benefits Beginning Balance
   
(19,976
)
   
(36,855
)
Amounts reclassified from accumulated other comprehensive income
   
53
     
634
 
Ending Balance
   
(19,923
)
   
(36,221
)
Accumulated Other Comprehensive Income Beginning Balance
   
42,395
     
25,623
 
Other comprehensive income before reclassifications
   
8,741
     
19,623
 
Amounts reclassified from accumulated other comprehensive income
   
(216
)
   
588
 
Net current period change
   
8,525
     
20,211
 
Ending Balance
 
$
50,920
   
$
45,834
 


Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(10)
Share-Based Compensation
 
Share-based compensation (benefit) expense recorded during the three months ended March 31, 2017 and 2016 was ($1,443) and $1,085, respectively.  The benefit recorded in the 2017 period results from a decrease in the 2014 and 2015 grants expected performance shares payouts.  There were no stock option exercises during the three months ended March 31, 2017 and 2016.
 
(11)
Net Income Available to Stockholders and Net Income per Share
 
The following table sets forth the computation of basic and diluted earnings per share:

   
Three months ended
March 31,
 
   
2017
   
2016
 
Numerator for earnings per share:
           
Net (loss) income attributable to TSM available to stockholders
 
$
(4,342
)
 
$
3,456
 
Denominator for basic earnings per share:
               
Weighted average of common shares
   
24,143,261
     
24,587,681
 
Effect of dilutive securities
   
-
     
72,353
 
Denominator for diluted earnings per share
   
24,143,261
     
24,660,034
 
Basic net (loss) income per share attributable to TSM
 
$
(0.18
)
 
$
0.14
 
Diluted net (loss) income per share attributable to TSM
 
$
(0.18
)
 
$
0.14
 

The Company generated a loss from continuing operations attributable to the Company’s common stockholders for the three months ended March 31, 2017, so the effect of dilutive securities is not considered because their effect would be antidilutive. If the Company had generated income from continuing operations during the three months ended March 31, 2017, the effect of restricted stock awards on the diluted shares calculation would have been an increase in shares of 59,284 shares.
 
(12)
Contingencies
 
The following information supplements and amends, as applicable, the disclosures in Note 24 to the Consolidated Financial Statements of the Company’s 2016 Annual Report on Form 10-K.  Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company’s compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.
 
We are involved in various legal actions arising in the ordinary course of business. We are also defendants in various other litigations and proceedings, some of which are described below.  Where the Company believes that a loss is both probable and estimable, such amounts have been recorded.  Although we believe our estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.  The outcome of legal proceedings is inherently uncertain and pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any.  Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material adverse effect on the consolidated financial condition, operating results and/or cash flows of the Company.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have rights to acquire shares of the Company on favorable terms pursuant to agreements previously entered by our predecessor managed care subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS), with physicians or dentists who joined our provider network to sell such new provider shares of SSS at a future date (Share Acquisition Agreements) or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.
 
ASES Audits
 
The Company is subject to numerous audits in connection with the provision of services to private and governmental entities.  These audits may include numerous aspects of our business, including claim payment practices, contractual obligations, service delivery, third-party obligations, and business practices, among others.  Deficiencies in audits could have a material adverse effect on our reputation and business, including termination of contracts, significant increases in the cost of managing and remediating deficiencies, payment of contractual penal clauses, and others, any of which could have a material and adverse effect on our results of operations, financial position and cash flows.
 
On July 2, 2014, ASES notified TSS that the results of an audit conducted in connection with the government health plan contract for several periods between October 2005 to September 2013, reflected an overpayment of premiums made to TSS pursuant to prior contracts with ASES in the amount of $7,900. The alleged overpayments were related to duplicated payments or payments made for deceased members, and ASES requested the reimbursement of the alleged overpayment. On January 16, 2015, TSS filed an injunction against ASES under the case Triple-S Salud, Inc. v. Administracion de Seguros de Salud de Puerto Rico. TSS contends that ASES’ request for reimbursement has no merits on several grounds, including a 2011 settlement between both parties covering the majority of the amount claimed by ASES, and that ASES, under the terms of the contracts, was responsible for certifying the membership. TSS also amended its claim to include the Puerto Rico Health Department (PRHD), as it asserts the PRHD is an indispensable party for the resolution of this matter and to seek the payment of approximately $5,000, since the premiums paid to TSS should have been higher than what ASES actually paid given the additional risk assumed by TSS. The case was assigned to a Special Commissioner, who has received a joint expert report concerning the case. On March 17, 2017, the Special Commissioner issued a report recommending the court to dismiss the complaint in favor of TSS. TSS is awaiting the court’s decision in connection to the report issued by the Special Commissioner. TSS will continue to conduct a vigorous defense of this matter.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(13)
Segment Information
 
