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 September 30, 2021

or

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

For the transition period from                         to                        

COMMISSION FILE NUMBER:  001-33865

TRIPLE-S MANAGEMENT CORPORATION

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

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

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

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

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

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

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

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

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

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

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

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

Title of each class
Outstanding at September 30, 2021
   
Common Stock, $1.00 par value
23,794,612

Triple-S Management Corporation
FORM 10-Q

For the Quarter Ended September 30, 2021

Table of Contents

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2
Part I -  Financial Information
Item 1.  Financial Statements
Triple-S Management Corporation
Condensed Consolidated Interim Balance Sheets (Unaudited)
(dollar in thousands, except share information)

 
 
September 30,
2021
   
December 31,
2020
 
Assets
           
Investments and cash:
           
Fixed-maturities available-for-sale, at fair value
 
$
1,290,234
   
$
1,342,465
 
Fixed-maturities held-to-maturity, at amortized cost
   
1,870
     
1,867
 
Equity investments, at fair value
   
518,765
     
404,328
 
Other invested assets, at net asset value
   
119,396
     
114,905
 
Policy loans
   
10,480
     
10,459
 
Cash and cash equivalents
   
122,709
     
110,989
 
Total investments and cash
   
2,063,454
     
1,985,013
 
Premiums and other receivables, net
   
496,477
     
488,840
 
Deferred policy acquisition costs and value of business acquired
   
255,010
     
248,325
 
Property and equipment, net
   
137,762
     
131,974
 
Deferred tax asset
   
111,206
     
119,534
 
Goodwill
   
28,614
     
28,614
 
Other assets
   
99,143
     
86,118
 
Total assets
 
$
3,191,666
   
$
3,088,418
 
Liabilities and Stockholders’ Equity
               
Claim liabilities
 
$
798,508
   
$
787,102
 
Liability for future policy benefits
   
438,008
     
414,997
 
Unearned premiums
   
101,331
     
97,481
 
Policyholder deposits
   
214,912
     
206,109
 
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
35,358
     
45,109
 
Accounts payable and accrued liabilities
   
389,918
     
332,699
 
Deferred tax liability
   
13,533
     
15,046
 
Short-term borrowings
   
-
     
30,000
 
Long-term borrowings
   
49,498
     
52,751
 
Liability for pension benefits
   
133,659
     
139,611
 
Total liabilities
   
2,174,725
     
2,120,905
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders’ equity
               
Common stock, $1 par value. Authorized 100,000,000 shares;
   

     

 
 issued and outstanding 23,794,612 and 23,430,292 shares at                
 September 30, 2021 and December 31, 2020, respectively     23,795       23,430  
Additional paid-in capital
   
63,471
     
57,399
 
Retained earnings
   
952,258
     
897,221
 
Accumulated other comprehensive loss, net
   
(21,850
)
   
(9,820
)
Total Triple-S Management Corporation stockholders’ equity
   
1,017,674
     
968,230
 
Non-controlling interest in consolidated subsidiary
   
(733
)
   
(717
)
Total stockholders’ equity
   
1,016,941
     
967,513
 
Total liabilities and stockholders’ equity
 
$
3,191,666
   
$
3,088,418
 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

3

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

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Revenues
                       
Premiums earned, net
 
$
1,019,696
   
$
922,934
   
$
3,016,012
   
$
2,657,366
 
Administrative service fees
   
3,875
     
3,752
     
9,316
     
8,755
 
Net investment income
   
17,572
     
14,168
     
46,178
     
42,294
 
Other operating revenues
   
3,925
     
2,052
     
8,518
     
6,394
 
Total operating revenues
   
1,045,068
     
942,906
     
3,080,024
     
2,714,809
 
Net realized investment gains (losses)
   
1,015
     
507
     
3,746
     
(180
)
Net unrealized investment (losses) gains on equity investments
   
(7,912
)
   
11,040
     
13,383
     
(17,428
)
Other income, net
   
11,085
     
1,811
     
19,047
     
6,217
 
Total revenues
   
1,049,256
     
956,264
     
3,116,200
     
2,703,418
 
Benefits and expenses
                               
Claims incurred, net of reinsurance
   
878,947
     
761,792
     
2,573,569
     
2,129,401
 
Operating expenses
   
154,526
     
158,809
     
456,880
     
499,669
 
Total operating costs
   
1,033,473
     
920,601
     
3,030,449
     
2,629,070
 
Interest expense
   
2,016
     
2,096
     
6,225
     
5,813
 
Total benefits and expenses
   
1,035,489
     
922,697
     
3,036,674
     
2,634,883
 
Income before taxes
   
13,767
     
33,567
     
79,526
     
68,535
 
Income tax expense
   
5,607
     
9,989
     
24,505
     
27,520
 
Net income
   
8,160
     
23,578
     
55,021
     
41,015
 
Net loss attributable to non-controlling interest
   
7
     
3
     
16
     
20
 
Net income attributable to Triple-S Management Corporation
 
$
8,167
   
$
23,581
   
$
55,037
   
$
41,035
 
Earnings per share attributable to Triple-S Management Corporation
                               
Basic net income per share
 
$
0.35
   
$
1.02
   
$
2.35
   
$
1.77
 
Diluted net income per share
 
$
0.35
   
$
1.02
   
$
2.34
   
$
1.76
 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

4

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

 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Net income
 
$
8,160
   
$
23,578
   
$
55,021
   
$
41,015
 
Other comprehensive income (loss), net of tax:
                               
Net unrealized change in fair value of available-for-sale securities, net of taxes
   
421
     
4,743
     
(13,869
)
   
32,023
 
Defined benefit pension plan:
                               
Actuarial loss, net
   
621
     
247
     
1,839
     
553
 
Total other comprehensive income (loss), net of tax
   
1,042
     
4,990
     
(12,030
)
   
32,576
 
Comprehensive income
   
9,202
     
28,568
     
42,991
     
73,591
 
Comprehensive loss attributable to non-controlling interest
   
7
     
3
     
16
     
20
 
Comprehensive income attributable to Triple-S Management Corporation
 
$
9,209
   
$
28,571
   
$
43,007
   
$
73,611
 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

5
Triple-S Management Corporation
Condensed Consolidated Interim Statements of Stockholders’ Equity (Unaudited)
(dollar in thousands)

 
 
Class A
Common
Stock
   
Class B
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
(Loss) Income
   
Triple-S
Management
Corporation
Stockholders’
Equity
   
Non-controlling
Interest in
Consolidated
Subsidiary
   
Total
Stockholders’
Equity
 
                                                                 
Balance, December 31, 2020
 
$
-
   
$
23,430
   
$
57,399
   
$
897,221
   
$
(9,820
)
 
$
968,230
   
$
(717
)
 
$
967,513
 
Share-based compensation
   
-
     
250
     
932
     
-
     
-
     
1,182
     
-
     
1,182
 
Comprehensive income (loss)
   
-
     
-
     
-
     
23,310
     
(15,944
)
   
7,366
     
(3
)
   
7,363
 
Balance, March 31, 2021
 
$
-
   
$
23,680
   
$
58,331
   
$
920,531
   
$
(25,764
)
 
$
976,778
   
$
(720
)
 
$
976,058
 
Share-based compensation
   
-
     
137
     
2,614
     
-
     
-
     
2,751
     
-
     
2,751
 
Repurchase and retirement of common stock
   
-
     
(21
)
   
(461
)
   
-
     
-
     
(482
)
   
-
     
(482
)
Comprehensive income (loss)
   
-
     
-
     
-
     
23,560
     
2,872
     
26,432
     
(6
)
   
26,426
 
Balance, June 30, 2021
 
$
-
   
$
23,796
   
$
60,484
   
$
944,091
   
$
(22,892
)
 
$
1,005,479
   
$
(726
)
 
$
1,004,753
 
Share-based compensation
    -       1       3,030       -       -       3,031       -       3,031  
Repurchase and retirement of common stock
    -       (2 )     (43 )     -       -       (45 )     -       (45 )
Comprehensive income (loss)
    -       -       -       8,167       1,042       9,209       (7 )     9,202  
Balance, September 30, 2021
  $ -     $ 23,795     $ 63,471     $ 952,258     $ (21,850 )   $ 1,017,674     $ (733 )   $ 1,016,941  
                                                                 
Balance, December 31, 2019
 
$
-
   
$
23,800
   
$
60,504
   
$
830,198
   
$
29,363
   
$
943,865
   
$
(693
)
 
$
943,172
 
Share-based compensation
   
-
     
590
     
1,769
     
-
     
-
     
2,359
     
-
     
2,359
 
Repurchase and retirement of common stock
   
-
     
(584
)
   
(8,511
)
   
-
     
-
     
(9,095
)
   
-
     
(9,095
)
Comprehensive income (loss)
   
-
     
-
     
-
     
(26,145
)
   
16,032
     
(10,113
)
   
(7
)
   
(10,120
)
Cumulative effect adjustment due to implementation of ASU 2016-13
   
-
     
-
     
-
     
(166
)
   
-
     
(166
)
   
-
     
(166
)
Balance, March 31, 2020
 
$
-
   
$
23,806
   
$
53,762
   
$
803,887
   
$
45,395
   
$
926,850
   
$
(700
)
 
$
926,150
 
Share-based compensation
   
-
     
7
     
4,228
     
-
     
-
     
4,235
     
-
     
4,235
 
Repurchase and retirement of common stock
   
-
     
(375
)
   
(5,618
)
   
-
     
-
     
(5,993
)
   
-
     
(5,993
)
Comprehensive income (loss)
   
-
     
-
     
-
     
43,599
     
11,554
     
55,153
     
(10
)
   
55,143
 
Balance, June 30, 2020
 
$
-
   
$
23,438
   
$
52,372
   
$
847,486
   
$
56,949
   
$
980,245
   
$
(710
)
 
$
979,535
 
Share-based compensation
    -       7       1,842       -       -       1,849       -       1,849  
Repurchase and retirement of common stock
    -       (15 )     (250 )     -       -       (265 )     -       (265 )
Comprehensive income (loss)
    -       -       -       23,581       4,990       28,571       (3 )     28,568  
Balance, September 30, 2020
  $ -     $ 23,430     $ 53,964     $
871,067     $ 61,939     $ 1,010,400     $ (713 )   $ 1,009,687  

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

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

 
 
Nine months ended
September 30,
 
 
 
2021
   
2020
 
Cash flows from operating activities:
           
Net income
 
$
55,021
   
$
41,015
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation and amortization
   
10,667
     
10,855
 
Net amortization of investments
   
2,290
     
2,151
 
(Reversal) provision for doubtful receivables
   
(340
)
   
2,229
 
Deferred tax expense
   
8,635
     
2,277
 
Net realized investment (gains) losses on sale of securities
   
(3,746
)
   
180
 
Net unrealized (gains) losses on equity investments
   
(13,383
)
   
17,428
 
Interest credited to policyholder deposits
   
4,874
     
4,788
 
Share-based compensation
   
6,964
     
8,443
 
Gain on sale of property and equipment
   
-
     
154
 
(Increase) decrease in assets:
               
Premium and other receivables, net
   
(7,811
)
   
26,038
 
Deferred policy acquisition costs and value of business acquired
   
(5,474
)
   
(10,827
)
Deferred taxes
   
45
     
(109
)
Other assets
   
(11,197
)
   
(29,831
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
11,406
     
77,662
 
Liability for future policy benefits
   
23,011
     
22,099
 
Unearned premiums
   
3,850
     
2,307
 
Liability to Federal Employees’ Health Benefits and Federal Employees’ Programs
   
(9,751
)
   
10,093
 
Accounts payable and accrued liabilities
   
25,638
     
36,729
 
Net cash provided by operating activities
   
100,699
     
223,681
 

(Continued)

7
Triple-S Management Corporation
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)

 
 
Nine months ended
September 30,
 
 
 
2021
   
2020
 
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed-maturities sold
 
$
140,866
   
$
94,557
 
Fixed-maturities matured/called
   
18,271
     
37,450
 
Securities held to maturity:
               
Fixed-maturities matured/called
   
747
     
1,079
 
Equity investments sold
   
99,951
     
80,152
 
Other invested assets sold
   
19,652
     
13,231
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed-maturities
   
(129,066
)
   
(206,387
)
Securities held to maturity:
               
Fixed-maturities
   
(751
)
   
(1,087
)
Equity investments
   
(199,046
)
   
(201,324
)
Other invested assets
   
(9,317
)
   
(25,442
)
Increase in other investments
   
(4,470
)
   
(3,924
)
Net change in policy loans
   
(21
)
   
240
 
Net capital expenditures
   
(16,948
)
   
(52,549
)
Capital contribution on equity method investees
   
-
     
(7,083
)
Net cash used in investing activities
   
(80,132
)
   
(271,087
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
20,594
     
16,814
 
Net change in short-term borrowings
   
(30,000
)
   
28,500
 
Proceeds from long-term borrowings
   
-
     
30,841
 
Repayments of long-term borrowings
   
(3,370
)
   
(2,760
)
Repurchase and retirement of common stock
   
-
     
(14,980
)
Proceeds from policyholder deposits
   
12,594
     
21,586
 
Surrenders of policyholder deposits
   
(8,665
)
   
(12,829
)
Net cash (used in) provided by financing activities
   
(8,847
)
   
67,172
 
Net increase in cash and cash equivalents
   
11,720
     
19,766
 
Cash and cash equivalents:
               
Beginning of period
   
110,989
     
109,837
 
End of period
 
$
122,709
   
$
129,603
 

See accompanying notes to unaudited condensed consolidated interim financial statements.

