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, 2016

or

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

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

Triple-S Management Corporation
 
Puerto Rico
 
66-0555678
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico
 
 
00920
(Address of principal executive offices)
 
(Zip code)

(787) 749-4949
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   Yes  No

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Title of each class
Outstanding at September 30, 2016
Common Stock Class A, $1.00 par value
950,968
Common Stock Class B, $1.00 par value
23,321,748
 


Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended September 30, 2016
 
Table of Contents
 
3
   
 
Item 1.
3
       
 
Item 2.
30
       
 
30
 
30
 
31
 
32
 
33
 
33
 
36
 
39
 
40
 
41
     
 
Item 3.
42
       
 
Item 4.
43
     
43
   
 
Item 1.
43
       
 
Item 1A.
43
       
 
Item 2.
44
       
 
Item 3.
44
       
 
Item 4.
44
       
 
Item 5.
44
       
 
Item 6.
44
       
45
 
2

Part I – Financial Information

Item 1.
Financial Statements

Triple-S Management Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(dollar amounts in thousands, except share data)
 
   
September 30,
2016
   
December 31,
2015
 
Assets
           
Investments and cash:
           
Securities available for sale, at fair value:
           
Fixed maturities
 
$
1,162,209
   
$
1,133,645
 
Equity securities
   
302,077
     
197,071
 
Securities held to maturity, at amortized cost:
               
Fixed maturities
   
2,833
     
2,929
 
Policy loans
   
8,372
     
7,901
 
Cash and cash equivalents
   
165,523
     
197,818
 
Total investments and cash
   
1,641,014
     
1,539,364
 
Premiums and other receivables, net
   
333,964
     
282,646
 
Deferred policy acquisition costs and value of business acquired
   
190,443
     
190,648
 
Property and equipment, net
   
68,184
     
73,953
 
Deferred tax asset
   
57,950
     
52,361
 
Goodwill
   
25,397
     
25,397
 
Other assets
   
57,966
     
41,776
 
Total assets
 
$
2,374,918
   
$
2,206,145
 
Liabilities and Equity
               
Claim liabilities
 
$
511,377
   
$
491,765
 
Liability for future policy benefits
   
315,404
     
289,530
 
Unearned premiums
   
160,066
     
80,260
 
Policyholder deposits
   
181,323
     
179,287
 
Liability to Federal Employees' Health Benefits Program (FEHBP)
   
34,474
     
26,695
 
Accounts payable and accrued liabilities
   
188,517
     
176,910
 
Deferred tax liability
   
23,938
     
15,070
 
Long-term borrowings
   
35,597
     
36,827
 
Liability for pension benefits
   
56,015
     
62,945
 
Total liabilities
   
1,506,711
     
1,359,289
 
Stockholders’ equity:
               
Triple-S Management Corporation stockholders' equity
               
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 950,968 at September 30, 2016 and December 31, 2015, respectively
   
951
     
951
 
Common stock Class B, $1 par value. Authorized 100,000,000 shares;  issued and outstanding 23,321,748 and 24,047,755 shares at September 30, 2016 and December 31, 2015, respectively
   
23,322
     
24,048
 
Additional paid-in capital
   
65,058
     
83,438
 
Retained earnings
   
718,861
     
713,466
 
Accumulated other comprehensive income
   
60,691
     
25,623
 
Total Triple-S Management Corporation stockholders' equity
   
868,883
     
847,526
 
Non-controlling interest in consolidated subsidiary
   
(676
)
   
(670
)
Total stockholders' equity
   
868,207
     
846,856
 
Total liabilities and equity
 
$
2,374,918
   
$
2,206,145
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
3

Triple-S Management Corporation
Condensed Consolidated Statements of Earnings (Unaudited)
(dollar amounts in thousands, except per share data)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Revenues:
                       
Premiums earned, net
 
$
721,187
   
$
746,718
   
$
2,188,770
   
$
2,033,383
 
Administrative service fees
   
4,146
     
6,163
     
13,749
     
39,835
 
Net investment income
   
12,337
     
10,618
     
36,570
     
32,534
 
Other operating revenues
   
871
     
862
     
2,598
     
2,656
 
Total operating revenues
   
738,541
     
764,361
     
2,241,687
     
2,108,408
 
Net realized investment gains (losses):
                               
Total other-than-temporary impairment losses on securities
   
-
     
(1,627
)
   
(1,434
)
   
(4,489
)
Net realized gains, excluding other-than-temporary impairment losses on securities
   
5,376
     
66
     
8,388
     
19,748
 
Total net realized investment gains (losses) on sale of securities
   
5,376
     
(1,561
)
   
6,954
     
15,259
 
Other income, net
   
734
     
2,289
     
5,468
     
5,131
 
Total revenues
   
744,651
     
765,089
     
2,254,109
     
2,128,798
 
Benefits and expenses:
                               
Claims incurred
   
629,169
     
634,909
     
1,877,950
     
1,705,237
 
Operating expenses
   
123,406
     
125,887
     
367,498
     
380,086
 
Total operating costs
   
752,575
     
760,796
     
2,245,448
     
2,085,323
 
Interest expense
   
1,893
     
1,979
     
5,729
     
6,235
 
Total benefits and expenses
   
754,468
     
762,775
     
2,251,177
     
2,091,558
 
(Loss) income before taxes
   
(9,817
)
   
2,314
     
2,932
     
37,240
 
Income tax benefit
   
(7,873
)
   
(1,850
)
   
(2,457
)
   
(631
)
Net (loss) income
   
(1,944
)
   
4,164
     
5,389
     
37,871
 
Less: Net loss attributable to non-controlling interest
   
3
     
30
     
6
     
85
 
Net (loss) income attributable to Triple-S Management Corporation
 
$
(1,941
)
 
$
4,194
   
$
5,395
   
$
37,956
 
Earnings per share attributable to Triple-S Management Corporation
                               
Basic net (loss) income per share
 
$
(0.08
)
 
$
0.17
   
$
0.22
   
$
1.46
 
Diluted net (loss) income per share
 
$
(0.08
)
 
$
0.16
   
$
0.22
   
$
1.46
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
4

Triple-S Management Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(dollar amounts in thousands)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Net (loss) income
 
$
(1,944
)
 
$
4,164
   
$
5,389
   
$
37,871
 
Other comprehensive income (loss), net of tax:
                               
Net unrealized change in fair value of available for sale securities, net of taxes
   
(1,884
)
   
(4,821
)
   
33,523
     
(32,071
)
Defined benefit pension plan:
                               
Actuarial loss, net
   
525
     
1,016
     
1,754
     
2,919
 
Prior service credit, net
   
(59
)
   
(77
)
   
(209
)
   
(215
)
Total other comprehensive (loss) income, net of tax
   
(1,418
)
   
(3,882
)
   
35,068
     
(29,367
)
Comprehensive (loss) income
   
(3,362
)
   
282
     
40,457
     
8,504
 
Comprehensive loss attributable to non-controlling interest
   
3
     
30
     
6
     
85
 
Comprehensive (loss) income attributable to Triple-S Management Corporation
 
$
(3,359
)
 
$
312
   
$
40,463
   
$
8,589
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
5

Triple-S Management Corporation
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollar amounts in thousands)
 
   
2016
   
2015
 
Balance at January 1
 
$
847,526
   
$
858,558
 
Share-based compensation
   
2,266
     
5,520
 
Stock issued upon the exercise of stock options
   
55
     
179
 
Repurchase and retirement of common stock
   
(21,427
)
   
(41,165
)
Comprehensive income
   
40,463
     
8,589
 
Total Triple-S Management Corporation stockholders' equity
   
868,883
     
831,681
 
Non-controlling interest in consolidated subsidiary
   
(676
)
   
(617
)
Balance at September 30
 
$
868,207
   
$
831,064
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
6

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

   
Nine months ended
September 30,
 
   
2016
   
2015
 
Cash flows from operating activities:
           
Net income
 
$
5,389
   
$
37,871
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
10,617
     
12,031
 
Net amortization of investments
   
6,181
     
4,956
 
Additions to the allowance for doubtful receivables
   
2,498
     
11,425
 
Deferred tax benefit
   
(4,026
)
   
(5,140
)
Net realized investment gain on sale of securities
   
(6,954
)
   
(15,259
)
Interest credited to policyholder deposits
   
3,091
     
2,557
 
Share-based compensation
   
1,931
     
5,520
 
(Increase) decrease in assets:
               