The operations of the Corporation are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Corporation evaluates performance based primarily on the operating revenues and operating income of each segment.  Operating revenues include premiums earned, net, administrative service fees, net investment income, and revenues derived from other segments.  Operating costs include claims incurred and operating expenses.  The Corporation calculates operating income or loss as operating revenues less operating costs.
 
The following tables summarize the operations by reportable segment for the three months ended March 31, 2017 and 2016:

   
Three months ended
March 31,
 
   
2017
   
2016
 
Operating revenues:
           
Managed Care:
           
Premiums earned, net
 
$
640,147
   
$
678,380
 
Administrative service fees
   
4,379
     
5,083
 
Intersegment premiums/service fees
   
1,534
     
1,485
 
Net investment income
   
3,892
     
3,480
 
Total managed care
   
649,952
     
688,428
 
Life Insurance:
               
Premiums earned, net
   
40,298
     
38,966
 
Intersegment premiums
   
191
     
137
 
Net investment income
   
6,087
     
5,914
 
Total life insurance
   
46,576
     
45,017
 
Property and Casualty Insurance:
               
Premiums earned, net
   
21,548
     
21,188
 
Intersegment premiums
   
153
     
153
 
Net investment income
   
1,924
     
1,929
 
Total property and casualty insurance
   
23,625
     
23,270
 
Other segments: *
               
Intersegment service revenues
   
1,586
     
2,545
 
Operating revenues from external sources
   
1,000
     
856
 
Total other segments
   
2,586
     
3,401
 
Total business segments
   
722,739
     
760,116
 
TSM operating revenues from external sources
   
78
     
4
 
Elimination of intersegment premiums/service fees
   
(1,598
)
   
(1,775
)
Elimination of intersegment service revenues
   
(1,586
)
   
(2,545
)
Other intersegment eliminations
   
-
     
(13
)
Consolidated operating revenues
 
$
719,633
   
$
755,787
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
Three months ended
March 31,
 
   
2017
   
2016
 
Operating income (loss):
           
Managed care
 
$
(18,582
)
 
$
(641
)
Life insurance
   
3,935
     
5,598
 
Property and casualty insurance
   
2,067
     
2,111
 
Other segments *
   
143
     
(179
)
Total business segments
   
(12,437
)
   
6,889
 
TSM operating revenues from external sources
   
78
     
4
 
TSM unallocated operating expenses
   
(2,217
)
   
(3,167
)
Elimination of TSM intersegment charges
   
2,400
     
2,387
 
Consolidated operating (loss) income
   
(12,176
)
   
6,113
 
Consolidated net realized investment gains
   
336
     
58
 
Consolidated interest expense
   
(1,686
)
   
(1,882
)
Consolidated other income, net
   
2,525
     
875
 
Consolidated (loss) income before taxes
 
$
(11,001
)
 
$
5,164
 
                 
Depreciation and amortization expense:
               
Managed care
 
$
2,239
   
$
2,934
 
Life insurance
   
280
     
255
 
Property and casualty insurance
   
114
     
161
 
Other segments*
   
160
     
153
 
Total business segments
   
2,793
     
3,503
 
TSM depreciation expense
   
197
     
197
 
Consolidated depreciation and amortization expense
 
$
2,990
   
$
3,700
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
March 31,
2017
   
December 31,
2016
 
Assets:
           
Managed care
 
$
1,144,927
   
$
1,013,872
 
Life insurance
   
820,481
     
816,920
 
Property and casualty insurance
   
347,282
     
349,159
 
Other segments *
   
26,274
     
26,034
 
Total business segments
   
2,338,964
     
2,205,985
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
22,531
     
17,033
 
Property and equipment, net
   
22,228
     
22,380
 
Other assets
   
21,337
     
21,646
 
     
66,096
     
61,059
 
Elimination entries-intersegment receivables and others
   
(46,605
)
   
(48,045
)
Consolidated total assets
 
$
2,358,455
   
$
2,218,999
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(14)
Subsequent Events
 
The Company evaluated subsequent events through the date the financial statements were issued.  No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standards Codification.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries.  The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months ended March 31, 2017.  Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2016 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months ended March 31, 2017 included in this Quarterly Report on Form 10-Q.
 