8
Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

1.
Basis of Presentation

The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation (Triple-S, TSM, the Company, the Corporation, we, us or our) and its subsidiaries are unaudited. The condensed consolidated interim financial statements do not include all the information and the footnotes required by accounting principles generally accepted in the United States of America (GAAP or U.S. GAAP) for complete financial statement presentation pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Accordingly, these condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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 and nine months ended September 30, 2021 are not necessarily indicative of the results for the full year ending December 31, 2021.

2.
Significant Accounting Policies

Recently Adopted Accounting Standards
 
On August 28, 2018, the Financial Accounting Standards Board (FASB) issued guidance for Compensation – Retirement Benefits – Defined Benefit Plans – General which addresses changes to the disclosure requirement for defined benefit plans. The amendments in this guidance modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.  Specifically, the guidance removes certain disclosure requirements, including the amounts of accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, related-party disclosures concerning the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer and related-parties and the plan, and adds other disclosures including the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation for the reasons for significant gains and losses related to changes in the benefit obligation for the period.   The Company adopted the standard effective January 1, 2021.  The adoption of this guidance did not have a material impact on the presentation and disclosures of the Company’s consolidated financial statements.
 
On December 18, 2019, the FASB issued Accounting Standards Update (ASU) 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. Also, the amendments simplify the accounting for income taxes by requiring the following: (1) that an entity recognize a franchise tax that is partially based on income in accordance with Topic 740 and account for any incremental amount incurred as a non-income-based tax; (2) that an entity evaluate when a step-up in the tax basis of Goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should instead be considered a separate transaction; and (3) that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that included the enactment date. The Company adopted the standard effective January 1, 2021. The adoption of this guidance did not have a material impact on the results of the Company’s consolidated financial statements.
 
On January 16, 2020, the FASB issued guidance to clarify the interaction between the accounting standards on recognition and measurement of financial instruments in Topic 321: Investments – Equity Securities, the one on equity method investments in Topic 323: Investments – Equity Method and Joint Ventures, and forward contracts and purchased options in Topic 815: Derivatives and Hedging. The amendments clarify that upon an increase or decrease in level of ownership or degree of influence, a company should remeasure the interest held in the investee to take into account observable transactions immediately before applying or discontinuing the equity method of accounting under Topic 323. The guidance also clarifies that an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchase option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option. The Company adopted the standard effective January 1, 2021. The adoption of this guidance did not have a material impact on the results of the Company’s consolidated financial statements.

9

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

Future Adoptions of Accounting Standards
 
On January 7, 2021, the FASB issued ASU 2021-01: Reference Rate Reform (Topic 848): Scope Refinement – to clarify the scope of the recent reference reform guidance in Topic 848. This ASU refines the scope of Topic 848 and clarifies that certain optional expedients and exceptions therein for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition. Specifically, modifications related to reference rate reform would not be considered an event that requires reassessment of previous accounting conclusions. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in the ASU are effective immediately for all entities. The Company is currently in the process of identifying its LIBOR-based contracts that will be affected by the phase-out of LIBOR and expects to use the optional expedients provided in this ASU.
 
Other than the accounting pronouncements disclosed above, there were no other new accounting pronouncements issued during the three and nine months ended September 30, 2021 that could have a material impact on the Company’s financial position, operating results or financials statement disclosures.

10

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
3.
Investment in Securities

The amortized cost for debt securities and alternative investments, gross unrealized gains and losses, and estimated fair value for the Company’s investments in securities by major security type and class of security as of September 30, 2021, and December 31, 2020, were as follows:

 
September 30, 2021
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
                 
 Fixed-maturities available-for-sale
               
Obligations of government-sponsored enterprises
 
$
21,303
   
$
294
   
$
(53
)
 
$
21,544
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
104,546
     
5,367
     
(4
)
   
109,909
 
Municipal securities
   
611,211
     
40,598
     
(853
)
   
650,956
 
Corporate bonds
   
177,640
     
23,510
     
(69
)
   
201,081
 
Residential mortgage-backed securities
   
284,745
     
16,807
     
(546
)
   
301,006
 
Collateralized mortgage obligations
   
5,301
     
437
     
-
     
5,738
 
Total fixed-maturities available-for-sale
 
$
1,204,746
   
$
87,013
   
$
(1,525
)
 
$
1,290,234
 

 
December 31, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
                         
Fixed-maturities available-for-sale
                       
Obligations of government-sponsored enterprises
 
$
24,496
   
$
665
   
$
(9
)
 
$
25,152
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
103,694
     
7,993
     
-
     
111,687
 
Municipal securities
   
646,961
     
54,067
     
-
     
701,028
 
Corporate bonds
   
189,516
     
30,280
     
-
     
219,796
 
Residential mortgage-backed securities
   
249,801
     
21,487
     
(57
)
   
271,231
 
Collateralized mortgage obligations
   
12,954
     
638
     
(21
)
   
13,571
 
Total fixed-maturities available-for-sale
 
$
1,227,422
   
$
115,130
   
$
(87
)
 
$
1,342,465
 

11

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
 
September 30, 2021
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Fixed-maturities held-to-maturity
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
613
   
$
154
   
$
-
   
$
767
 
Residential mortgage-backed securities
   
164
     
8
     
-
     
172
 
Certificates of deposit
   
1,093
     
-
     
-
     
1,093
 
Total fixed-maturities held-to-maturity
 
$
1,870
   
$
162
   
$
-
   
$
2,032
 

 
 
December 31, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Fixed-maturities held-to-maturity
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
614
   
$
201
   
$
-
   
$
815
 
Residential mortgage-backed securities
   
164
     
17
     
-
     
181
 
Certificates of deposit
   
1,089
     
-
     
-
     
1,089
 
Total fixed-maturities held-to-maturity
 
$
1,867
   
$
218
   
$
-
   
$
2,085
 

 
September 30, 2021
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Other invested assets - Alternative investments
 
$
105,151
   
$
17,908
   
$
(3,663
)
 
$
119,396
 

 
December 31, 2020
 
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
 
                       
Other invested assets - Alternative investments
 
$
112,171
   
$
6,119
   
$
(3,385
)
 
$
114,905
 

12

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020 were as follows:

 
September 30, 2021
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Fixed-maturities available-for-sale
                                                     
Obligations of government-sponsored enterprises
 
$
4,665
   
$
(22
)
   
4
   
$
1,518
   
$
(31
)
   
1
   
$
6,183
   
$
(53
)
   
5
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
    983       (4 )     1       -       -       -       983       (4 )     1  
Municipal securities
   
70,535
     
(853
)
   
16
     
-
     
-
     
-
     
70,535
     
(853
)
   
16
 
Corporate bonds
   
3,931
     
(69
)
   
1
     
-
     
-
     
-
     
3,931
     
(69
)
   
1
 
Residential mortgage-backed securities
   
48,592
     
(546
)
   
13
     
-
     
-
     
-
     
48,592
     
(546
)
   
13
 
Total fixed-maturities available-for-sale
 
$
128,706
   
$
(1,494
)
   
35
   
$
1,518
   
$
(31
)
   
1
   
$
130,224
   
$
(1,525
)
   
36
 
Other invested assets - Alternative investments
 
$
2,439
   
$
(105
)
   
2
   
$
18,022
   
$
(3,558
)
   
7
   
$
20,461
   
$
(3,663
)
   
9
 

 
December 31, 2020
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Fixed-maturities available-for-sale
                                                     
Obligations of government-sponsored enterprises
 
$
1,539
   
$
(9
)
   
1
   
$
-
   
$
-
     
-
   
$
1,539
   
$
(9
)
   
1
 
Residential mortgage-backed securities
   
3,624
     
(57
)
   
1
     
-
     
-
     
-
     
3,624
     
(57
)
   
1
 
Collateralized mortgage obligations
   
6,060
     
(21
)
   
2
     
-
     
-
     
-
     
6,060
     
(21
)
   
2
 
Total fixed-maturities available-for-sale
 
$
11,223
   
$
(87
)
   
4
   
$
-
   
$
-
     
-
   
$
11,223
   
$
(87
)
   
4
 
Other invested assets - Alternative investments
 
$
12,584
   
$
(808
)
   
4
   
$
16,396
   
$
(2,577
)
   
6
   
$
28,980
   
$
(3,385
)
   
10
 

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

 
•
Obligations of government-sponsored enterprises, U.S. treasury securities and obligations of U.S government instrumentalities, and Municipal securities: The unrealized losses of these securities were mainly caused by fluctuations in interest rates and general market conditions. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. In addition, they have investment-grade ratings. The Company does not consider these investments to be credit-impaired because of several factors: the decline in fair value is attributable to changes in interest rates and not credit quality; the Company does not intend to sell the investments and it is 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 at maturity; and because the Company expects to collect all contractual cash flows.

13

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
•
Corporate bonds: The unrealized losses of these bonds were mainly caused by fluctuations in interest rates and general market conditions.  All corporate bonds with an unrealized loss have investment grade ratings. The Company does not consider these investments to be credit-impaired because of several factors: the decline in fair value is attributable to changes in interest rates and not credit quality; the Company does not intend to sell the investments and it is 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 at maturity; and because the Company expects to collect all contractual cash flows.

•
Residential mortgage-backed securities: The unrealized losses on these investments were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities are guaranteed by a U.S. government-sponsored enterprise. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior, typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Company owns. The Company does not consider these investments to be credit-impaired because of several factors: the decline in fair value is attributable to changes in interest rates and not credit quality; the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be at maturity; and because the Company expects to collect all contractual cash flows.

•
Alternative Investments: As of September 30, 2021, alternative investments with unrealized losses were not considered credit-impaired based on market conditions.

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

 
September 30, 2021
 
 
 
Amortized
cost
   
Estimated
fair value
 
Fixed-maturities available-for-sale
           
Due in one year or less
 
$
60,380
   
$
61,218
 
Due after one year through five years
   
572,854
     
605,722
 
Due after five years through ten years
   
149,432
     
157,360
 
Due after ten years
   
132,034
     
159,190
 
Residential mortgage-backed securities
   
284,745
     
301,006
 
Collateralized mortgage obligations
   
5,301
     
5,738
 
 
 
$
1,204,746
   
$
1,290,234
 
Fixed-maturities held-to-maturity
               
Due in one year or less
 
$
1,093
   
$
1,093
 
Due after ten years
   
613
     
767
 
Residential mortgage-backed securities
   
164
     
172
 
 
 
$
1,870
   
$
2,032
 

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.