Premium and other receivables, net
   
(53,816
)
   
10,983
 
Deferred policy acquisition costs and value of business acquired
   
(5,250
)
   
(2,928
)
Deferred taxes
   
(2,384
)
   
869
 
Other assets
   
(15,598
)
   
(13,602
)
Increase (decrease) in liabilities:
               
Claim liabilities
   
19,612
     
82,895
 
Liability for future policy benefits
   
25,874
     
17,410
 
Unearned premiums
   
79,806
     
(4,216
)
Liability to FEHBP
   
7,779
     
8,032
 
Accounts payable and accrued liabilities
   
8,261
     
18,066
 
Net cash provided by operating activities
   
83,011
     
171,470
 
 
 (Continued)
 
7

Triple-S Management Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)
 
   
Nine months ended
September 30,
 
   
2016
   
2015
 
Cash flows from investing activities:
           
Proceeds from investments sold or matured:
           
Securities available for sale:
           
Fixed maturities sold
 
$
227,631
   
$
307,545
 
Fixed maturities matured/called
   
32,308
     
38,323
 
Equity securities sold
   
67,054
     
81,176
 
Securities held to maturity - fixed maturities matured/called
   
1,220
     
639
 
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
   
(258,378
)
   
(360,588
)
Equity securities
   
(153,399
)
   
(81,901
)
Securities held to maturity - fixed maturities
   
(1,124
)
   
(623
)
Increase in other investments
   
(1,939
)
   
(2,139
)
Net disbursements for policy loans
   
(471
)
   
(498
)
Net capital expenditures
   
(3,517
)
   
(5,628
)
Net cash used in investing activities
   
(90,615
)
   
(23,694
)
Cash flows from financing activities:
               
Change in outstanding checks in excess of bank balances
   
(1,035
)
   
(5,262
)
Repayments of long-term borrowings
   
(1,230
)
   
(12,230
)
Repurchase and retirement of common stock
   
(21,371
)
   
(40,983
)
Proceeds from policyholder deposits
   
12,488
     
5,587
 
Surrenders of policyholder deposits
   
(13,543
)
   
(10,468
)
Net cash used in financing activities
   
(24,691
)
   
(63,356
)
Net (decrease) increase in cash and cash equivalents
   
(32,295
)
   
84,420
 
Cash and cash equivalents:
               
Beginning of period
   
197,818
     
110,037
 
End of period
 
$
165,523
   
$
194,457
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
8

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(1)
Basis of Presentation

The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited.  In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries.  The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements.  These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015.

In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included.  The results of operations for the three months and nine months ended September 30, 2016 are not necessarily indicative of the results for the full year ending December 31, 2016.

(2)
Recent Accounting Standards

On January 5, 2016, the Financial Accounting Standards Board (FASB) issued guidance to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  Among the many targeted improvements to U.S. GAAP are (1) requiring equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; and (4) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.  This guidance applies to all entities that hold financial assets or owe financial liabilities. For public companies, these amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We are currently evaluating the impact that the adoption of this guidance may have on the Company's consolidated financial statements.

On February 25, 2016, the FASB issued guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements.  This guidance sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessors and lessees. It requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The guidance requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We are currently evaluating the impact that the adoption of this guidance may have on the Company's consolidated financial statements.
 
9

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
On March 30, 2016, the FASB issued guidance to reduce complexity in accounting standards.  The areas for simplification involve several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures; (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes:, (6) the practical expedient for estimating the expected term, and (7) intrinsic value.  For public companies, these amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.

On May 9, 2016, the FASB issued guidance which affects only the narrow aspects of guidance related to revenue from contracts with customers that include: (1) clarification of the collectibility criterion and the addition of a new criterion to clarify when revenue would be recognized for a contract that fails to meet the criteria in step 1 of the core principle of the guidance (i.e., identifying the contracts with a customer); (2) presentation of sales taxes and similar taxes collected from customers; (3) non-cash consideration; (4) contract modifications at transition; (5) completed contracts at transition; and (6) clarification that an entity that retrospectively applies in the guidance to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption, but is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. For public companies, these amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.

On June 16, 2016, the FASB issued guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  For public companies, these amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.

On August 26, 2016, the FASB issued guidance to addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under, Statement of Cash Flows, and other Topics.  In particular, the guidance addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  For public companies, these amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We are currently evaluating the impact the adoption of this guidance may have on the Company's consolidated financial statements.

Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the three months and nine months ended September 30, 2016 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.

10

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(3)
Investment in Securities

The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at September 30, 2016 and December 31, 2015, were as follows:
 
   
September 30, 2016
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
                       
Fixed maturities:
                       
Obligations of government- sponsored enterprises
 
$
59,423
   
$
512
   
$
-
   
$
59,935
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
77,790
     
948
     
(2
)
   
78,736
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
17,624
     
3,248
     
-
     
20,872
 
Municipal securities
   
687,107
     
55,639
     
(37
)
   
742,709
 
Corporate bonds
   
226,761
     
20,642
     
(93
)
   
247,310
 
Residential mortgage-backed securities
   
728
     
43
     
-
     
771
 
Collateralized mortgage obligations
   
11,823
     
61
     
(8
)
   
11,876
 
Total fixed maturities
   
1,081,256
     
81,093
     
(140
)
   
1,162,209
 
Equity securities - Mutual funds
   
262,314
     
39,968
     
(205
)
   
302,077
 
Total
 
$
1,343,570
   
$
121,061
   
$
(345
)
 
$
1,464,286
 
 
11

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
December 31, 2015
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities available for sale:
                       
Fixed maturities:
                       
Obligations of government- sponsored enterprises
 
$
115,965
   
$
301
   
$
(26
)
 
$
116,240
 
U.S. Treasury securities and obligations of U.S. government instrumentalities
   
163,322
     
234
     
(286
)
   
163,270
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
25,302
     
317
     
-
     
25,619
 
Municipal securities
   
612,225
     
35,418
     
(197
)
   
647,446
 
Corporate bonds
   
148,198
     
9,782
     
(572
)
   
157,408
 
Residential mortgage-backed securities
   
883
     
54
     
-
     
937
 
Collateralized mortgage obligations
   
22,363
     
368
     
(6
)
   
22,725
 
Total fixed maturities
   
1,088,258
     
46,474
     
(1,087
)
   
1,133,645
 
Equity securities - Mutual funds
   
169,593
     
27,851
     
(373
)
   
197,071
 
Total
 
$
1,257,851
   
$
74,325
   
$
(1,460
)
 
$
1,330,716
 

   
September 30, 2016
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
619
   
$
224
   
$
-
   
$
843
 
Residential mortgage-backed securities
   
191
     
20
     
-
     
211
 
Certificates of deposit
   
2,023
     
-
     
-
     
2,023
 
Total
 
$
2,833
   
$
244
   
$
-
   
$
3,077
 
 
12

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

   
December 31, 2015
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
Securities held to maturity:
                       
U.S. Treasury securities and obligations of U.S. government instrumentalities
 
$
620
   
$
178
   
$
-
   
$
798
 
Residential mortgage-backed securities
   
191
     
17
     
-
     
208
 
Certificates of deposit
   
2,118
     
-
     
-
     
2,118
 
Total
 
$
2,929
   
$
195
   
$
-
   
$
3,124
 
 
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, 2016 and December 31, 2015 were as follows:
 
   
September 30, 2016
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Securites available for sale
                                                     
Fixed maturities
                                                     
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
 
$
2,497
   
$
(2
)
   
1
   
$
-
   
$
-
     
-
   
$
2,497
   
$
(2
)
   
1
 
Municipal securities
   
13,251
     
(37
)
   
2
     
-
     
-
     
-
     
13,251
     
(37
)
   
2
 
Corporate bonds
   
26,644
     
(93
)
   
7
     
-
     
-
     
-
     
26,644
     
(93
)
   
7
 
Collateralized mortgage obligations
   
5,561
     
(4
)
   
4
     
940
     
(4
)
   
1
     
6,501
     
(8
)
   
5
 
Total fixed maturities
   
47,953
     
(136
)
   
14
     
940
     
(4
)
   
1
     
48,893
     
(140
)
   
15
 
Equity securities-Mutual funds
   
7,958
     
(205
)
   
5
     
-
     
-
     
-
     
7,958
     
(205
)
   