Cautionary Statement Regarding Forward-Looking Information
 
This Quarterly Report on Form 10-Q and other of our publicly available documents may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations.  These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control.  These statements may address, among other things, future financial results, strategy for growth, and market position.  It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.  The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form.  We are not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise.  Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.
 
Overview
 
We are one of the most significant players in the managed care industry in Puerto Rico and have over 55 years of experience in this industry.  We offer a broad portfolio of managed care and related products in the Commercial, Medicaid and Medicare Advantage markets.  In the Commercial market we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement.  We also participate in the Government of Puerto Rico Health Insurance Plan (a government of Puerto Rico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid), by administering the provision of health benefits in designated service regions in Puerto Rico.  See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016 under the sub-caption “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.
 
We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands and Anguilla.  As of March 31, 2017, we served approximately 1,016,000 members across all regions of Puerto Rico.  For the three months ended March 31, 2017 and 2016 respectively, our managed care segment represented approximately 91% and 92% of our total consolidated premiums earned.  We also have significant positions in the life insurance and property and casualty insurance markets.
 
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS) and Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB).  TSS, TSA and TSB are Blue Cross Blue Shield Association (BCBSA) licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands, and Anguilla.
 
We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc., and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP).
 
Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results.  Except as otherwise indicated, the numbers for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations.  These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income.  See note 13 of the Condensed Consolidated Financial Statements included in Quarterly Report on Form 10-Q.
 
Our revenues primarily consist of premiums earned, net and administrative service fees.  These revenues are derived from the sale of managed care products in the Commercial market to employer groups, individuals and government-sponsored programs, principally Medicare and the Government of Puerto Rico Health Insurance Plan.  Premiums are derived from insurance contracts and administrative service fees are derived from self-funded contracts, under which we provide a range of services, including claims administration, billing and membership services, among others.  Revenues also include premiums earned from the sale of property and casualty and life insurance contracts, and investment income and revenues derived from other segments.  Substantially all of our earnings are generated in Puerto Rico.
 
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders.  Each segment’s results of operations depend to a significant extent on their ability to accurately predict and effectively manage claims.  A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period.  Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses.
 
We use operating income as a measure of performance of the underwriting and investment functions of our segments.  We also use the loss ratio and the operating expense ratio as measures of performance.  The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100.  The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.
 
Recent Developments
 
Puerto Rico Economy
 
During the past decade, Puerto Rico has been facing economic and fiscal challenges and its economy has been contracting.  In response to the Commonwealth of Puerto Rico (the Commonwealth) fiscal and economic crisis, on June 30, 2016, the U.S. Congress enacted the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which, among other things, established a Federally-appointed oversight board (the “Oversight Board”) comprised of seven members with ample powers over the finances of the Commonwealth and its instrumentalities.  PROMESA also established a temporary stay on litigation to enforce rights or remedies related to financial liabilities of the Commonwealth, its instrumentalities and municipalities, which expired on May 1, 2017.  Finally, PROMESA established two separate mechanisms to restructure the debts of the Commonwealth, its public corporations and municipalities. The first mechanism permits modifications of financial indebtedness with the consent of a supermajority of affected financial creditors. The second mechanism, known as Title III, is a court-supervised debt-adjustment process, which is modeled after Chapter 9 of the U.S. Bankruptcy Code.
 
Pursuant to PROMESA, the Oversight Board required the Commonwealth to deliver a fiscal plan by January 15, 2017, which deadline was later extended until February 28, 2017.  In a letter dated January 18, 2017, the Oversight Board recommended to the Governor a series of measures for inclusion in the fiscal plan, including: (i) a $1.0 billion reduction in health care spending by fiscal year 2019, (ii) the elimination of budgetary subsidies to municipalities and (iii) significant reductions in payroll expenditures and pension and/or pension-related benefits.  On February 28, 2017, the Governor of Puerto Rico submitted a 10-year fiscal plan to the Oversight Board, for its review and approval.  After certain revisions, a final plan was approved by the Oversight Board on March 13, 2017, which includes spending reductions of $25.7 billion. The plan implies larger concessions from bondholders since there would be approximately $8 billion available for debt service payments over the next 10 years, compared to around $35 billion that is owed over that period.  The plan also proposes (i) certain significant changes to the Commonwealth’s healthcare delivery model in order to reduce expenses and (ii) the elimination of subsidies to the municipalities, many of which have contracts for the provision of healthcare or other insurance products with our subsidiaries.  The plan, however, does not provide details about the proposed changes or the timeline for their implementation.  Also, it is uncertain if and how the elimination of municipal subsidies will affect municipal finances and their ability to continue to meet their contractual obligations.
 