On September 30, 2021 and December 31, 2020 investments with an amortized cost of $207,890 and $227,890 (fair value of $223,930 and $250,088), respectively, were pledged with the Federal Home Loan Bank of New York (FHLBNY) to secure short-term borrowings.

14

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
4.
Realized and Unrealized Gains (Losses)

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


 
 
Three months ended
   
Nine months ended
 
 
 
September 30,
   
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Realized gains (losses)
                       
Fixed-maturity securities
                       
Fixed-maturities available-for-sale
                       
Gross gains
 
$
-
   
$
402
   
$
90
   
$
1,953
 
Gross losses
   
(138
)
   
(1
)
   
(1,104
)
   
(7
)
Total fixed-maturity securities
   
(138
)
   
401
     
(1,014
)
   
1,946
 
Equity investments
                               
Gross gains
   
238
     
67
     
2,121
     
1,057
 
Gross losses
   
(19
)
   
(479
)
   
(438
)
   
(3,249
)
Gross losses from impaired securities
   
-
     
-
     
-
     
(678
)
Total equity investments
   
219
     
(412
)
   
1,683
     
(2,870
)
Other invested assets
                               
Gross gains
   
934
     
518
     
3,077
     
744
 
Total other invested assets
   
934
     
518
     
3,077
     
744
 
Net realized gains (losses) on securities
 
$
1,015
   
$
507
   
$
3,746
   
$
(180
)

The gross losses from impaired securities during the nine months ended September 30, 2020 are related to an equity method investment held by the Company.
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2021
 
2020
 
2021
 
2020
 
Changes in net unrealized gains (losses):
               
Recognized in accumulated other comprehensive income (loss):
               
Fixed-maturities – available-for-sale
 
$
(3,742
)
 
$
4,705
   
$
(29,555
)
 
$
44,943
 
Other invested assets
   
4,136
     
1,498
     
11,511
     
(2,700
)
 
 
$
394
   
$
6,203
   
$
(18,044
)
 
$
42,243
 
Not recognized in the consolidated financial statements:
                               
Fixed-maturities – held-to-maturity
 
$
(11
)
 
$
(6
)
 
$
(56
)
 
$
64
 

The change in deferred tax asset (liability) on unrealized gains (losses) recognized in Accumulated Other Comprehensive Income during the nine months ended September 30, 2021 and 2020 was $3,212 and $8,446, respectively.

As of September 30, 2021 and December 31, 2020, no individual investment in securities exceeded 10% of stockholders’ equity.

15

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

5.
Premiums and Other Receivables, Net

Premiums and Other Receivables, Net were as follows:

 
 
September 30,
2021
   
December 31,
2020
 
Premiums
 
$
177,298
   
$
106,322
 
Self-funded group receivables
   
27,767
     
26,412
 
FEHBP
   
15,002
     
12,830
 
Agent balances
   
30,235
     
31,509
 
Accrued interest
   
9,206
     
10,418
 
Reinsurance recoverable
   
157,665
     
216,314
 
Other
   
128,988
     
135,774
 
 
   
546,161
     
539,579
 
Less allowance for doubtful receivables:
               
Premiums
   
34,433
     
37,231
 
Other
   
15,251
     
13,508
 
 
   
49,684
     
50,739
 
Total premium and other receivables, net
 
$
496,477
   
$
488,840
 

As of September 30, 2021 and December 31, 2020, the Company had premiums and other receivables of $70,372 and $53,397, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of September 30, 2021 and December 31, 2020 were $20,164 and $23,752, respectively.

Reinsurance recoverable as of September 30, 2021 and December 31, 2020 includes $115,160 and $172,021, respectively, related to catastrophe losses covered by the Property and Casualty segment’s reinsurance program.

6.
 Fair Value Measurements

Our condensed Consolidated Balance Sheets include the following financial instruments: fixed-maturities available-for-sale, equity investments, policy loans, policyholder deposits, short-term borrowings and long-term borrowings. We consider the carrying amounts of policy loans, policyholder deposits, short-term borrowings and long-term borrowings to approximate their fair value and are considered Level 2 financial instruments. Certain assets are measured at fair value on a recurring basis and are disclosed below. These assets are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2020 Annual Report on Form 10-K.
16

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

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

 
 
September 30, 2021
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed-maturities available-for-sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
21,544
   
$
-
   
$
21,544
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
109,909
     
-
     
-
     
109,909
 
Municipal securities
   
-
     
650,956
     
-
     
650,956
 
Corporate bonds
   
-
     
201,081
     
-
     
201,081
 
Residential agency mortgage-backed securities
   
-
     
301,006
     
-
     
301,006
 
Collateralized mortgage obligations
   
-
     
5,738
     
-
     
5,738
 
Total fixed-maturities available-for-sale
 
$
109,909
   
$
1,180,325
   
$
-
   
$
1,290,234
 
Equity investments
 
$
276,531
   
$
236,893
   
$
5,341
   
$
518,765
 

 
 
December 31, 2020
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
                       
Fixed-maturities available-for-sale
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
25,152
   
$
-
   
$
25,152
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
111,687
     
-
     
-
     
111,687
 
Municipal securities
   
-
     
701,028
     
-
     
701,028
 
Corporate bonds
   
-
     
219,796
     
-
     
219,796
 
Residential agency mortgage-backed securities
   
-
     
271,231
     
-
     
271,231
 
Collateralized mortgage obligations
   
-
     
13,571
     
-
     
13,571
 
Total fixed-maturities available-for-sale
 
$
111,687
   
$
1,230,778
   
$
-
   
$
1,342,465
 
Equity investments
 
$
220,118
   
$
179,108
   
$
5,102
   
$
404,328
 

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.

There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2021 and the year ended December 31, 2020.

17

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(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 and nine months ended September 30 is as follows:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
 
Three months ended
   
Nine months ended
 
   
September 30, 2021
   
September 30, 2021
 
Beginning Balance
 
$
5,199
   
$
5,102
 
Unrealized in other accumulated comprehensive income
   
142
     
239
 
Ending Balance
 
$
5,341
   
$
5,341
 

7.
Claim Liabilities

The tables below present a reconciliation of the beginning and ending balances of Claim Liabilities during the nine months ended September 30:

 
 
Nine months ended
September 30, 2021
 
 
 
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
 
                 
Claim liabilities at beginning of period
 
$
445,655
   
$
341,447
   
$
787,102
 
Reinsurance recoverable on claim liabilities
   
-
     
(138,816
)
   
(138,816
)
Net claim liabilities at beginning of period
   
445,655
     
202,631
     
648,286
 
Claims incurred
                       
Current period insured events
   
2,485,095
     
92,526
     
2,577,621
 
Prior period insured events
   
(35,986
)
   
982
   
(35,004
)
Total
   
2,449,109
     
93,508
     
2,542,617
 
Payments of losses and loss-adjustment
                       
expenses                        
Current period insured events
   
2,124,676
     
47,360
     
2,172,036
 
Prior period insured events
   
236,405
     
63,086
     
299,491
 
Total
   
2,361,081
     
110,446
     
2,471,527
 
Net claim liabilities at end of period
   
533,683
     
185,693
     
719,376
 
Reinsurance recoverable on claim liabilities
   
-
     
79,132
     
79,132
 
Claim liabilities at end of period
 
$
533,683
   
$
264,825
   
$
798,508
 

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

18

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
 
Nine months ended
September 30, 2020
 
 
 
Managed
Care
   
Other
Business
Segments *
   
Consolidated
 
 
                 
 
                 
Claim liabilities at beginning of period
 
$
341,277
   
$
367,981
   
$
709,258
 
Reinsurance recoverable on claim liabilities
   
-
     
(137,017
)
   
(137,017
)
Net claim liabilities at beginning of period
   
341,277
     
230,964
     
572,241
 
Claims incurred
                       
Current period insured events
   
2,000,825
     
84,358
     
2,085,183
 
Prior period insured events
   
24,297
   
(7,885
)
   
16,412
Total
   
2,025,122
     
76,473
     
2,101,595
 
Payments of losses and loss-adjustment
                       
expenses
                       
Current period insured events
   
1,678,400
     
45,815
     
1,724,215
 
Prior period insured events
   
267,427
     
41,081
     
308,508
 
Total
   
1,945,827
     
86,896
     
2,032,723
 
Net claim liabilities at end of period
   
420,572
     
220,541
     
641,113
 
Reinsurance recoverable on claim liabilities
   
-
     
145,807
     
145,807
 
Claim liabilities at end of period
 
$
420,572
   
$
366,348
   
$
786,920
 

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

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

The favorable developments in the claims incurred and loss-adjustment expenses for prior-period insured events for the nine months ended September 30, 2021 and 2020 were primarily due to better than expected utilization trends. Reinsurance recoverable on unpaid claims is reported as Premium and Other Receivables, Net in the accompanying condensed consolidated financial statements.

The claims incurred disclosed in the table above exclude the portion of the change in the liability for future policy benefits amounting to $9,539 and $30,952 during the three months and nine months ended September 30, 2021, respectively, and $13,737 and $27,806 during the three months and nine months ended September 30, 2020, respectively, which is included within the consolidated Claims Incurred.

The following is information about incurred and paid claims development, net of reinsurance, as of September 30, 2021, as well as cumulative claim frequency. Additional information presented includes total incurred-but-not-reported liabilities plus expected development on reported claims which is included within the net incurred claims amounts. 

19

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
Incurred Year
 
Total of IBNR Liabilities Plus Expected
Development on Reported Claims
 
2020
   $
119,675
 
2021
   
360,419
 

8.
Borrowings

Our credit agreements with commercial banks in Puerto Rico include certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Company’s business. For one of our credit agreements, covering three term loans, the Company was not in compliance with the Debt Service Coverage Ratio covenant of the credit agreement during the quarter ended September 30, 2021. As of September 30, 2021 and December 31, 2020, the outstanding balance of the debt was $20,217 and $22,644, respectively. On November 1, 2021, the financial banking institution waived the Company’s obligation to comply with this covenant for the quarter ended September 30, 2021 and quarters ending on December 31, 2021 and March 31, 2022.

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

•
In August 2019, TSS and TSV became members of the FHLBNY, which provides access to collateralized advances. The borrowing capacity of TSS and TSV is up to 15% and 10%, respectively, of their admitted assets as disclosed in the most recent filing with the Commissioner of Insurance but is constrained by the amount of collateral held at the FHLBNY (see Note 3). As of September 30, 2021 and December 31, 2020, the borrowing capacity was approximately $192,430 and $200,338, respectively. There was no outstanding balance as of September 30, 2021. As of December 31, 2020 the outstanding balance was $30,000. The average interest rate of the outstanding balance was 0.33% as of December 31, 2020.

•
TSA has a $10,000 revolving loan agreement with a commercial bank in Puerto Rico. This line of credit has an interest rate of 30-day LIBOR plus 250 basis points and contains certain financial and non-financial covenants that are customary for this type of facility. This line of credit matured on June 30, 2021 and was renewed for an additional year. There was no outstanding balance as of September 30, 2021.

9.
Pension Plan

The components of net periodic benefit cost were as follows:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Components of net periodic benefit cost:
                       
Interest cost
 
$
1,370
   
$
1,474
   
$
4,120
   
$
4,554
 
Expected return on assets
   
(1,098
)
   
(2,211
)
   
(3,298
)
   
(6,629
)
Amortization of actuarial loss
   
994
     
396
     
2,944
     
884
 
Settlement loss
   
1,359
     
356
     
3,359
     
1,068
 
Net periodic benefit cost (income)
 
$
2,625
   
$
15
 
$
7,125
   
$
(123
)

 
Employer Contributions: The Company disclosed in its audited consolidated financial statements for the year ended December 31, 2020 that it expected to contribute $10,000 to the pension program in 2021. As of September 30, 2021, the Company has contributed $10,000 to the pension program. 