5
 
Total for securities available for sale
 
$
55,911
   
$
(341
)
   
19
   
$
940
   
$
(4
)
   
1
   
$
56,851
   
$
(345
)
   
20
 

   
December 31, 2015
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Number of
Securities
 
                                                       
Securites available for sale
                                                     
Fixed maturities
                                                     
Obligations of government- sponsored enterprises
 
$
18,989
   
$
(26
)
   
1
   
$
-
   
$
-
     
-
   
$
18,989
   
$
(26
)
   
1
 
U.S. Treasury securities and obligations of U.S. governmental instrumentalities
   
130,996
     
(286
)
   
5
     
-
     
-
     
-
     
130,996
     
(286
)
   
5
 
Municipal securities
   
43,937
     
(197
)
   
11
     
-
     
-
     
-
     
43,937
     
(197
)
   
11
 
Corporate bonds
   
35,718
     
(572
)
   
9
     
-
     
-
     
-
     
35,718
     
(572
)
   
9
 
Collateralized mortgage obligations
   
1,448
     
(6
)
   
1
     
-
     
-
     
-
     
1,448
     
(6
)
   
1
 
Total fixed maturities
   
231,088
     
(1,087
)
   
27
     
-
     
-
     
-
     
231,088
     
(1,087
)
   
27
 
Equity securities-Mutual funds
   
9,319
     
(373
)
   
2
     
-
     
-
     
-
     
9,319
     
(373
)
   
2
 
Total for securities available for sale
 
$
240,407
   
$
(1,460
)
   
29
   
$
-
   
$
-
     
-
   
$
240,407
   
$
(1,460
)
   
29
 
 
13

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
The Corporation reviews the investment portfolios under the Corporation’s impairment review policy.  Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material other-than-temporary impairments may be recorded in future periods.  The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.

Obligations of U.S. Government Instrumentalities, Municipal Securities and Corporate bonds:  The unrealized losses on the Corporation’s investments in obligations of U.S. Government Instrumentalities, Municipal Securities and Corporate bonds were mainly caused by fluctuations in interest rates and general market conditions.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.  In addition, these investments have investment grade ratings. Because the decline in fair value is attributable to changes in interest rates and not credit quality; because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.

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

Mutual Funds:  As of September 30, 2016, investments in mutual funds with unrealized losses are not considered other-than-temporarily impaired based on market conditions and the length of time the funds have been in a loss position.  During the nine months ended September 30, 2016, positions with a total fair market value of $11,582 were impaired by $1,434.  There were no impairment on mutual funds during the three months ended September 30, 2016.  During the three months and nine months ended September 30, 2015, we recorded an other-than-temporary impairment related to mutual funds amounting to $479.

Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $7,787 and a gross unrealized gain of $15, and (2) bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $13,085 and a gross unrealized gain of $3,233.

Besides holdings in escrowed bonds, which are backed by US Government securities and therefore have an implicit AA+/Aaa rating, our exposure is in senior lien bonds issued by Cofina. 

There was no impairment on Cofina during the three months and nine months ended September 30, 2016.  During the three and nine months ended September 30, 2015, we recorded an other-than-temporary impairment related to these positions amounting to $1,148 and $4,010, respectively.
14

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
Maturities of investment securities classified as available for sale and held to maturity were as follows:
 
   
September 30, 2016
 
   
Amortized
cost
   
Estimated
fair value
 
Securities available for sale:
           
Due in one year or less
 
$
18,504
   
$
18,666
 
Due after one year through five years
   
337,657
     
344,781
 
Due after five years through ten years
   
120,438
     
133,079
 
Due after ten years
   
592,106
     
653,036
 
Residential mortgage-backed securities
   
728
     
771
 
Collateralized mortgage obligations
   
11,823
     
11,876
 
   
$
1,081,256
   
$
1,162,209
 
Securities held to maturity:
               
Due in one year or less
 
$
2,023
   
$
2,023
 
Due after ten years
   
619
     
843
 
Residential mortgage-backed securities
   
191
     
211
 
   
$
2,833
   
$
3,077
 
 
Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

Information regarding realized and unrealized gains and losses from investments is as follows:
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
Securities available for sale:
 
2016
   
2015
   
2016
   
2015
 
Realized gains (losses):
                       
Securities available for sale:
                       
Fixed maturity securities:
                       
Gross gains from sales
 
$
187
   
$
868
   
$
2,060
   
$
7,205
 
Gross losses from sales
   
(20
)
   
(136
)
   
(1,482
)
   
(540
)
Gross losses from other-than-temporary impairments
   
-
     
(1,148
)
   
-
     
(4,010
)
Total fixed maturity securities
   
167
     
(416
)
   
578
     
2,655
 
Equity securities:
                               
Gross gains from sales
   
5,873
     
126
     
8,985
     
14,000
 
Gross losses from sales
   
(664
)
   
(792
)
   
(1,175
)
   
(917
)
Gross losses from other-than-temporary impairments
   
-
     
(479
)
   
(1,434
)
   
(479
)
Total equity securities
   
5,209
     
(1,145
)
   
6,376
     
12,604
 
Net realized gains (losses) on securities available for sale
 
$
5,376
   
$
(1,561
)
 
$
6,954
   
$
15,259
 
 
15

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

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2016
   
2015
   
2016
   
2015
 
Changes in net unrealized gains (losses):
                       
Recognized in accumulated other comprehensive income:
                   
Fixed maturities – available for sale
 
$
(5,762
)
 
$
6,379
   
$
35,566
   
$
(13,378
)
Equity securities – available for sale
   
2,608
     
(12,018
)
   
12,285
     
(24,891
)
 
 
$
(3,154
)
 
$
(5,639
)
 
$
47,851
   
$
(38,269
)
 Not recognized in the consolidated financial statements:
                               
Fixed maturities – held to maturity
 
$
(14
)
 
$
15
   
$
49
   
$
(5
)

The deferred tax asset (liability) on unrealized gains (losses) change recognized in accumulated other comprehensive income during the nine months ended September 30, 2016 and 2015 was ($14,328) and $6,198, respectively.

As of September 30, 2016 and December 31, 2015, no individual investment in securities exceeded 10% of stockholders’ equity.

(4)
Premiums and Other Receivables, Net

Premiums and other receivables, net as of September 30, 2016, and December 31, 2015 were as follows:
 
   
September 30,
2016
   
December 31,
2015
 
Premium
 
$
137,064
   
$
92,600
 
Self-funded group receivables
   
60,094
     
73,552
 
FEHBP
   
12,421
     
13,859
 
Agent balances
   
26,463
     
25,424
 
Accrued interest
   
11,325
     
12,624
 
Reinsurance recoverable
   
58,076
     
48,506
 
Other
   
67,153
     
53,325
 
     
372,596
     
319,890
 
Less allowance for doubtful receivables:
               
Premium
   
29,950
     
28,944
 
Other
   
8,682
     
8,300
 
     
38,632
     
37,244
 
Total premium and other receivables, net
 
$
333,964
   
$
282,646
 

As of September 30, 2016 and December 31, 2015, the Company had premiums and other receivables of $112,020 and $78,230, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations.  The related allowance for doubtful receivables as of September 30, 2016 and December 31, 2015 were $20,558 and $19,133, respectively.
 
16

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

(5)
Fair Value Measurements

Assets recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Level inputs, as defined by current accounting guidance for fair value measurements and disclosures, are as follows:
 
Level Input:
 
Input Definition:
Level 1
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2
 
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
 
The Corporation uses observable inputs when available. Fair value is based upon quoted market prices when available. The Corporation limits valuation adjustments to those deemed necessary to ensure that the security’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria.  The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results.  The fair value measurement levels are not indicative of risk of investment.