The Oversight Board also required that certain Commonwealth instrumentalities, such as Government Development Bank for Puerto Rico, the Puerto Rico Aqueduct and Sewer Authority, the Puerto Rico Electric Power Authority and the University of Puerto Rico, prepare and submit fiscal plans.  All such fiscal plans have been submitted and approved, other than the plan for the University of Puerto Rico, and include significant expenditure reductions across all types of expenses.  In the future, the Oversight Board may require other instrumentalities and municipalities to prepare and submit fiscal plans.
On May 1, 2017, the temporary stay on litigation established by PROMESA expired. After the expiration of the temporary stay, several investors holding general obligation and sales and use tax-backed bonds filed lawsuits to enforce their rights and remedies related to the financial liabilities of the Commonwealth, its instrumentalities and municipalities. On May 3, 2017, after not reaching an agreement with its creditors, the Oversight Board filed an order seeking the protection of the provisions of Title III of PROMESA for the Commonwealth.  On May 5, 2017, the Oversight Board also sought the protection of Title III of PROMESA for the Puerto Rico Sales Tax Financing Corporation (“COFINA” by its Spanish acronym), which issued the sales and use tax-backed bonds. While the proceedings under Title III of PROMESA are ongoing, all enforcement and collection actions against the Commonwealth and COFINA by its creditors are stayed.  As a result of this court-supervised debt-adjustment process, the principal and interest payments due on general obligation and sales and use tax-backed bonds will likely be restructured and such restructuring could lead to significant additional losses on such holdings.
 
Although the Oversight Board has not sought the protection of Title III of PROMESA for the Puerto Rico Health Insurance Administration (“ASES” by its Spanish acronym), the instrumentality responsible for the administration of the Government’s health plan, ASES may be affected by the Commonwealth’s fiscal plan and the proceedings commenced for the Commonwealth under Title III of PROMESA because its state-based funding is solely dependent on appropriations from the Government’s general fund. Notwithstanding the Government’s statement in recent legislation that its public policy includes guaranteeing the continuity of public services in essential areas such as health, security, education, social work and development, among others, it is uncertain how the Commonwealth’s Title III proceeding will affect ASES and the contracts administered by it.
 
If the liquidity of the Government of Puerto Rico, its agencies, municipalities and public corporations becomes significantly affected as a result of their inability to raise funding in the market or generate enough revenues, we may face credit losses in our premium and fees receivables from these and other government related entities.  As of March 31, 2017, the Company had premiums and other receivables of $51.5 million from the Government of Puerto Rico, including its agencies, municipalities and public corporations with a related allowance for doubtful receivables of $14.1 million.  We also hold several positions categorized as Obligations of the Commonwealth of Puerto Rico, including Cofina bonds, which are susceptible to aforementioned recent developments in the economy, see note 3 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
 
Puerto Rico Government Health Reform Program
 
Current Medicaid premiums rates are effective until June 30, 2017; the negotiation for new rates, until the end of the three year agreement, is ongoing.  See Item 1A.   Risk Factors—Risks Related to Our Business – “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.’’ included in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
Political and Regulatory Developments
 
CMS announced final benchmark rates for the 2018 Medicare Advantage plans.  The call letter included revenue adjustments reflecting the physician payment increases, maintaining the zero claims adjustment, and allowing certain Puerto Rico counties to qualify for double bonus status.  The impact of these updates result in a benchmark increase of about 4%. See Item 1A.   Risk Factors—Risks Related to the Regulation of our Industry – “The revised rate calculation system for Medicare Advantage, the payment system for the Medicare Part D and changes in the methodology and payment policies used by CMS to establish rates could reduce our profitability and the benefits we offer our beneficiaries’’ included in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
Recent Accounting Standards
 
For a description of recent accounting standards, see note 2 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
 
Managed Care Membership
 
   
As of March 31,
 
   
2017
   
2016
 
Managed care enrollment:
           
Commercial 1
   
505,848
     
544,846
 
Medicare
   
121,352
     
119,224
 
Medicaid
   
389,130