10.
Reinsurance

Triple-S Propiedad, Inc. (TSP) uses facultative reinsurance, pro rata, and excess of loss reinsurance treaties to manage its exposure to losses, including those from catastrophe events. TSP has geographic exposure to catastrophe losses from hurricanes and earthquakes. The incidence and severity of catastrophes are inherently unpredictable.
 
20

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
Under these treaties, TSP ceded premiums written were $14,791 and $14,920 for the three months ended September 30, 2021 and 2020, respectively, and $44,245 and $45,637 for the nine months ended September 30, 2021 and 2020, respectively. Ceded incurred losses and loss adjustment expenses during the three months and nine months ended September 30, 2021 and 2020 were $3,926 and $5,419, respectively, and $3,167 and $45,802, respectively. The ceded incurred losses and loss adjustment expenses for the nine months ended September 30, 2020 include $40,000 related to earthquake losses ceded under catastrophe reinsurance.
 
Principal reinsurance agreements are as follows:
  
•
Casualty excess of loss treaty provides reinsurance for losses up to $20,000, subject to a retention of $225.
 
•
Medical malpractice excess of loss treaty provides reinsurance for losses up to $3,000, subject to a retention of $150.
 
•
Property reinsurance treaty includes proportional cessions and a per risk excess of loss contract limiting losses to $400 in $30,000 risks.
 
•
Catastrophe protection is purchased limiting losses to $5,000 per event with losses up to approximately $811,450 in a $816,450 event.

All principal reinsurance contracts are for a period of one year and are subject to modifications and negotiations in each renewal. TSP’s current property and catastrophe reinsurance program was renewed effective April 1, 2021 for a twelve-month period ending March 31, 2022. Other contracts that expired on January 1, 2021 were renewed.

21

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
11.
Comprehensive Income (Loss)

The accumulated balances for each classification of other comprehensive income (loss), net of tax, are as follows:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Net Unrealized Gain on Securities
                       
Beginning Balance
 
$
77,399
   
$
85,110
   
$
91,689
   
$
57,830
 
Other comprehensive income (loss)
                               
before reclassifications     1,233       5,149       (10,872 )     31,879  
Amounts reclassified from accumulated                                
  other comprehensive (loss) income
   
(812
)
   
(406
)
   
(2,997
)
   
144
 
Net current period change
   
421
     
4,743
     
(13,869
)
   
32,023
 
Ending Balance
   
77,820
     
89,853
     
77,820
     
89,853
 
Liability for Pension Benefits
                               
Beginning Balance
   
(100,291
)
   
(28,161
)
   
(101,509
)
   
(28,467
)
Amounts reclassified from accumulated                                
  other comprehensive income
   
621
     
247
     
1,839
     
553
 
Ending Balance
   
(99,670
)
   
(27,914
)
   
(99,670
)
   
(27,914
)
Accumulated Other Comprehensive (Loss) Income
                               
Beginning Balance
   
(22,892
)
   
56,949
     
(9,820
)
   
29,363
 
   Other comprehensive income (loss)                                
before reclassifications
   
1,233
     
5,149
     
(10,872
)
   
31,879
 
Amounts reclassified from accumulated                                
  other comprehensive (loss) income
   
(191
)
   
(159
)
   
(1,158
)
   
697
 
Net current period change
   
1,042
     
4,990
     
(12,030
)
   
32,576
 
Ending Balance
 
$
(21,850
)
 
$
61,939
   
$
(21,850
)
 
$
61,939
 

12.
Share-Based Compensation

Share-based compensation expense recorded during the three months ended September 30, 2021 and 2020 was $3,031 and $1,849, respectively. Share-based compensation expense recorded during the nine months ended September 30, 2021 and 2020 was $6,964 and $8,443, respectively. During the three months ended September 30, 2021, and 2020, 2,063 and 14,040 shares were repurchased and retired as the result of non-cash tax withholdings upon vesting of shares. During the nine months ended September 30, 2021 and 2020, 22,886 and 20,922 shares were repurchased and retired as the result of non-cash tax withholdings upon vesting of shares.

22

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

13.
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
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Numerator for earnings per share:
                       
Net income attributable to TSM available to stockholders
 
$
8,167
   
$
23,581
   
$
55,037
   
$
41,035
 
Denominator for basic earnings per share:
                               
Weighted average of common shares
   
23,494,415
     
23,073,511
     
23,402,622
     
23,215,840
 
Effect of dilutive securities
   
116,257
     
120,469
     
143,655
     
102,229
 
Denominator for diluted earnings per share
   
23,610,672
     
23,193,980
     
23,546,277
     
23,318,069
 
Basic net income per share attributable to TSM
 
$
0.35
   
$
1.02
   
$
2.35
   
$
1.77
 
Diluted net income per share attributable to TSM
 
$
0.35
   
$
1.02
   
$
2.34
   
$
1.76
 

14.
Contingencies
 
The following information supplements and amends, as applicable, the disclosures in Note 25 to the Consolidated Financial Statements of the Company’s 2020 Annual Report on Form 10-K. The Company’s business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, U.S. Virgin Islands (USVI), Costa Rica, British Virgin Islands (BVI), and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company's compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.

 
The Company is involved in various legal actions arising in the ordinary course of business. The Company is also defendant in various other litigations and proceedings, some of which are described below. Where the Company believes that a loss is both probable and estimable, such amounts have been recorded.  Although the Company believes the estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution. However, there are legal proceedings where a loss is reasonably possible, and for which it is possible to reasonably estimate the amount of the possible loss or range of losses. We currently believe that on September 30, 2021, the range of possible losses for such proceedings in excess of established reserves is, in the aggregate, from $0 to approximately $10,000. The outcome of legal proceedings is inherently uncertain; pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any. Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material effect on the consolidated financial condition, operating results and/or cash flows of the Company.

 

Additionally, we may face various potential litigation claims that have not been asserted to date.

 

In re Blue Cross Blue Shield Antitrust Litigation

 

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


23

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

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

 

On April 16, 2018, Defendants moved the Federal District Court for the Northern District of Alabama to certify for immediate interlocutory appeal the Court’s April 5, 2018 Standard of Review Ruling. On June 12, 2018 Hon. Judge Proctor agreed to grant Defendant’s motion for certification pursuant to 28 U.S.C. §1292(b). Defendants filed their Notice of Appeal on July 12, 2018. On December 12, 2018, the Court of Appeals for the Eleventh Circuit denied Defendants’ petition to appeal the District Court’s Standard of Review Ruling.   On July 29, 2020, the Defendants reached a settlement agreement with subscribers, which was subject to approval by the BCBSA and Member Plans boards, as well as from the Federal District Court for the Northern District of Alabama. Following the BCBSA Board of Directors and Members Plans’ August 14, 2020 approval, on September 30, 2020, the Company’s Board of Directors voted to approve the Settlement Agreement. On November 30, 2020, the Federal District Court for the Northern District of Alabama issued its Memorandum Opinion and Preliminary Order approving settlement terms. The Settlement Agreement requires a monetary settlement payment from defendants. On March 1, 2021, the plans finished producing the data for settlement notice and allocation. The deadline for class members to opt-out or file objections to Settlement was July 28, 2021. The Company's portion of the monetary settlement payment was estimated at $32,000, which was accrued during the year ended December 31, 2020. As of September 30, 2021 the accrued amount related to this contingency was $27,364.



Following the suspension of negotiation efforts with providers and the stay of litigation proceedings from July 2019 to October 2020, providers resumed their mediation efforts with Defendants in October 2021.

24

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
15.
Segment Information
 
The operations of the Company are conducted principally through three reportable business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Company evaluates performance based primarily on the operating revenues and operating income of each segment.  Operating revenues include Premiums Earned, Net, Administrative Service Fees and Net Investment Income. Operating costs include Claims Incurred and Operating Expenses.  The Company calculates operating income or loss as operating revenues less operating costs.

The following tables summarize the operations by reportable segment for the three months and nine months ended September 30, 2021 and 2020:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Operating revenues
                       
Managed Care:
                       
Premiums earned, net
 
$
939,210
   
$
849,529
   
$
2,779,869
   
$
2,447,588
 
Administrative service fees
   
3,875
     
3,013
     
9,316
     
8,755
 
Intersegment premiums/service fees
   
598
     
644
     
2,319
     
2,624
 
Net investment income
   
8,088
     
5,065
     
19,088
     
14,763
 
Total Managed Care
   
951,771
     
858,251
     
2,810,592
     
2,473,730
 
Life Insurance:
                               
Premiums earned, net
   
54,394
     
49,616
     
159,783
     
143,325
 
Intersegment premiums
   
636
     
516
     
1,811
     
1,552
 
Net investment income
   
6,785
     
6,900
     
19,851
     
20,625
 
Total Life Insurance
   
61,815
     
57,032
     
181,445
     
165,502
 
Property and Casualty Insurance:
                               
Premiums earned, net
   
26,092
     
23,789
     
76,360
     
66,453
 
Intersegment premiums
   
153
     
153
     
460
     
460
 
Net investment income
   
2,569
     
2,103
     
6,847
     
6,551
 
Total Property and Casualty insurance
   
28,814
     
26,045
     
83,667
     
73,464
 
Other segments: *
                               
Intersegment service revenues
   
2,229
     
2,595
     
9,678
     
7,637
 
Operating revenues from external sources
   
3,925
     
2,052
     
8,518
     
6,394
 
Total other segments
   
6,154
     
4,647
     
18,196
     
14,031
 
Total business segments
   
1,048,554
     
945,975
     
3,093,900
     
2,726,727
 
TSM operating revenues from external sources
   
130
     
100
     
392
     
355
 
Elimination of intersegment premiums/service fees
   
(1,387
)
   
(574
)
   
(4,590
)
   
(4,636
)
Elimination of intersegment service revenues
   
(2,229
)
   
(2,595
)
   
(9,678
)
   
(7,637
)
Consolidated operating revenues
 
$
1,045,068
   
$
942,906
   
$
3,080,024
   
$
2,714,809
 

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

25

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Operating income (loss):
                       
Managed Care
 
$
8,532
   
$
13,006
   
$
34,496
   
$
56,495
 
Life Insurance
   
5,591
     
5,682
     
17,772
     
20,188
 
Property and Casualty insurance
   
1,975
     
4,386
     
7,763
     
10,921
 
Other segments *
   
(2,161
)
   
(1,639
)
   
(6,593
)
   
(4,552
)
Total business segments
   
13,937
     
21,435
     
53,438
     
83,052
 
TSM operating revenues from external sources
   
130
     
100
     
392
     
355
 
TSM unallocated operating expenses
   
(4,875
)
   
(1,633
)
   
(11,464
)
   
(4,877
)
Elimination of TSM intersegment charges
   
2,403
     
2,403
     
7,209
     
7,209
 
Consolidated operating income
   
11,595
     
22,305
     
49,575
     
85,739
 
Consolidated net realized investment gains (losses)
   
1,015
     
507
     
3,746
     
(180
)
Consolidated net unrealized investment (losses) gains on equity investments
   
(7,912
)
   
11,040
     
13,383
     
(17,428
)
Consolidated interest expense
   
(2,016
)
   
(2,096
)
   
(6,225
)
   
(5,813
)
Consolidated other income, net
   
11,085
     
1,811
     
19,047
     
6,217
 
Consolidated income before taxes
 
$
13,767
   
$
33,567
   
$
79,526
   
$
68,535
 
 
                               
Depreciation and amortization expense:
                               
Managed Care
 
$
2,319
   
$
2,085
   
$
7,111
   
$
8,061
 
Life Insurance
   
320
     
289
     
965
     
869
 
Property and Casualty insurance
   
72
     
93
     
216
     
296
 
Other segments*
   
355
     
240
     
1,057
     
913
 
Total business segments
   
3,066
     
2,707
     
9,349
     
10,139
 
TSM depreciation expense
   
488
     
404
     
1,318
     
716
 
Consolidated depreciation and amortization expense
 
$
3,554
   
$
3,111
   
$
10,667
   
$
10,855
 

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

 
 