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

The following tables summarize fair value measurements by level at September 30, 2016 and December 31, 2015 for assets measured at fair value on a recurring basis:
 
   
September 30, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
 
$
-
   
$
59,935
   
$
-
   
$
59,935
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
78,736
     
-
     
-
     
78,736
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
20,872
     
-
     
20,872
 
Municipal securities
   
-
     
742,709
     
-
     
742,709
 
Corporate bonds
   
-
     
247,310
     
-
     
247,310
 
Residential agency mortgage-backed securities
   
-
     
771
     
-
     
771
 
Collateralized mortgage obligations
   
-
     
11,876
     
-
     
11,876
 
Total fixed maturities
   
78,736
     
1,083,473
     
-
     
1,162,209
 
Equity securities - Mutual funds
   
205,924
     
69,700
     
26,453
     
302,077
 
Total
 
$
284,660
   
$
1,153,173
   
$
26,453
   
$
1,464,286
 
 
17

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

 
   
December 31, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale:
                       
Fixed maturity securities
                       
Obligations of government-sponsored enterprises
   
-
     
116,240
     
-
     
116,240
 
U.S. Treasury securities and obligations of U.S government instrumentalities
   
163,270
     
-
     
-
     
163,270
 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
   
-
     
25,619
     
-
     
25,619
 
Municipal securities
   
-
     
647,446
     
-
     
647,446
 
Corporate bonds
   
-
     
157,408
     
-
     
157,408
 
Residential agency mortgage-backed securities
   
-
     
937
     
-
     
937
 
Collateralized mortgage obligations
   
-
     
22,725
     
-
     
22,725
 
Total fixed maturities
   
163,270
     
970,375
     
-
     
1,133,645
 
Equity securities - Mutual funds
   
167,082
     
22,031
     
7,958
     
197,071
 
Total
 
$
330,352
   
$
992,406
   
$
7,958
   
$
1,330,716
 
 
The fair value of fixed maturity and equity securities included in the Level 2 category were based on market values obtained from independent pricing services, which utilize evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and when available loan performance data.  Because many fixed income securities do not trade on a daily basis, the models used by independent pricing service providers to prepare evaluations apply available information, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing.  For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available.  The independent pricing service providers monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The fair value of the investments in partnerships included in the Level 3 category was based on the net asset value (NAV) which is affected by the changes in the fair market value of the investments held in these partnerships.

Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement.  Transfers between levels, if any, are recorded as of the actual date of the event or change in circumstance that caused the transfer.  There were no transfers in and/or out of Level 3 and between Levels 1 and 2 during the three months and nine months ended September 30, 2016 and 2015.
 
18

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

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and nine months ended September 30 is as follows:
 
   
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Beginning balance
 
$
14,869
   
$
9,083
   
$
7,958
   
$
13,349
 
Realized gains
   
21
     
125
     
234
     
1,537
 
Unrealized in other accumulated  comprehensive income
   
(485
)
   
18
     
(1,454
)
   
(3,284
)
Purchases
   
12,587
     
125
     
21,220
     
314
 
Capital distributions
   
(539
)
   
(175
)
   
(1,505
)
   
(2,740
)
Ending balance
 
$
26,453
   
$
9,176
   
$
26,453
   
$
9,176
 

In addition to the preceding disclosures on assets recorded at fair value in the condensed consolidated balance sheets, accounting guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the condensed consolidated balance sheets.

Non-financial instruments such as property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as claim liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, receivables, accounts payable and accrued liabilities, and short-term borrowings approximate fair value because of the short term nature of these items.  These assets and liabilities are not listed in the table below.

The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:

(i)
Policy Loans

Policy loans have no stated maturity dates and are part of the related insurance contract. The carrying amount of policy loans approximates fair value because their interest rate is reset periodically in accordance with current market rates.

(ii)
Policyholder Deposits

The fair value of policyholder deposits is the amount payable on demand at the reporting date, and accordingly, the carrying value amount approximates fair value.

(iii)
Long-term Borrowings

The carrying amount of the loans payable to bank – variable approximates fair value due to its floating interest-rate structure.  The fair value of the senior unsecured notes payable was determined using broker quotations.
 
19

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

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on our condensed consolidated balance sheets at September 30, 2016 and December 31, 2015 are as follows:
 
   
September 30, 2016
 
   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
8,372
   
$
-
   
$
8,372
   
$
-
   
$
8,372
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
181,323
   
$
-
   
$
181,323
   
$
-
   
$
181,323
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
11,597
     
-
     
11,597
     
-
     
11,597
 
6.6% senior unsecured notes payable
   
24,000
     
-
     
19,200
     
-
     
19,200
 
Total long-term borrowings
   
35,597
     
-
     
30,797
     
-
     
30,797
 
Total liabilities
 
$
216,920
   
$
-
   
$
212,120
   
$
-
   
$
212,120
 

   
December 31, 2015
 
   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Policy loans
 
$
7,901
   
$
-
   
$
7,901
   
$
-
   
$
7,901
 
                                         
Liabilities:
                                       
Policyholder deposits
 
$
179,287
   
$
-
   
$
179,287
   
$
-
   
$
179,287
 
Long-term borrowings:
                                       
Loans payable to bank - variable
   
12,827
     
-
     
12,827
     
-
     
12,827
 
6.6% senior unsecured notes payable
   
24,000
     
-
     
19,920
     
-
     
19,920
 
Total long-term borrowings
   
36,827
     
-
     
32,747
     
-
     
32,747
 
Total liabilities
 
$
216,114
   
$
-
   
$
212,034
   
$
-
   
$
212,034
 
 
20

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

(6)
Claim Liabilities

The activity in claim liabilities is as follows:
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Claim liabilities at beginning of period
 
$
481,864
   
$
462,186
   
$
491,765
   
$
390,086
 
Reinsurance recoverable on claim liabilities
   
(38,109
)
   
(39,156
)
   
(40,714
)
   
(40,635
)
Net claim liabilities at beginning of period
   
443,755
     
423,030
     
451,051
     
349,451
 
Incurred claims and loss-adjustment expenses:
                               
Current period insured events
   
615,125
     
631,135
     
1,878,029
     
1,700,653
 
Prior period insured events
   
6,908
     
(2,315
)
   
(20,619
)
   
(13,597
)
Total
   
622,033
     
628,820
     
1,857,410
     
1,687,056
 
Payments of losses and loss-adjustment expenses:
                               
Current period insured events
   
570,110
     
561,269
     
1,540,182
     
1,345,082
 
Prior period insured events
   
23,728
     
56,699
     
296,329
     
257,543
 
Total
   
593,838
     
617,968
     
1,836,511
     
1,602,625
 
Net claim liabilities at end of period
   
471,950
     
433,882
     
471,950
     
433,882
 
Reinsurance recoverable on claim liabilities
   
39,427
     
39,099
     
39,427
     
39,099
 
Claim liabilities at end of period
 
$
511,377
   
$
472,981
   
$
511,377
   
$
472,981
 

As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.

The amount in the incurred claims and loss-adjustment expenses for the prior period insured events for the three months ended September 30, 2016 is due primarily to higher than anticipated utilization trends.  The favorable developments in the claims incurred and loss-adjustment expenses for prior period insured events for the nine months ended September 30, 2016 and for the three months and nine months ended September 30, 2015 are due primarily to better than expected utilization trends.  Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements.

The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $7,136 and $20,540 during the three months and nine months ended September 30, 2016, respectively.  The change in the liability for future policy benefits during the three months and nine months ended September 30, 2015 amounted to $6,089 and $18,181, respectively.

(7)
Long-Term Borrowings

On March 11, 2016, Triple-S Salud, Inc. (TSS) entered into a $30,000 revolving loan agreement with a commercial bank in Puerto Rico. This line of credit, unused as of September 30, 2016, has an interest rate of LIBOR plus 220 basis points, matures on March 11, 2017, and contains certain financial and non-financial covenants that are customary for this type of facility.
 
21

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

(8)
Income Taxes

In connection with the Puerto Rico tax code, as amended, on April 15, 2015, the group of corporations that comprise TSM entered into a Closing Agreement with the Puerto Rico Department of Treasury.  The Closing Agreement, among other matters, was related with the payment of the preferential tax rate on the increase in value of some of its long-term capital assets, as permitted by Act No. 238 of 2014 and Act No. 44 of 2015.  The agreement also covered certain tax attributes of the Corporation.  During the nine months ended September 30, 2016, as a result of the aforementioned tax laws and the Closing Agreement, the Company: (1) obtained a benefit from the lower tax rate provided under these statutes, (2) reassessed the realizability of some of its deferred taxes and (3) recorded a tax benefit of $3,129.

During the nine months ended September 30, 2016, our Property and Casualty subsidiary, Triple-S Propiedad, Inc. (TSP), reassessed the tax rate used to measure several temporary differences, from 20% to 39%, which resulted in an increase in the deferred tax expense of approximately $2,633.

(9)
Pension Plan

The components of net periodic benefit cost for the three months and nine months ended September 30 were as follows:
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Components of net periodic benefit cost:
                       
Service cost
 
$
779
   
$
1,160
   
$
2,907
   
$
3,217
 
Interest cost
   
1,874
     
2,322
     
6,575
     
6,544
 
Expected return on assets
   
(1,928
)
   
(2,350
)
   
(6,908
)
   
(6,564
)
Amortization of prior service benefit
   
(96
)
   
(126
)
   
(342
)
   
(352
)
Amortization of actuarial loss
   
863
     
1,665
     
2,877
     
4,784
 
Net periodic benefit cost
 
$
1,492
   
$
2,671
   
$
5,109
   
$
7,629
 

Employer Contributions:  The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 2015 that it expected to contribute $8,000 to the pension program in 2016.  As of September 30, 2016, the Corporation has contributed $10,000 to the pension program.

(10)
Stock Repurchase Program

The Company repurchases shares through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, under repurchase programs authorized by the Board of Directors.

In November 2015 the Company’s Board of Directors authorized a $25,000 repurchase program of its Class B common stock.  During the three months ended September 30, 2016, the Company repurchased and retired under this program 299,884 shares at an average per share price of $22.60, for an aggregate cost of $6,825. During the nine months ended September 30, 2016, the Company repurchased and retired under this program 951,831 shares at an average per share price of $22.54, for an aggregate cost of $21,418.  This program was completed on September 14, 2016.
 
22

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

(11)
Comprehensive Income

The accumulated balances for each classification of other comprehensive income, net of tax, are as follows:
 
   
Net Unrealized Gain on Securities
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Beginning Balance
 
$
97,885
   
$
74,217
   
$
62,478
   
$
101,467
 
Other comprehensive income before reclassifications
   
2,417
     
(5,764
)
   
40,233
     
(17,269
)
Amounts reclassified from accumulated other comprehensive income
   
(4,301
)
   
943
 
   
(6,710
)
   
(14,802
)
Net current period change
   
(1,884
)
   
(4,821
)
   
33,523
     
(32,071
)
Ending Balance
 
$
96,001
   
$
69,396
   
$
96,001
   
$
69,396
 

   
Liability for Pension Benefits
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Beginning Balance
 
$
(35,776
)
 
$
(50,926
)
 
$
(36,855
)
 
$
(52,691
)
Other comprehensive income before reclassifications
   
-
     
-
     
-
     
-
 
Amounts reclassified from accumulated other comprehensive income
   
466
     
939
     
1,545
     
2,704
 
Net current period change
   
466
     
939
     
1,545
     
2,704
 
Ending Balance
 
$
(35,310
)
 
$
(49,987
)
 
$
(35,310
)
 
$
(49,987
)

   
Accumulated Other Comprehensive Income
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Beginning Balance
 
$
62,109
   
$
23,291
   
$
25,623
   
$
48,776
 
Other comprehensive income before reclassifications
   
2,417
     
(5,764
)
   
40,233
     
(17,269
)
Amounts reclassified from accumulated other comprehensive income
   
(3,835
)
   
1,882
     
(5,165
)
   
(12,098
)
Net current period change
   
(1,418
)
   
(3,882
)
   
35,068
     
(29,367
)
Ending Balance
 
$
60,691
   
$
19,409
   
$
60,691
   
$
19,409
 
 
23

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

(12)
Share-Based Compensation

Share-based compensation expense (benefit) recorded during the three months and nine months ended September 30, 2016 was ($383) and $1,931, respectively.  Share-based compensation expense recorded during the three months and nine months ended September 30, 2015 was $2,321 and $5,520, respectively.  There was no cash received from stock option exercises during the nine months ended September 30, 2016 and 2015.  During the nine months ended September 30, 2016 and 2015, 2,290 and 7,235 shares, respectively, were repurchased and retired as a result of non-cash exercises of stock options.

(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 for the three and nine months ended September 30:
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Numerator for earnings per share:
                       
Net (loss) income attributable to TSM available to stockholders
 
$
(1,941
)
 
$
4,194
   
$
5,395
   
$
37,956
 
Denominator for basic earnings per share:
                               
Weighted average of common shares
   
24,386,076
     
25,388,077
     
24,534,647
     
25,932,049
 
Effect of dilutive securities
   
-
     
72,983
     
70,632
     
88,688
 
Denominator for diluted earnings per share
   
24,386,076
     
25,461,060
     
24,605,279
     
26,020,737
 
Basic net (loss) income per share attributable to TSM
 
$
(0.08
)
 
$
0.17
   
$
0.22
   
$
1.46
 
Diluted net (loss) income per share attributable to TSM
 
$
(0.08
)
 
$
0.16
   
$
0.22
   
$
1.46
 

No dilutive securities have been included in the diluted earnings per share calculation for the three months ended September 30, 2016 due to our reporting of a net loss for the quarter.

(14)
Contingencies

The following information supplements and amends, as applicable, the disclosures in Note 24 to the Consolidated Financial Statements of the Company’s 2015 Annual Report on Form 10-K.  Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company's compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.

We are involved in various legal actions arising in the ordinary course of business. We are also defendants in various other litigations and proceedings, some of which are described below.  Where the Company believes that a loss is both probable and estimable, such amounts have been recorded.  Although we believe our estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.  The outcome of legal proceedings is inherently uncertain and pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any.  Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material adverse effect on the consolidated financial condition, operating results and/or cash flows of the Company.
 
24

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

Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have rights to acquire shares of the Company on favorable terms pursuant to agreements previously entered by our predecessor managed care subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS), with physicians or dentists who joined our provider network to sell such new provider shares of SSS at a future date (Share Acquisition Agreements) or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.

Claims by Heirs of Former Shareholders

In the case entitled Cebollero Santamaría v. Triple-S Salud, Inc., et al, was filed on March 26, 2013, and the Company filed its response on May 16, 2013. On October 29, 2013, the Company filed a motion for summary judgment on the grounds that the claim is time-barred under the fifteen-year statute of limitations of the Puerto Rico Civil Code for collection of monies and, in the alternative, that plaintiff failed to state a claim for which relief can be granted, which was denied by the court.  On November 2, 2015, the Company filed a petition of Writ of Certiorari with the Puerto Rico Court of Appeals, which was denied on March 8, 2016.  On March 23, 2016, the Company filed a request for reconsideration to its petition of Writ of Certiorari with the Puerto Rico Court of Appeals, which the plaintiff opposed. The Court of Appeals denied reconsideration on April 28, 2016. The Company filed a Writ of Certiorari before the Supreme Court on May 31, 2016, which was denied on September 23, 2016. Defendants requested reconsideration on October 11, 2016 and are still waiting for the Court’s determination.. The same has been opposed by the plaintiff.

In the case entitled Gallardo Mendez, et al, v. Triple-S Management Corporation, which was filed on December 30, 2014, the Company filed a motion to dismiss on March 13, 2015.  After an extension of time granted by the court, plaintiff did not file an opposition.  Therefore, on June 16, 2015, the court deemed our motion to dismiss unopposed. On March 18, 2016, the court dismissed the complaint with prejudice. Since plaintiff did not file within 30 days an appeal brief opposing the trial court’s determination, the dismissal of the case is final.

Claims Relating to the Provision of Health Care Services

On June 5, 2014, ASES initiated an administrative hearing against TSS moved by a primary medical group for alleged outstanding claims related to services provided to Medicaid beneficiaries from 2005 to 2010, totaling approximately $3,000. On June 19, 2014, TSS filed its response.  On June 25, 2014, the hearing officer ordered the parties to file a joint working plan and schedule.  In the process of executing said plan and after discovery was completed, this matter was settled for $316 on June 6, 2016.

(15)
Segment Information

The operations of the Corporation are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Corporation evaluates performance based primarily on the operating revenues and operating income of each segment.  Operating revenues include premiums earned, net, administrative service fees, net investment income, and revenues derived from other segments.   Operating costs include claims incurred and operating expenses.  The Corporation calculates operating income or loss as operating revenues less operating costs.

The Managed Care segment participates in the Commonwealth of Puerto Rico Health Insurance Plan (similar to Medicaid) (Medicaid) program to provide health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the government of Puerto Rico, by administering the provision of the physical health component in designated service regions in Puerto Rico.  We served all eight service regions on an administrative service only basis (ASO) until March 31, 2015.  During the nine months ended September administrative service fees related to this agreement amounted to $24,367.  Effective April 1, 2015, we started to provide healthcare services to only two regions of the Medicaid program on a risk based model.
 