September 30,
2021
   
December 31,
2020
 
Assets:
           
Managed Care
 
$
1,456,710
   
$
1,319,389
 
Life Insurance
   
1,095,884
     
1,051,819
 
Property and Casualty Insurance
   
508,783
     
583,404
 
Other segments *
   
35,854
     
34,020
 
Total business segments
   
3,097,231
     
2,988,632
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
16,945
     
16,489
 
Property and equipment, net
   
74,209
     
68,678
 
Other assets
   
90,257
     
88,684
 
 
   
181,411
     
173,851
 
Elimination entries-intersegment receivables and others
   
(86,976
)
   
(74,065
)
Consolidated total assets
 
$
3,191,666
   
$
3,088,418
 

*
Includes segments that are not required to be reported separately, primarily the health clinics.
26

Triple-S Management Corporation
Notes to Condensed Consolidated Interim Financial Statements
(dollar in thousands, except per share and share information)
(Unaudited)
16.
Subsequent Events

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


27
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,” “our,” and “us” refers to Triple-S Management Corporation and its subsidiaries.  The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and nine months ended September 30, 2021. 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, 2020 and the MD&A included therein, and our unaudited condensed consolidated interim financial statements and accompanying notes as of and for the three months and nine months ended September 30, 2021 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 under no obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise.  Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, the development of the COVID-19 outbreak, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues, the risk that a condition of closing of the Merger may not be satisfied or that the closing of the Merger might otherwise not occur; the risk that a regulatory approval or a Blue Cross and Blue Shield Association approval that may be required for the Merger is not obtained or is obtained subject to conditions that are not anticipated; the diversion of management time on Merger-related issues; risks related to disruption of management time from ongoing business operations due to the proposed Merger; and unexpected costs, charges or expenses resulting from the proposed Merger.
 
Overview
 
Triple-S is a health services company and one of the top players in the Puerto Rico health care industry. With more than 60 years of experience, we are the premier health care brand and serve more people through the most attractive provider networks on the island. We have the exclusive right to use the Blue Cross and Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands (USVI), Costa Rica, the British Virgin Islands (BVI) and Anguilla, and we offer a broad portfolio of managed care and related products in the Commercial, Medicare Advantage and Medicaid markets. In the Commercial market, we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Insurance Plan, a government of Puerto Rico and U.S. federal government funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S. (Medicaid or the Government health plan).
 
Our commitment to our valued customers and provider partners, backed by our heritage of excellent care, access and service have positioned Triple-S for continued growth in the healthcare arena. Our progressive use of technology and clinical data, value-based partnerships with care providers and initial investments in ambulatory and primary care assets are a strong foundation for differentiation and growth through the development of an integrated delivery system over the next several years. We believe continued investment and focus on delivering an excellent healthcare experience and great service, coupled with health management programs that improve outcomes and quality of life while reducing the total cost of care, will separate Triple-S from our competition and strengthen the financial performance of our business well into the future.
 
28
As of September 30, 2021, we served 1 million managed care members in Puerto Rico.  For the nine months ended September 30, 2021 and 2020, our Managed Care segment represented approximately 92% of our total consolidated premiums earned.
 
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS), Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB).  TSS, TSA and TSB are Blue Cross Blue Shield Association (BCBSA) licensees.
 
Triple-S is also a well-known brand in the life insurance and property and casualty insurance markets, with a significant share in each. We participate in the life insurance market through our subsidiary Triple-S Vida (TSV), and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad (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 reported balances 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 15 of the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
 
Our revenue primarily consists of premiums earned, net and investment income.  Premiums are derived from the sale of managed care products and property and casualty and life insurance contracts.  Substantially all our earnings are generated in Puerto Rico.
 
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and policyholders.  Each segment’s results of operations depend to a significant extent on management’s 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
 
Triple-S Management-GuideWell Merger Agreement
 
On August 24, 2021, Triple-S Management Corporation and GuideWell Mutual Holding Corporation, a Florida not-for-profit mutual insurance holding company (GuideWell) announced that on August 23, 2021, Triple-S, GuideWell and GuideWell Merger, Inc., a Delaware corporation and a wholly owned subsidiary of GuideWell (Merger Sub), entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which, subject to the satisfaction or waiver of certain conditions and on the terms set forth therein, Merger Sub will be merged with and into Triple-S, with Triple-S surviving the merger as a wholly-owned subsidiary of GuideWell (the Merger).
 
At the effective time of the Merger, except as otherwise provided under the Merger Agreement, each share of Triple-S common stock, par value $1.00 per share will be automatically canceled and retired and converted into the right to receive $36.00 in cash, without interest and less any applicable withholding taxes.
 
29
COVID-19
 
COVID-19 Situation in Puerto Rico
 
As of November 1, 2021, the Puerto Rico Department of Health reported a cumulative total of 151,819 and 33,407 confirmed (RT-PCR+) and probable (antigen) COVID-19 cases, respectively, and a total of 3,234 confirmed and probable COVID-19-related deaths in Puerto Rico. According to the Puerto Rico Department of Health, as of November 1, 2021, the positivity rate was 1.98%.
 
Puerto Rico was under a stay-at-home order from March 15, 2020 until June 16, 2020.  The Governor of Puerto Rico also issued several consecutive executive orders establishing COVID-19 related restrictions and the rules for the gradual re-opening of the economy, which were in effect from May 4, 2020 to July 4, 2021.  As of July 5, 2021 the Governor delegated all authority to issue guidelines and protocols to address the COVID-19 emergency to the Puerto Rico Secretary of Health. However, the Governor continues to issue executive orders establishing COVID-19 related restrictions as deemed necessary.
 
Puerto Rico began its COVID-19 vaccination program in December 2020 and as of May 12, 2021, all citizens 12 years old and older are eligible to receive the vaccine. The Puerto Rico Department of Health reported as of October 20, 2021 that over 80% of the eligible population had received the full dose of the COVID-19 vaccine and over 88% of the eligible population had received at least the first dose. According to data from the Centers for Disease Control and Prevention, Puerto Rico has the highest COVID-19 vaccination rate in the United States, with 73.4% of its population fully vaccinated.  A COVID-19 vaccine third dose or booster is available for eligible populations.
 
We have implemented our business continuity and risk mitigation plans and are closely monitoring outbreak developments in order to ensure the health and safety of our employees and visitors.
 
Economic Impact
 
As mentioned below, the 2021 Fiscal Plan (defined below) estimates that, while the COVID-19 pandemic and the measures taken in response to the same severely reduced economic activity and caused an unprecedented increase in unemployment in Puerto Rico, pandemic-related federal and local stimulus measures, some of which are summarized below, have more than offset the estimated income loss due to reduced economic activity and have caused a temporary increase in personal income on a net basis. However, it is still too early to fully assess the ultimate medium- and long-term impact of the pandemic and lockdown in the Puerto Rico economy.  See Item 1A.  Risk Factors – Risks Related to our Business – Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us. included in our Annual Report on Form 10-K for the year ended December 31, 2020.
 
Funding and Economic Relief for Puerto Rico
 
The Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, makes approximately $182.9 million available for Puerto Rico’s Medicaid Program and increases the FMAP (as defined below) from 76% to approximately 82% during the emergency period.  The Coronavirus Aid, Relief, and Economic Security or CARES Act, enacted on March 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, enacted on December 27, 2020, and the American Rescue Plan, enacted on March 11, 2021 include a series of direct relief and financial assistance measures for Puerto Rico residents and businesses.  The CARES Act also assigns $2.2 billion to the Government of Puerto Rico to cover necessary expenditures related to COVID-19 and not included in the territory’s budget, among other measures. The Puerto Rico government has earmarked approximately $1 billion for its COVID-19 response.
 
Measures Impacting our Business
 
The FFCRA and CARES Act also require health plans and insurers to cover testing for COVID-19 without imposing cost-sharing or prior authorization requirements.  On April 16, 2020, the Puerto Rico Government enacted Act number 43, which requires health plans and insurers to cover COVID-19-related diagnostic and treatment services, including hospitalization, without cost-sharing.  Our regulators have also issued regulations or circular letters requiring waivers of pre-authorizations for certain services and drugs, requiring temporary coverage of certain out-of-network providers and services, and limiting cost-sharing for certain services.  See Item 1A. Risk Factors – Risks Related to our Business – Pandemics, like the COVID-19 pandemics and local, state and federal governments’ response to the pandemics may have a material adverse effect on our business, financial condition and results of operations. included on our Annual Report on Form 10-K for the year ended December 31, 2020.
 
30
Puerto Rico Economy

The Puerto Rico economy entered a recession in the fourth quarter of fiscal year 2006. Puerto Rico’s gross national product (GNP) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. Pursuant to the latest Puerto Rico Planning Board (the Planning Board) estimates, dated March 2021, the Commonwealth’s real GNP increased by 1.8% in fiscal year 2019, primarily due to federal disaster recovery spending related to Hurricanes Irma and María. The Planning Board estimates, however, that the Commonwealth’s real GNP decreased by approximately 3.2% in fiscal year 2020 due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same. The Planning Board projected that the negative effects of COVID-19 would continue through fiscal year 2021, resulting in a contraction in real GNP of approximately -2%, followed by 0.8% real GNP growth in fiscal year 2022.
 
Puerto Rico’s population has also been in decline over the past decade. Estimates by the U.S. Census Bureau indicate the population has decreased by 11.8%, or approximately 440,000 people, from 2010 to 2020. The 2021 Fiscal Plan (as defined below) projects that population will continue to steadily decline at an average rate of approximately 1-2% per year, due to a combination of outmigration and economic factors. The weakness of Puerto Rico’s economy has also adversely affected employment. Total average annual employment, as measured by the Puerto Rico Department of Labor and Human Resources (the DLHR) has decreased approximately 23% since 2007. The reduction in total employment began in the fourth quarter of fiscal year 2007, when total employment was 1,244,425, and continued consistently until the first half of fiscal year 2015, after which it mostly stabilized.  According to the most recent data from DLHR, Puerto Rico’s average total employment as of August 2021 was 982,000, a 1% increase from total employment of 972,000 as of August 2020. The DLHR also reported an average unemployment rate of approximately 8.4% as of August 2021, a 0.1% increase from 8.3% unemployment rate reported by the DLHR as of August 2020.
 
PROMESA and the Oversight Board
 
The Commonwealth has been enduring a fiscal and economic crisis for over a decade. Such crisis prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in June 2016. PROMESA, among other things, created a federal fiscal oversight board (the Oversight Board) with broad powers over the Commonwealth’s fiscal affairs and established two mechanisms for the restructuring of the obligations of the Commonwealth, its instrumentalities and municipalities, contained in Titles III and VI of PROMESA. The Commonwealth and several of its instrumentalities have been in the process of restructuring their debts through the mechanisms provided by PROMESA for some time.
 
Commonwealth Fiscal Plan and Plan of Adjustment
 
The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated April 23, 2021 (the 2021 Fiscal Plan). The 2021 Fiscal Plan provides that, while the COVID-19 pandemic and the measures taken in response to the same severely reduced economic activity and caused an unprecedented increase in unemployment in Puerto Rico, pandemic-related federal and local stimulus funding have more than offset the estimated income loss due to reduced economic activity and are estimated to have caused a temporary increase in personal income on a net basis. As a result, the 2021 Fiscal Plan’s economic projections incorporate adjustments for the short-term income effects caused by such stimulus programs. For example, the 2021 Fiscal Plan estimates that real GNP contracted by 3% in fiscal year 2020 but estimates the GNP contraction adjusted for short-term income effects to have been approximately 1.1%. For fiscal years 2021 and 2022, the 2021 Fiscal Plan projects that real GNP will grow 1% and 0.6%, respectively, but projects that growth adjusted for income effects for such years will be approximately 3.8% and 1.5%, respectively.
 