25

Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
The following tables summarize the operations by reportable segment for the three and nine months ended September 30, 2016 and 2015:
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Operating revenues:
                       
Managed Care:
                       
Premiums earned, net
 
$
660,660
   
$
689,532
   
$
2,007,972
   
$
1,857,216
 
Administrative service fees
   
4,146
     
6,163
     
13,749
     
39,835
 
Intersegment premiums/service fees
   
1,384
     
(248
)
   
4,521
     
4,257
 
Net investment income
   
3,628
     
2,727
     
11,215
     
8,444
 
Total managed care
   
669,818
     
698,174
     
2,037,457
     
1,909,752
 
Life Insurance:
                               
Premiums earned, net
   
38,729
     
35,636
     
116,286
     
109,661
 
Intersegment premiums
   
212
     
54
     
551
     
185
 
Net investment income
   
6,355
     
5,840
     
18,681
     
17,724
 
Total life insurance
   
45,296
     
41,530
     
135,518
     
127,570
 
Property and Casualty Insurance:
                               
Premiums earned, net
   
21,798
     
21,550
     
64,512
     
66,506
 
Intersegment premiums
   
153
     
153
     
460
     
460
 
Net investment income
   
2,358
     
1,951
     
6,612
     
6,172
 
Total property and casualty insurance
   
24,309
     
23,654
     
71,584
     
73,138
 
Other segments: *
                               
Intersegment service revenues
   
2,502
     
2,770
     
7,664
     
7,932
 
Operating revenues from external sources
   
878
     
905
     
2,693
     
2,768
 
Total other segments
   
3,380
     
3,675
     
10,357
     
10,700
 
Total business segments
   
742,803
     
767,033
     
2,254,916
     
2,121,160
 
TSM operating revenues from external sources
   
7
     
15
     
12
     
45
 
Elimination of intersegment premiums/service fees
   
(1,749
)
   
41
     
(5,532
)
   
(4,902
)
Elimination of intersegment service revenues
   
(2,502
)
   
(2,770
)
   
(7,664
)
   
(7,932
)
Other intersegment eliminations
   
(18
)
   
42
     
(45
)
   
37
 
Consolidated operating revenues
 
$
738,541
   
$
764,361
   
$
2,241,687
   
$
2,108,408
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Operating (loss) income:
                       
Managed care
 
$
(22,022
)
 
$
(2,169
)
 
$
(26,443
)
 
$
6,288
 
Life insurance
   
4,247
     
4,300
     
14,899
     
14,402
 
Property and casualty insurance
   
4,017
     
2,593
     
9,516
     
6,553
 
Other segments *
   
(894
)
   
(219
)
   
(1,255
)
   
(503
)
Total business segments
   
(14,652
)
   
4,505
     
(3,283
)
   
26,740
 
TSM operating revenues from external sources
   
7
     
15
     
12
     
45
 
TSM unallocated operating expenses
   
(1,771
)
   
(3,397
)
   
(7,645
)
   
(10,937
)
Elimination of TSM intersegment charges
   
2,382
     
2,442
     
7,155
     
7,237
 
Consolidated operating income
   
(14,034
)
   
3,565
     
(3,761
)
   
23,085
 
Consolidated net realized investment gains (losses)
   
5,376
     
(1,561
)
   
6,954
     
15,259
 
Consolidated interest expense
   
(1,893
)
   
(1,979
)
   
(5,729
)
   
(6,235
)
Consolidated other income, net
   
734
     
2,289
     
5,468
     
5,131
 
Consolidated (loss) income before taxes
 
$
(9,817
)
 
$
2,314
   
$
2,932
   
$
37,240
 
                                 
Depreciation and amortization expense:
                               
Managed care
 
$
2,622
   
$
3,227
   
$
8,395
   
$
9,987
 
Life insurance
   
247
     
261
     
751
     
810
 
Property and casualty insurance
   
91
     
88
     
402
     
278
 
Other segments*
   
160
     
120
     
479
     
365
 
Total business segments
   
3,120
     
3,696
     
10,027
     
11,440
 
TSM depreciation expense
   
197
     
197
     
590
     
591
 
Consolidated depreciation and amortization expense
 
$
3,317
   
$
3,893
   
$
10,617
   
$
12,031
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
   
September 30,
2016
   
December 31,
2015
 
Assets:
           
Managed care
 
$
1,165,750
   
$
1,034,725
 
Life insurance
   
830,074
     
770,721
 
Property and casualty insurance
   
360,314
     
350,514
 
Other segments *
   
26,064
     
25,629
 
Total business segments
   
2,382,202
     
2,181,589
 
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
   
2,269
     
12,304
 
Property and equipment, net
   
22,620
     
23,219
 
Other assets
   
29,362
     
31,732
 
     
54,251
     
67,255
 
Elimination entries-intersegment receivables and others
   
(61,535
)
   
(42,699
)
Consolidated total assets
 
$
2,374,918
   
$
2,206,145
 

*
Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.
 
Triple-S Management Corporation
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
(unaudited)
 
(16)
Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued.  No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standards Codification.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries.  The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and nine months ended September 30, 2016.  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, 2015 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months and nine months ended September 30, 2016 included in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations.  These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control.  These statements may address, among other things, future financial results, strategy for growth, and market position.  It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.  The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form.  We are not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise.  Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.

Overview

We are one of the largest players in the managed care industry in Puerto Rico with over 50 years of experience in this industry.  We offer a broad portfolio of managed care and related products in the Commercial, Medicaid and Medicare Advantage markets.  In the Commercial market we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement.  We also participate in the Government of Puerto Rico Health Insurance Plan (a government of Puerto Rico and U.S. Federal Government funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid), by administering the provision of the physical health component in designated service regions in Puerto Rico.  We served all eight regions on an administrative service only basis (ASO) until March 31, 2015.  Effective April 1, 2015, the government changed the Medicaid delivery model from ASO to a risk-based model that includes the physical and mental health components. We elected to participate in this sector as a fully-insured provider in only two regions.  See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015 under the sub-caption “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.

We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands and Anguilla.  As of September 30, 2016, we served approximately 1,038,000 members.  For the nine months ended September 30, 2016 and 2015, our managed care segment represented approximately 92% and 91%, respectively, of our total consolidated premiums earned.  We also have significant positions in the life insurance and property and casualty insurance markets.
 
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS) and Triple-S Advantage, Inc. (TSA).  TSS, TSA and Triple-S Blue, Inc. (TSB) are Blue Cross Blue Shield Association (BCBSA) BCBSA licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, British Virgin Islands, and Anguilla.

We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (TSV), and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP).

Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results.  Except as otherwise indicated, the numbers for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations.  These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income.  See note 15 of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Our revenues primarily consist of premiums earned, net and administrative service fees.  These revenues are derived from the sale of managed care products in the Commercial market to employer groups, individuals and government-sponsored programs, principally Medicare and the Government of Puerto Rico Health Insurance Plan.  Premiums are derived from insurance contracts.  Administrative service fees are derived from self-funded contracts, under which we provide a range of services, including claims administration, billing and membership services, among others.  Revenues also include premiums earned from the sale of property and casualty and life insurance contracts, and investment income and revenues derived from other segments.  Substantially all of our earnings are generated in Puerto Rico.

Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders.  Each segment’s results of operations depend to a significant extent on their ability to accurately predict and effectively manage claims.  A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period.  Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses. Operating expenses also includes the Health Insurance Providers Fee paid under the Affordable Care Act (ACA).

We use operating income as a measure of performance of the underwriting and investment functions of our segments.  We also use the loss ratio and the operating expense ratio as measures of performance.  The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100.  The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.

Recent Developments
Puerto Rico Economy Update

During recent years, Puerto Rico has been facing economic and fiscal challenges and its economy has been contracting.

On June 30, 2016, the President of the United States signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which grants the Commonwealth of Puerto Rico (Commonwealth) and its component units, access to an orderly mechanism to restructure their debts in exchange for significant federal oversight over the Commonwealth’s finances. In general, PROMESA seeks to provide Puerto Rico with fiscal and economic discipline through the creation of a control board, relief from creditor lawsuits through the enactment of a temporary stay on litigation, and two alternative methods to adjust unsustainable debt.

On July 1, 2016, the Commonwealth defaulted on $911 million of bond payments, which included $780 million of General Obligation debt, after the Governor of Puerto Rico evoked a local debt moratorium provision.