31
The 2021 Fiscal Plan projects that, if the fiscal measures and structural reforms contemplated by the plan are not successfully implemented, the Commonwealth will have a pre-contractual debt service deficit starting in fiscal year 2023. It estimates that the fiscal measures could drive approximately $10 billion in savings and extra revenue over fiscal years 2022 through 2026 and that the structural reforms could drive a cumulative 0.90% increase in growth by fiscal year 2051 (equal to approximately $30.7 billion). However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2021 Fiscal Plan projects that there will be an annual deficit starting in fiscal year 2036.
 
On July 30, 2021, the Oversight Board filed the Seventh Amended Title III Joint Plan of Adjustment for the Commonwealth, et. al. (the Proposed Plan) in the pending debt restructuring proceedings under Title III of PROMESA. The Proposed Plan, which has substantial support from several creditor constituencies but is still subject to confirmation in the Title III proceeding, seeks to restructure approximately $35 billion of debt and other claims against the Commonwealth, the Public Building Administration and the Employee Retirement System. In October of 2021, the Puerto Rico government approved legislation establishing the framework for the debt restructuring under the Proposed Plan. The Proposed Plan is expected to be amended to reflect certain changes required by such legislation. The final hearings for the confirmation of a plan of adjustment are scheduled to begin on November 8, 2021 and continue as necessary until November 23, 2021.
 
Property & Casualty Litigation
 
As of September 30, 2021, our Property and Casualty subsidiary had been served in a total of 490 cases relating to Hurricane Maria. Of those, 255 remained open as of September 30, 2021. See Item 1A. Risk Factors – Risks Related to our Business – Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. and We face risks related to litigation. included in our Annual Report on Form 10-K for the year ended December 31, 2020.
 
Property and Casualty Reinsurance Program
 
The Company’s Property and Casualty segment completed the renewal of its reinsurance property and catastrophe program with an effective date of April 1, 2021 with a term of twelve-months ending on March 31, 2022.  The reinsurance program provides the segment with a catastrophe loss protection of $811.5 million in excess of $5 million. The cost of entering into the new reinsurance program is estimated to remain similar to the expiring program.
 
ASES Contract Renewal
 
The Puerto Rico Health Insurance Administration (ASES by its Spanish acronym) has notified us of its exercise of its right to extend our agreement for the provision of health coverage to the medically indigent in Puerto Rico under the Puerto Rico Health Reform Program (similar to Medicaid) for an additional year, from October 1, 2021 to September 30, 2022. The renewal is subject to premium negotiations for the extended term, which are under way.
 
Medicaid Cliff
 
Medicaid is jointly funded by the federal government and state governments. States receive a percentage of their Medicaid program expenditures from the federal government, through a formula known as the Federal Medical Assistance Percentage (FMAP). The FMAP varies by state based on factors such as per capita income. However, unlike states, the FMAP for Puerto Rico and other U.S. territories is fixed, and federal funding is capped per funding period.
 
The Further Consolidated Appropriations Act of 2019, assigned to Puerto Rico an FMAP of 76% and up to approximately $5.342 billion in Medicaid funding. It was understood among the federal government, Congress, the territories, and members of the healthcare system that the 2019 legislation allocated federal contributions and matching rates to run the Medicaid program until September 30, 2021. Efforts were being made in Congress to address the expiration of funding. However, the Centers for Medicare and Medicaid Services (CMS) determined that the 2019 legislation granted the territories with a baseline amount to run the Medicaid program for perpetuity, including an inflation adjustment.
 
32
Based on CMS’ determination, the allocation of $2.9B assigned to Puerto Rico for Fiscal Year 2020 will be used as a baseline to run the Medicaid program in perpetuity along with the inflation adjustment.  However, CMS’ interpretation is that the FMAP was not addressed in the same way. Therefore, without Congressional action, Puerto Rico’s FMAP will revert to 55 percent. In addition, Puerto Rico will continue to qualify for the temporary 6.2 percentage point increase (to approximately 82%) under the FFCRA through the end of the quarter in which the public health emergency ends, if Puerto Rico continues to meet the applicable statutory requirements. As an administrative interpretation of a statute, CMS’ determination is susceptible to legal challenges by anyone with standing, as well as to a change in interpretation with a new government administration.
 
On September 30, 2021, the current FMAP of 76% was extended until December 3, 2021 by the Continuing Resolution that was approved to fund the federal government for 2022. In addition, as part of the negotiations relating to the reconciliation package, Congress is proposing to increase Puerto Rico’s FMAP to 76% for 2022 and to 83% for 2023 and going forward. 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 for our Managed Care segment included in our Annual Report on Form 10-K for the year ended December 31, 2020. See also Item 1A.  Risk Factors – Risks Related to our Business –Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us included in our Annual Report on Form 10-K for the year ended December 31, 2020.
 
Recent Accounting Standards
 
For a description of recent accounting standards, see Note 2 of the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
 
Managed Care Membership
 
   
As of September 30,
 
   
2021
   
2020
 
Managed Care enrollment:
           
Commercial 1
   
416,033
     
429,503
 
Medicare
   
136,459
     
136,135
 
Medicaid
   
449,474
     
385,344
 
Total
   
1,001,966
     
950,982
 
Managed Care enrollment by funding arrangement:
               
Fully insured
   
907,705
     
843,152
 
Self-insured
   
94,261
     
107,830
 
Total
   
1,001,966
     
950,982
 

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

33
Consolidated Operating Results
 
The following table sets forth our consolidated operating results.  Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar in millions)
 
2021
   
2020
   
2021
   
2020
 
Revenues:
                       
Premiums earned, net
 
$
1,019.7
   
$
923.0
   
$
3,016.0
   
$
2,657.4
 
Administrative service fees
   
3.9
     
3.7
     
9.3
     
8.7
 
Net investment income
   
17.6
     
14.2
     
46.2
     
42.3
 
Other operating revenues
   
3.8
     
2.0
     
8.5
     
6.4
 
Total operating revenues
   
1,045.0
     
942.9
     
3,080.0
     
2,714.8
 
Net realized investment gains (losses)
   
1.0
     
0.5
     
3.7
     
(0.2
)
Net unrealized investment (losses) gains on equity investments
   
(7.9
)
   
11.1
     
13.4
     
(17.4
)
Other income, net
   
11.1
     
1.8
     
19.1
     
6.2
 
Total revenues
   
1,049.2
     
956.3
     
3,116.2
     
2,703.4
 
Benefits and expenses:
                               
Claims incurred
   
879.0
     
761.8
     
2,573.6
     
2,129.4
 
Operating expenses
   
154.5
     
158.8
     
456.9
     
499.7
 
Total operating expenses
   
1,033.5
     
920.6
     
3,030.5
     
2,629.1
 
Interest expense
   
2.0
     
2.1
     
6.2
     
5.8
 
Total benefits and expenses
   
1,035.5
     
922.7
     
3,036.7
     
2,634.9
 
Income before taxes
   
13.7
     
33.6
     
79.5
     
68.5
 
Income tax expense
   
5.6
     
10.0
     
24.5
     
27.5
 
Net income attributable to TSM
 
$
8.1
   
$
23.6
   
$
55.0
   
$
41.0
 
 
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
 
Operating Revenues
 
Consolidated premiums earned, net increased by $96.7 million, or 10.5%, to $1,019.7 million. This increase primarily reflects higher premiums in the Managed Care segment by $89.7 million. The growth in Managed Care premiums reflects higher average premium rates across all lines of business and an increase in Medicaid and Medicare membership.
 
Net Unrealized Investment (Losses) Gains on Equity Investments
 
The $7.9 million in consolidated net unrealized investment losses on equity investments reflect the impact of changes in equity markets.
 
Claims Incurred
 
Consolidated claims incurred increased by $117.2 million, or 15.4%, to $879.0 million, and the consolidated loss ratio increased 370 basis points, to 86.2%, when compared to the prior-year period primarily reflecting a more normalized utilization of Managed Care services compared to the lower utilization in the prior-year quarter due to the pandemic, COVID-19-related testing and treatments costs, increased benefits in the Medicare product offering in 2021 and the effect of the elimination of the Health Insurance Providers Fee (HIP fee) pass-through in 2021.
 
In the 2020 period, following the government-enforced lockdown related to the COVID-19 pandemic, we experienced a decrease in utilization of Managed Care services as members and providers deferred non-emergent or elective health services.
 
Operating Expenses
 
Consolidated operating expenses decreased by $4.3 million, or 2.7%, to $154.5 million. The decrease in operating expenses primarily reflects the elimination in 2021 of the HIP fee of $12.1 million and lower business promotion expenses related to COVID-19 relief efforts incurred in 2020, offset in part by higher personnel costs.  The consolidated operating expense ratio decreased 200 basis points, to 15.1%.
 
34
Income Taxes
 
Consolidated income tax expense for the three months ended September 30, 2021 decreased by $4.4 million, to $5.6 million, primarily reflecting lower taxable income in 2021.
 
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
 
Operating Revenues
 
Consolidated premiums earned, net increased by $358.6 million, or 13.5%, to $3,016.0 million during the nine months ended September 30, 2021. This increase primarily reflects higher premiums in the Managed Care segment by $332.4 million due to higher average premium rates in all lines of business and an increase in Medicaid and Medicare membership.
 
Net Unrealized Investment Gains (Losses) on Equity Investments
 
The $13.4 million in consolidated net unrealized investment gains on equity investments reflect the impact of changes in equity markets.
 
Claims Incurred
 
Consolidated claims incurred increased by $444.2 million, or 20.9%, to $2,573.6 million, during the nine months ended September 30, 2021. The consolidated loss ratio increased 520 basis points, to 85.3%, from the prior-year period, reflecting higher Managed Care claim trends and utilization of services because of COVID-19-related testing and treatments costs, the waiver of medical and payment policies (see Recent Developments – COVID-19 – Measures Impacting our Business included in this quarterly report on Form 10-Q), increased benefits in the 2021 Medicare product and a more normalized utilization of services compared to the low utilization in the prior year due to the pandemic.
 
In the 2020 period, following the government-enforced lockdown related to the COVID-19 pandemic, we experienced a decrease in utilization of Managed Care services as members and providers deferred non-emergent or elective health services.
 
Operating Expenses
 
Consolidated operating expenses decreased by $42.8 million, or 8.6%, to $456.9 million. The decrease in operating expenses primarily reflects the elimination of the HIP fee in 2021 by $43.4 million and the accrual in the prior year of a contingency reserve related to a legal proceeding in the Managed Care segment amounting to $32.0 million. These decreases were partially offset by higher personnel costs and professional fees. The consolidated operating expense ratio decreased 360 basis points, to 15.1%.
 
Income Taxes
 
Consolidated income taxes decreased by $3.0 million, or 10.9%, to $24.5 million, primarily reflecting the impact of the unrealized investment gains on equity investments in the 2021 income tax expense compared with the impact of the unrealized investment loss in the 2020 income tax expense.
 
35
Managed Care Operating Results
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar in millions)
 
2021
   
2020
   
2021
   
2020
 
Operating revenues:
                       
Medical premiums earned, net:
                       
Medicare
 
$
423.1
   
$
400.7
   
$
1,233.8
   
$
1,160.9
 
Medicaid
   
302.2
     
240.9
     
916.7
     
682.9
 
Commercial
   
214.4
     
208.4
     
631.0
     
605.3
 
Medical premiums earned, net
   
939.7
     
850.0
     
2,781.5
     
2,449.1
 
Administrative service fees
   
3.9
     
3.1
     
10.0
     
9.8
 
Net investment income
   
8.1
     
5.1
     
19.1
     
14.8
 
Total operating revenues
   
951.7
     
858.2
     
2,810.6
     
2,473.7
 
Medical operating costs:
                               
Medical claims incurred
   
833.8
     
720.3
     
2,449.1
     
2,025.1
 
Medical operating expenses
   
109.4
     
124.9
     
327.0
     
392.1
 
Total medical operating costs
   
943.2
     
845.2
     
2,776.1
     
2,417.2
 
Medical operating income
 
$
8.5
   
$
13.0
   
$
34.5
   
$
56.5
 
Additional data:
                               
Member months enrollment:
                               
Commercial:
                               
Fully insured
   
966,002
     
966,906
     
2,871,788
     
2,920,460
 
Self-funded
   
281,153
     
324,372
     
875,844
     
981,634
 
Total commercial
   
1,247,155
     
1,291,278
     
3,747,632
     
3,902,094
 
Medicare
   
410,939
     
407,170
     
1,228,732
     
1,220,280
 
Medicaid
   
1,342,953
     
1,132,626
     
3,972,136
     
3,278,098
 
Total member months
   
3,001,047
     
2,831,074
     
8,948,500
     
8,400,472
 
Medical loss ratio
   
88.7
%
   
84.7
%
   
88.0
%
   
82.7
%
Operating expense ratio
   
11.6
%
   
14.6
%
   
11.7
%
   
15.9
%

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
 
Medical Premiums Earned, Net
 
Medical premiums earned increased by $89.7 million, or 10.6%, to $939.7 million. This increase is principally the result of the following:
 
•
Premiums generated by the Medicaid business increased by $61.3 million, or 25.4%, to $302.2 million, primarily reflecting an increase in enrollment of approximately 210,000 member months and higher average premium rates. In addition, following a reconciliation process with ASES this quarter we recognized premiums corresponding to prior periods. These increases were partially offset by the elimination of the HIP fee pass-through in 2021.
 
•
Premiums generated by the Medicare business increased by $22.4 million, or 5.6%, to $423.1 million, primarily due to higher average premium rates resulting from an increase in the premium rate benchmark, higher average membership risk score and higher enrollment of approximately 3,800 members months when compared with the prior-year period.
 
•
Premiums generated by the Commercial business increased by $6.0 million, or 2.9%, to $214.4 million, primarily reflecting higher average premium rates. This increase was partially offset by the elimination of the HIP Fee pass-through in 2021.
 
36
Medical Claims Incurred
 
Medical claims incurred increased by $113.5 million, or 15.8%, to $833.8 million when compared to the three months ended September 30, 2020. The medical loss ratio (MLR) of the segment increased 400 basis points during the 2021 period, to 88.7%.  This fluctuation is principally attributed to the net effect of the following:
 
•
Claims incurred in the Medicaid business increased by $61.2 million, or 27.1%, during the 2021 period.  The MLR, at 95.2%, was 120 basis points higher than the same period last year. The increase in claims cost is due to higher member months, a more normalized utilization of services compared to the lower utilization experienced in the prior-year quarter due to the pandemic, and COVID-19-related testing and treatment costs. In addition, the 2021 MLR was impacted by the elimination of the HIP fee pass-through in 2021.
 
•
Claims incurred in the Medicare business increased by $26.1 million, or 8.1%, during the 2021 period and its MLR increased 190 basis points to 82.5%. These increases reflect a more normalized utilization of services compared to the lower utilization experienced in the prior-year quarter due to the pandemic, improved benefits in the 2021 product offerings, COVID-19-related testing and treatment costs and the waiver of medical and payment policies, partially offset by favorable prior period reserve development in the 2021 period.
 
•
Claims incurred in the Commercial business increased by $26.2 million, or 15.3%, during 2021 and its MLR increased 1,000 basis points, to 91.9%.  The higher MLR principally reflects higher claim trends, a more normalized utilization of services compared to the low utilization experienced in the prior-year quarter due to the pandemic, COVID-19-related testing and treatment costs and the elimination of the HIP fee pass-through in 2021.
 
Medical Operating Expenses
 
Medical operating expenses decreased by $15.5 million, or 12.4%, to $109.4 million, primarily reflecting the elimination of the HIP fee in 2021 and lower business promotion expenses driven by the COVID-19 relief efforts incurred in 2020, partially offset by higher personnel costs. The operating expense ratio decreased 300 basis points to 11.6% in 2021.
 
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
 
Medical Premiums Earned, Net
 
Medical premiums earned increased by $332.4 million, or 13.6%, to $2,781.5 million. This increase is principally the result of the following:
 
•
Premiums generated by the Medicaid business increased by $233.8 million, or 34.2%, to $916.7 million, primarily reflecting higher average premium rates following two premium rates increases that were effective in May 2020 and July 2020 and an increase in enrollment of approximately 694,000 member months. In addition, following a reconciliation process with ASES this year, we recognized premiums corresponding to prior periods in the first and third quarter of 2021. These increases were partially offset by the elimination of the HIP fee pass-through in 2021.
 
•
Premiums generated by the Medicare business increased by $72.9 million, or 6.3%, to $1,233.8 million, primarily due to higher average premium rates reflecting an increase in the premium rate benchmark and membership risk score. Member months increased by approximately 8,500 when compared with the prior-year period.
 
•
Premiums generated by the Commercial business increased by $25.7 million, or 4.2%, to $631.0 million, mainly reflecting higher average premium rates in the 2021 period. This increase was partially offset by the elimination of the HIP fee pass-through in 2021 and a decrease of approximately 49,000 fully insured member months.
 
Medical Claims Incurred
 
Medical claims incurred increased by $424.0 million, or 20.9%, to $2,449.1 million when compared to the nine months ended September 30, 2020. The MLR of the segment increased 530 basis points during 2021, to 88.0%. This fluctuation is principally attributed to the net effect of the following:
 
•
Claims incurred in the Medicaid business increased by $211.7 million, or 33.4%, during 2021 and its MLR decreased 60 basis points, to 92.1%. The increase in claim cost is due to higher member months. The lower MLR reflects the premium rates increases and prior period premiums recognized this year, partially offset by COVID-19-related testing and treatment costs, the waiver of medical and payment policies and the elimination of the HIP fee pass-through in 2021.
 
37
•
Claims incurred in the Medicare business increased by $118.3 million, or 12.7%, during the 2021 period and its MLR increased 490 basis points, to 85.1%. The higher MLR reflects a more normalized utilization of services compared to the low utilization experienced in the prior-year period due to the pandemic, improved benefits in the 2021 product offerings, COVID-19-related testing and treatment costs and the waiver of medical and payment policies. These increases were partially offset by favorable prior period reserve development in the 2021 period.
 
•
Claims incurred in the Commercial business increased by $94.0 million, or 20.4%, during 2021 and its MLR increased 1,180 basis points, to 87.9%. These increases primarily result from higher claim trends, a more normalized utilization of services compared to low utilization in the prior year due to the pandemic, COVID-19-related testing and treatment costs, the waiver of medical and payment policies and the elimination of the HIP fee pass-through in 2021.
 
Medical Operating Expenses
 
Medical operating expenses decreased by $65.1 million, or 16.6%, to $327.0 million, primarily reflecting the elimination of the HIP fee in 2021, the accrual in prior year of a contingency reserve related to a legal proceeding and lower business promotion expenses driven by the COVID-19 relief efforts incurred in 2020, offset in part by an increase in personnel costs. The operating expense ratio decreased 420 basis points to 11.7% in 2021.
 
38
Life Insurance Segment Operating Results
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar in millions)
 
2021
   
2020
   
2021
   
2020
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums earned
 
$
57.9
   
$
52.6
   
$
170.0
   
$
152.2
 
Assumed earned premiums
   
-
     
0.1
     
-
     
0.1
 
Ceded premiums earned
   
(2.8
)
   
(2.6
)
   
(8.4
)
   
(7.4
)
Premiums earned, net
   
55.1
     
50.1
     
161.6
     
144.9
 
Net investment income
   
6.8
     
6.9
     
19.9
     
20.6
 
Total operating revenues
   
61.9
     
57.0
     
181.5
     
165.5
 
Operating costs:
                               
Policy benefits and claims incurred
   
30.8
     
30.6
     
89.8
     
78.6
 
Underwriting and other expenses
   
25.5
     
20.7
     
73.9
     
66.7
 
Total operating costs
   
56.3
     
51.3
     
163.7
     
145.3
 
Operating income
 
$
5.6
   
$
5.7
   
$
17.8
   
$
20.2
 
Additional data:
                               
Loss ratio
   
55.9
%
   
61.1
%
   
55.6
%
   
54.2
%
Operating expense ratio
   
46.3
%
   
41.3
%
   
45.7
%
   
46.0
%

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
 
Operating Revenues
 
Premiums earned, net increased by $5.0 million, or 10.0%, to $55.1 million, primarily as the result of higher sales across all lines of business, particularly in the Individual Life and Cancer lines of business. Last year premium growth slowed down due to the COVID-19 government-enforced lockdown and restrictions, which severely affected sales and increased policy cancellations.
 
Policy Benefits and Claims Incurred
 
Policy benefits and claims incurred increased by $0.2 million, or 0.7%, to $30.8 million, while the segment’s loss ratio decreased 520 basis points, to 55.9% following the segment’s increased premiums.
 
Underwriting and Other Expenses
 
Underwriting and other expenses increased $4.8 million, or 23.2%, to $25.5 million, primarily reflecting an increase in commissions expense resulting from higher sales during the period, and higher amortization of deferred acquisition costs. The segment’s operating expense ratio increased 500 basis points, to 46.3%.
 
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
 
Operating Revenues
 
Premiums earned, net increased by $16.7 million, or 11.5%, to $161.6 million, primarily as the result of increased persistency and new sales across all lines of business, particularly in the Individual Life, Cancer and Group Life lines of business. In addition, during the second quarter of 2020, this segment acquired an insurance portfolio that contributed additional premiums in the Cancer and Group Life lines of business.
 
Policy Benefits and Claims Incurred
 
Policy benefits and claims incurred increased by $11.2 million, or 14.2%, to $89.8 million, primarily as the result of higher actuarial reserves, due to improved persistency during the period, and higher benefits paid driven by the lower volume of claim submissions in the prior year following the government-enforced lockdown due to COVID-19 pandemic. As a result, the segment’s loss ratio increased 140 basis points, to 55.6%.
 
39
Underwriting and Other Expenses
 
Underwriting and other expenses increased $7.2 million, or 10.8%, to $73.9 million, primarily reflecting an increase in commissions expense resulting from higher sales during the period and higher amortization of deferred acquisition costs. The segment’s operating expense ratio decreased 30 basis points to 45.7%.
 
Property and Casualty Insurance Operating Results
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar in millions)
 
2021
   
2020
   
2021
   
2020
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums written
 
$
46.0
   
$
44.0
   
$
123.8
   
$
115.6
 
Premiums ceded
   
(14.8
)
   
(14.9
)
   
(44.2
)
   
(45.6
)
Change in unearned premiums
   
(4.9
)
   
(5.2
)
   
(2.7
)
   
(3.1
)
Premiums earned, net
   
26.3
     
23.9
     
76.9
     
66.9
 
Net investment income
   
2.5
     
2.2
     
6.8
     
6.6
 
Total operating revenues
   
28.8
     
26.1
     
83.7
     
73.5
 
Operating costs:
                               
Claims incurred
   
13.5
     
10.4
     
34.6
     
27.8
 
Underwriting and other expenses
   
13.3
     
11.3
     
41.3
     
34.8
 
Total operating costs
   
26.8
     
21.7
     
75.9
     
62.6
 
Operating income
 
$
2.0
   
$
4.4
   
$
7.8
   
$
10.9
 
Additional data:
                               
Loss ratio
   
51.3
%
   
43.5
%
   
45.0
%
   
41.6
%
Operating expense ratio
   
50.6
%
   
47.3
%
   
53.7
%
   
52.0
%

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
 
Operating Revenues
 
Total premiums written increased by $2.0 million, or 4.5%, to $46.0 million, primarily driven by higher premiums in Personal Package, Commercial Liability, Commercial Auto and Commercial Property products, partially offset by a decrease in Commercial Package products.
 