On August 31, 2016, the President of the United States appointed the seven members of the Financial Oversight and Management Board for Puerto Rico (the Oversight Board) created by PROMESA, which held its first official meeting on September 30, 2016.
 
On October 10, 2016, several hedge funds, which hold General Obligation bonds of the Commonwealth, filed a lawsuit against the Commonwealth, demanding the Commonwealth to discontinue directing sales tax revenues towards the Puerto Rico Sales Tax Financing Corporation (Cofina) debt service and requesting the court to declare that the General Obligations bonds of the Commonwealth have payment priority over Cofina debt.

On October 14, 2016, the Government of Puerto Rico presented the Commonwealth of Puerto Rico Fiscal Plan to the Oversight Board. The fiscal plan, which is subject to the review and approval of the Oversight Board, includes structural reforms to reduce the size of the government, the deficit and public spending and proposals to achieve economic growth, while providing for essential services such as healthcare, public safety and education.

If the liquidity of the Government of Puerto Rico, its agencies, municipalities and public corporations becomes significantly affected as a result of their inability to raise funding in the market or generate enough revenues, we may face credit losses in our premium and fees receivables from these and other government related entities.  As of September 30, 2016, the Company had premiums and other receivables of $112.0 million from the Government of Puerto Rico, including its agencies, municipalities and public corporations with a related allowance for doubtful receivables of $20.6 million.

See Item 1A.   Risk Factors—Risks Related to Our Business – “Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us.” and “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.’’ included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Managed Care – Medicare Advantage

On October 12, 2016, the Centers for Medicare & Medicaid Services (CMS) published the STAR Ratings for payment year 2018.  Contract H5774, the Triple-S Advantage Health Maintenance Organization (HMO) contract, scored 4.0 overall on a 5.0 star rating system, increasing 1.0 versus the prior year, and achieved 5 stars in Part D, all this demonstrating our dedication to providing the highest quality of care for our members as well as the significant investments we have made in technology and systems.  Contract H4005, the Triple-S Advantage Preferred Provider Organization (PPO) contract, scored 3.5 overall, sustaining the rating from the previous year and achieved 4.5 stars in Part D.   It is worth noting that no plan in Puerto Rico has achieved more than a 4 overall star rating.  Star ratings are calculated annually and are subject to change each year.

Recent Accounting Standards

For a description of recent accounting standards, see note 2 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
 
Managed Care Membership

   
As of September 30,
 
   
2016
   
2015
 
Managed care enrollment:
           
Commercial 1
   
521,994
     
552,471
 
Medicare
   
113,950
     
124,004
 
Medicaid
   
402,358
     
423,944
 
Total
   
1,038,302
     
1,100,419
 
Managed care enrollment by funding arrangement:
               
Fully-insured
   
860,619
     
919,374
 
Self-insured
   
177,683
     
181,045
 
Total
   
1,038,302
     
1,100,419
 

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

Consolidated Operating Results

The following table sets forth the Corporation’s consolidated operating results.  Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2016
   
2015
   
2016
   
2015
 
Revenues:
                       
Premiums earned, net
 
$
721.2
   
$
746.7
   
$
2,188.8
   
$
2,033.4
 
Administrative service fees
   
4.2
     
6.2
     
13.7
     
39.8
 
Net investment income
   
12.3
     
10.6
     
36.6
     
32.5
 
Other operating revenues
   
0.9
     
0.9
     
2.6
     
2.7
 
Total operating revenues
   
738.6
     
764.4
     
2,241.7
     
2,108.4
 
Net realized investment gains (losses)
   
5.4
     
(1.6
)
   
7.0
     
15.3
 
Other income, net
   
0.7
     
2.3
     
5.4
     
5.1
 
Total revenues
   
744.7
     
765.1
     
2,254.1
     
2,128.8
 
Benefits and expenses:
                               
Claims incurred
   
629.2
     
634.9
     
1,878.0
     
1,705.2
 
Operating expenses
   
123.4
     
125.9
     
367.5
     
380.1
 
Total operating expenses
   
752.6
     
760.8
     
2,245.5
     
2,085.3
 
Interest expense
   
1.9
     
2.0
     
5.7
     
6.3
 
Total benefits and expenses
   
754.5
     
762.8
     
2,251.2
     
2,091.6
 
(Loss) income before taxes
   
(9.8
)
   
2.3
     
2.9
     
37.2
 
Income tax benefit
   
(7.9
)
   
(1.9
)
   
(2.5
)
   
(0.7
)
Net (loss) income
   
(1.9
)
   
4.2
     
5.4
     
37.9
 
Less: net loss attributable to non-controlling interest
   
-
     
-
     
-
     
0.1
 
Net (loss) income attributable to TSM
 
$
(1.9
)
 
$
4.2
   
$
5.4
   
$
38.0
 
 
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Operating Revenues

Consolidated premiums earned, net decreased by $25.5 million, or 3.4%, to $721.2 million.  This decrease primarily reflects lower premiums in the Managed Care segment by $28.8 million mainly due to lower fully-insured membership across all sectors.  This impact is offset in part by an increase in Life Insurance premiums and the increase in Medicaid premiums resulting from the release of the accrual of excess profit (previously recorded as accrual return premiums)  to the government of Puerto Rico.  This release of the accrual of excess profit is in line with the provisions of the Medicaid at-risk contract.

Claims Incurred

Consolidated claims incurred decreased by $5.7 million, or 0.9%, to $629.2 million, mostly due to the Managed Care segment’s decrease in fully-insured membership, partially offset by unfavorable prior period reserve developments across all sectors. Also, we experienced higher claims incurred in the Life Insurance segment.  The consolidated loss ratio increased by 220 basis points to 87.2%.  Excluding the impact of prior period reserve developments, as well as moving risk score revenue adjustments to its corresponding period, consolidated loss ratio was 83.8%, 90 basis points lower than last year.

Operating Expenses

Consolidated operating expenses decreased by $2.5 million, or 2.0%, to $123.4 million.  The lower  operating expenses reflects a $4.4 million contingency accrual recorded in the 2015 period and lower personnel costs and professional service fees in the 2016 period.  These decreases were partially offset by an increase in the Health Insurance Providers Fee, reflecting the at-risk Medicaid enrollment after the model changed in 2015, as well as to a new business-to-business tax implemented in Puerto Rico at the end of the third quarter of 2015.  For the three months ended September 30, 2016, the consolidated operating expense ratio increased 30 basis points to 17.0%.

Income Taxes

Consolidated income tax benefit increased by $6.0 million, to $7.9 million for the three months ended September 30, 2016.  The year over year change primarily results from the loss before taxes in the 2016 period incurred in the Managed Care segment.
 
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Operating Revenues

Consolidated premiums earned, net increased by $155.4 million, or 7.6%, to $2.2 billion.  This increase primarily reflects higher premiums in the Managed Care segment by $150.8 million after the change in the Medicaid business model from an ASO agreement to a fully insured model effective April 1, 2015 and higher premium rates in the Commercial business.

The consolidated administrative service fees decreased $26.1 million, or 65.6%, mostly as a result of the previously mentioned change in the Medicaid contract model.  Total administrative fees related to the previous Medicaid ASO agreement during the 2015 period amounted to $24.4 million.

Net investment income increased by $4.1 million, or 12.6%, to $36.6 million mostly as a result of higher invested balances.

Claims Incurred

Consolidated claims incurred increased by $172.8 million, or 10.1%, to $1.9 billion, mostly due to higher claims in the Managed Care segment.  This increase primarily reflects higher claims incurred in the segment’s Medicaid business by $151.9 million after the contract changed to a fully insured model, the impact of Managed Care prior period reserve developments.  The consolidated loss ratio increased by 190 basis points to 85.8%.  Excluding the impact of prior period development, as well as moving the 2015 risk score revenue adjustments to its corresponding period, consolidated loss ratio was 85.5%, 60 basis points higher than last year.

Operating Expenses

Consolidated operating expenses decreased by $12.6 million, or 3.3%, to $367.5 million.  The decrease reflects lower expenses following the change in the Medicaid membership after we elected to decrease the number of regions we serve, from eight regions under an ASO agreement to only two regions when the contract changed to a fully-insured model.  The lower operating expenses also reflect a decrease in the provision for doubtful accounts, mostly due to the strengthening of the allowance for doubtful receivables in the 2015 period, as well as a $4.4 million contingency accrual recorded in 2015.  These decreases were partially offset by a new business-to-business tax implemented in Puerto Rico at the end of the third quarter 2015 and an increase in the Health Insurance Providers Fee, reflecting the at-risk Medicaid enrollment after the model changed in 2015.  For the nine months ended September 30, 2016, the consolidated operating expense ratio decreased 160 basis points to 16.7%, as the result of the increase in premiums and lower expenses.