Claims Incurred
 
Claims incurred increased by $3.1 million, or 29.8%, to $13.5 million, primarily resulting from lower losses in the 2020 period in the segment’s on-going business as a result of the two-month government-enforced lockdown because of the COVID-19 pandemic and an increase in loss adjustment expenses related to catastrophe claims. As a result, the loss ratio increased 780 basis points, to 51.3% during this period.
 
Underwriting and Other Expenses
 
Underwriting and other operating expenses increased by $2.0 million, or 17.7%, to $13.3 million primarily due to higher net commission expense following the increase in net premiums earned. The net commission expense for the current period was also unfavorably impacted by a lower capitalization of deferred acquisition costs. The operating expense ratio was 50.6%, 330 basis points higher than prior year.
 
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
 
Operating Revenues
 
Total premiums written increased by $8.2 million, or 7.1%, to $123.8 million, primarily driven by higher premiums, particularly in Personal Package, Commercial Property, Commercial Auto and Commercial Liability products, partially offset by a decrease in Commercial Package products.
 
The premiums ceded to reinsurers decreased by $1.4 million, or 3.1%, primarily due to $3.0 million of reinsurance reinstatement premiums in 2020 following the losses recorded after the earthquakes in the southwest region of Puerto Rico in January 2020, offset in part by an increase in the cost of catastrophe reinsurance protection.
 
40
Claims Incurred
 
Claims incurred increased by $6.8 million, or 24.5%, to $34.6 million primarily resulting from lower losses in the 2020 period because of the COVID-19 pandemic and an increase in loss adjustment expenses related to catastrophe claims, offset in part by the recognition of $5.0 million of earthquake losses after the January 2020 events. As a result, the loss ratio increased by 340 basis points, to 45.0% during this period.
 
Underwriting and Other Expenses
 
Underwriting and other operating expenses increased by $6.5 million, or 18.7%, to $41.3 million, mostly because of higher net commission expense following the increase in net premiums earned. Current year net commission expense was also affected by a lower capitalization of deferred acquisition costs. The operating expense ratio was 53.7%, 170 basis points higher than prior year.
 
Liquidity and Capital Resources
 
Cash Flows
 
A summary of our major sources and uses of cash for the periods indicated is presented in the following table:
 
   
Nine months ended
September 30,
 
(dollar in millions)
 
2021
   
2020
 
Sources (uses) of cash:
           
Cash provided by operating activities
 
$
100.7
   
$
223.7
 
Net purchases of investment securities
   
(63.2
)
   
(211.7
)
Net capital expenditures
   
(16.9
)
   
(52.5
)
Capital contribution on equity method investees
   
-
     
(7.1
)
Proceeds from long-term borrowings
   
-
     
30.9
 
Net change in short-term borrowings
   
(30.0
)
   
28.5
 
Payments of long-term borrowings
   
(3.4
)
   
(2.8
)
Proceeds from policyholder deposits
   
12.6
     
21.6
 
Surrenders of policyholder deposits
   
(8.7
)
   
(12.8
)
Repurchase and retirement of common stock
   
-
     
(14.9
)
Other
   
20.6
     
16.9
 
Net increase in cash and cash equivalents
 
$
11.7
   
$
19.8
 
 
The decrease of approximately $123 million in net cash provided by operating activities is mostly due to higher claims paid in the Managed Care segments, offset in part by higher premiums collections, lower income taxes paid, and lower cash paid to suppliers and employees.
 
The net purchases of investments in securities are part of our asset/liability management strategy.
 
The decrease in capital contribution reflects capital contributions made in the 2020 period in exchange for a participation in equity method investees.
 
The net change in short-term borrowings represents repayments of short-term facilities available to address timing differences between cash receipts and disbursements.
 
The fluctuation in other sources of cash principally reflects the $3.8 million change in outstanding checks in excess of bank balances.
 
41
Stock Repurchase Program
 
In August 2017 the Company’s Board of Directors authorized a $30.0 million repurchase program of its Class B common stock and in February 2018 the Company’s Board of Directors authorized a $25.0 million expansion of this program.  In October 2019 the Company’s Board of Directors authorized an additional expansion to this program increasing its remaining balance up to a total of $25.0 million, effective November 2019.  Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the three months ended March 31, 2020, the Company repurchased and retired under this program 577,447 shares at an average per share price of $15.57, for an aggregate cost of $9.0 million. The program was completed in 2020.
 
Financing and Financing Capacity
 
Long-Term Borrowings
 
TSM has $35.5 million credit agreement (the Loan) with a commercial bank in Puerto Rico.  The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11.2 million, (ii) Term Loan B in the principal amount of $20.2 million, and (iii) Term Loan C in the principal amount of $4.1 million.  Term Loan A matures in October 2023 while Term Loans B and C mature in January 2024.  Pursuant to the credit agreement, interest is payable on the outstanding balance of the Loan at the following annual rate: (i) 100 basis points over LIBOR for Term Loan A, (ii) 275 basis points over LIBOR for Term Loan B, and (iii) 325 basis points over LIBOR for Term Loan C.  The loan includes certain financial and non-financial covenants, which are customary for this type of facility, including negative covenants imposing certain restrictions on the Company’s business.  Failure to meet these covenants may trigger the accelerated payment of the outstanding balance.  The Company was not in compliance with the Debt Service Coverage Ratio covenant of the credit agreement during the quarter ended September 30, 2021. As of September 30, 2021 and December 31, 2020, the outstanding balance of the debt was $20,217 and $22,644, respectively. On November 1, 2021, the financial banking institution waived the Company’s obligation to comply with this covenant for the quarter ended September 30, 2021 and quarters ending on December 31, 2021 and March 31, 2022.
 
As detailed above, the three term loans under our credit agreement with a commercial bank in Puerto Rico bear interest rates in relation to 1-month and 3-month LIBOR, a widely used interest rate benchmark.
 
In July 2017, the Financial Conduct Authority (FCA) in the United Kingdom, which regulates LIBOR, announced that it would phase out this benchmark by the end of 2021. In response, the U.S. Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a working group comprised of private market participants, to ensure a transition to a new reference rate.
 
The ARRC has recommended the use of the Secured Overnight Financing Rate (SOFR), which is an index based on the cost of borrowing overnight cash collateralized by U.S. Treasury securities. Currently, there is no definitive information regarding the future use of SOFR as a widely accepted benchmark or any other replacement rate.
 
If LIBOR rates are no longer available and we have not agreed with the bank on a replacement rate, we are subject to an alternative benchmark rate, as defined in the credit agreement of our long-term bank loan.  At this time we cannot assess the impact, if any, on the interest paid on this loan. We are in regular contact with the lender about this subject, but at this point the bank has not yet determined a course of action. Alternatively, the loan could be refinanced by us without prepayment penalties.
 
We will closely follow any new developments regarding the LIBOR phase out.
 
On June 19, 2020, TSM entered into a $31.4 million Credit Agreement with a commercial bank in Puerto Rico. The proceeds were used by the Company to partially finance the acquisition of a building. The Credit Agreement is guaranteed by a mortgage over the building, a pledge of all collateral related to the building and an assignment of the rents collected for the lease of office space in the building. Approximately 64.25% of the acquired building is currently leased to third parties. The Company is in the process of moving some of its offices currently leased to third parties to the new building and expects to fully occupy the new facilities together with the leased space. Pursuant to the Credit Agreement, interest is payable on the outstanding principal balance of the Loan at an annual rate equal to the Prime Rate. Monthly interest payments commenced on July 1, 2020 and will continue to be paid each month until the principal of the Loan has been paid in full.
 
42
The Company may, at its option and at any time, upon notice as specified in the Credit Agreement, prepay prior to maturity, all, or any part of the Loan upon the payment of a penalty fee of the outstanding principal amount at the time of the prepayment of 3% during the first year, 2% during the second year, 1% during the third year and thereafter at par.
 
The Credit Agreement includes certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business. The Company was in compliance with these covenants as of September 30, 2021.
 
For further details, see Note 13, Borrowings, of the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2020.
 
Short-Term Facilities
 
We have several short-term facilities available to address timing differences between cash receipts and disbursements, consisting of collateralized advances from the Federal Home Loan Bank of New York (FHLBNY) and a revolving credit facility.  See Note 8 of the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for details of available short-term facilities.
 
We anticipate that we will have sufficient liquidity to support our currently expected needs.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business.  We have exposure to market risk mostly in our investment activities.  For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices.  No material changes have occurred in our exposure to financial market risks since December 31, 2020.  A discussion of our market risk is incorporated by reference to Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2020.
 
Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
In connection with the preparation of this Quarterly Report on Form 10-Q, Management, under the supervision and with the participation of the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, conducted an evaluation of the effectiveness of the “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to Management, including the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Based on this evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that as of September 30, 2021, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.
 
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There were no significant changes in our disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer completed the evaluation referred to above.
 
Changes in Internal Controls Over Financial Reporting
 
No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended September 30, 2021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Part II – Other Information
 
Item 1.
Legal Proceedings
 
For a description of legal proceedings that have experienced significant developments during this quarter, see Note 14 to the unaudited condensed consolidated interim financial statements included in this quarterly report on Form 10-Q.
 
Item 1A.
Risk Factors
 
For a description of our risk factors, see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
 
The following risk factor was added during the three months ended September 30, 2021.
 
The conditions to Merger may not be met, or the Merger Agreement may be terminated, which could result in the Merger not being completed and a decline in the share price of the Company, as well as adversely affect our financial condition and results of operations.

If the Company fails to obtain shareholder approval of the Merger Agreement, or fails to obtain the required regulatory or Blue Cross and Blue Shield Association approvals, or other conditions to the closing of the Merger are not met, the Merger may not be consummated or may be significantly delayed, which could result in a decline in the price of our shares and could have a material and adverse effect on our results of operations, financial position and cash flows. The Merger Agreement provides for the payment of a termination fee of $17,985,000 by the Company should the Merger Agreement be terminated pursuant to certain provisions. Should the Merger Agreement be terminated pursuant to an event triggering the payment of the termination fee by the Company, the termination of the Merger Agreement and the payment of such termination fee could result in a material and adverse effect on our results of operations, financial position and cash flows.
 
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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities by the Issuer

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

(Dollar amounts in millions, except per share data)
 
Total Number
of Shares
Purchased (1)
   
Average
Price
Paid per
Share
   
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Programs
   
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs
 
                         
July 1, 2021 to July 31, 2021
   
-
   
$
-
     
-
   
$
-
 
August 1, 2021 to August 31, 2021
   
-
     
-
     
-
     
-
 
September 1, 2021 to September 30, 2021
   
2,063
     
21.90
     
-
     
-
 

(1) Represents shares repurchased and retired as the result of non-cash tax witholdings upon vesting of shares of participants under the Company’s equity compensation plans.  In September 2021, 2,063 shares were repurchased and retired as the result of non-cash tax witholdings upon vesting of shares.

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

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Item 6.
Exhibits
 
 
Exhibits
Description
     
 
Amendment to the contract between Administración de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Provision of Physical and Behavioral Health Services Under the Government Health Plan dated as of September 9, 2021.
 
 
 
Amendment to the contract between Administración de Seguros de Salud de Puerto Rico (ASES) and Triple-S Salud, Inc., to administer the Provision of Physical & Behavioral Health Services under the Provision of Physical and Behavioral Health Services Under the Government Health Plan dated as of September 29, 2021.
 
 
 
11
Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three and nine months ended September 30, 2021 and 2020 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.
 
 
 
Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).
 
 
 
Certification of the Executive Vice President and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).
 
 
 
Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350.
 
 
 
Certification of the Executive Vice President and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.
 
All other exhibits for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
 
* Filed herein.
 
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SIGNATURES
 
Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
Triple-S Management Corporation
       
     
Registrant
       
Date:
November 4, 2021
 
By:
/s/ Roberto García-Rodríguez
 
     
Roberto García-Rodríguez
     
President and Chief Executive Officer
       
Date:
November 4, 2021
 
By:
/s/ Victor J. Haddock-Morales
 
     
Victor J. Haddock-Morales
     
Executive Vice President and Chief Financial Officer
 

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