Income Taxes

Consolidated income tax benefit increased by $1.8 million, to $2.5 million.  The higher tax benefit primarily results from the net effect of the following:

·
For the 2016 period the Managed Care segment, which has a higher effective tax rate than our other segments, incurred in a loss before taxes, resulting in the recording of a tax benefit during the period.

·
During the 2015 period, the Company executed a Closing Agreement between TSM and its subsidiaries and the Puerto Rico Treasury Department in connection with a local law that provided a temporary preferential tax rate in capital asset transactions.  These events allowed the Company to record a $3.1 million benefit in the 2015 period resulting from the enacted lower taxable rate and the reassessment of the realizability of some of its deferred taxes.

·
The Property and Casualty segment reassessed the tax rate used to measure several temporary differences; as a consequence such rate was increased from 20% to 39%, resulting in an increase to its deferred tax expense of approximately $2.6 million.
 
Managed Care Operating Results

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2016
   
2015
   
2016
   
2015
 
Operating revenues:
                       
Medical premiums earned, net:
                       
Commercial
 
$
206.3
   
$
210.6
   
$
636.8
   
$
634.9
 
Medicare
   
255.3
     
279.4
     
789.4
     
818.0
 
Medicaid
   
199.4
     
199.8
     
582.8
     
405.3
 
Medical premiums earned, net
   
661.0
     
689.8
     
2,009.0
     
1,858.2
 
Administrative service fees
   
5.2
     
5.6
     
17.3
     
43.2
 
Net investment income
   
3.6
     
2.7
     
11.2
     
8.4
 
Total operating revenues
   
669.8
     
698.1
     
2,037.5
     
1,909.8
 
Medical operating costs:
                               
Medical claims incurred
   
598.0
     
605.5
     
1,784.5
     
1,614.0
 
Medical operating expenses
   
93.8
     
94.8
     
279.4
     
289.5
 
Total medical operating costs
   
691.8
     
700.3
     
2,063.9
     
1,903.5
 
Medical operating (loss) income
 
$
(22.0
)
 
$
(2.2
)
 
$
(26.4
)
 
$
6.3
 
Additional data:
                               
Member months enrollment:
                               
Commercial:
                               
Fully-insured
   
1,039,842
     
1,119,344
     
3,199,546
     
3,388,436
 
Self-funded
   
534,653
     
544,881
     
1,617,900
     
1,680,435
 
Total Commercial member months
   
1,574,495
     
1,664,225
     
4,817,446
     
5,068,871
 
                                 
Medicare member months
   
344,167
     
370,702
     
1,059,702
     
1,073,726
 
                                 
Medicaid:
                               
Fully-insured
   
1,205,792
     
1,279,692
     
3,634,029
     
2,583,204
 
Self-insured
   
-
     
-
     
-
     
4,229,082
 
Total Medicaid member months
   
1,205,792
     
1,279,692
     
3,634,029
     
6,812,286
 
Total member months
   
3,124,454
     
3,314,619
     
9,511,177
     
12,954,883
 
Medical loss ratio
   
90.5
%
   
87.8
%
   
88.8
%
   
86.9
%
Operating expense ratio
   
14.1
%
   
13.6
%
   
13.8
%
   
15.2
%

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Medical Operating Revenues

Medical premiums earned for the three months ended September 30, 2016 decreased by $28.8 million, or 4.2%, to $661.0 million.  This decrease is principally the result of the following:

·
Medicare premiums decrease of $24.1 million, or 8.6%, primarily results from lower member months enrollment when compared to 2015 combined with a 2.4% average reduction in 2016 Medicare reimbursement rates.

·
Commercial premiums decrease of $4.3 million, or 2.0%, primarily results from a decrease in fully-insured member months enrollment, partially offset by an approximately 5% year over year increase in average premium rates.

·
Medicaid premiums decreased by $0.4 million, or 0.2% primarily as the result of a lower member months enrollment, reflecting the population decline in Puerto Rico, and the lower average premium rates negotiated with the government of Puerto Rico that went into effect July 1, 2016.  These decreases are partially offset by a $15.6 million increase in the Medicaid premiums resulting from a partial reduction of the accrual of excess profit, which was driven by the previously mentioned decrease in premium rates and higher utilization trends.
 
Medical Claims Incurred

Medical claims incurred decreased by $7.5 million, or 1.2%, to $598.0 million.  The medical loss ratio (MLR) of the segment increased 270 basis points during the 2016 period, to 90.5%.  This fluctuation is primarily attributed to the net effect of the following:

·
The medical claims incurred of the Medicaid business decreased by $6.0 million during the 2016 period primarily reflecting the net effect of the previously described decrease in member months enrollment partially offset by higher pharmacy and outpatient trends.

·
The medical claims incurred of the Medicare business decreased by $2.5 million, or 1.0%, during the 2016 period reflecting the previously mentioned decrease in membership and changes in benefit design included in 2016 products as the result of the decrease in reimbursement rates.  This decrease is offset by unfavorable prior period reserve developments related to previous quarters. Adjusting for the effect of prior period reserve developments, and moving risk score revenue adjustments to their corresponding periods, our Medicare MLR would have been approximately 87.1% this quarter, about 180 basis points higher than last year, mostly driven by increased Part B drug costs, mainly related to cancer and rheumatoid arthritis and the decrease in premium rates reimbursements from CMS.

·
The medical claims incurred of the Commercial business increased by $1.0 million, or 0.6%, during the 2016 period.  This increase mostly reflects the impact of unfavorable prior period reserve developments.  Excluding the effect of prior period reserve developments in 2016 and 2015, the MLR would have decreased by 270 basis points to 83.4%, reflecting the continuity of our underwriting discipline and premium trends higher than claims trends.

Medical Operating Expenses

Medical operating expenses decreased by $1.0 million, or 1.1%, to $93.8 million.  The lower operating expenses reflect a $4.4 million contingency accrual recorded in the 2015 period, and lower professional service fees in the 2016 period.  These decreases were partially offset by an increase in the Health Insurance Providers Fee, reflecting the at-risk Medicaid enrollment after the model changed in 2015, as well as to a new business-to-business tax implemented in Puerto Rico at the end of the third quarter of 2015.  For the three months ended September 30, 2016, the operating expense ratio increased 50 basis points to 14.1%.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Medical Operating Revenues

Medical premiums earned increased by $150.8 million, or 8.1%, to $2.0 billion.  This increase is principally the result of the following:

·
Medical premiums generated by the Medicaid business increased by $177.5 million to $582.8 million, primarily as the result of the change in the Medicaid service model, from an ASO agreement to a fully-insured model effective April 1, 2015.

·
Medical premiums generated by the Commercial business increased by $1.9 million, or 0.3%, to $636.8 million.  This fluctuation is primarily the result of approximately 6% year over year increase in average premium rates, partially offset by a decrease in fully insured member month enrollment.

·
Medical premiums generated by the Medicare business decreased by $28.6 million, or 3.5%, to $789.4 million.  This fluctuation primarily results from lower risk score revenue as compared with 2015, lower member months enrollment, and a reduction in 2016 Medicare reimbursement rates.

Administrative service fees decreased by $25.9 million, or 60.0%, to $17.3 million mainly due to the previously mentioned change in the Medicaid contract effective April 1, 2015.
 
Medical Claims Incurred

Medical claims incurred increased by $170.5 million, or 10.6%, to $1.8 billion.  The MLR of the segment increased 190 basis points during the 2016 period, to 88.8%.  These fluctuations are primarily attributed to the net effect of the following:

·
The medical claims incurred of the Medicaid business increased by $151.9 million during the 2016 period reflecting the previously mentioned change in the Medicaid contract effective April 1, 2015. 

·
The medical claims incurred of the Commercial business increased by $13.8 million, or 2.6%, during 2016, mostly reflecting the impact of prior period reserve developments, partially offset by lower member months enrollment.  The Commercial MLR was 86.4%, which is 200 basis points higher than the MLR for the prior year.  Excluding the effect of prior period reserve developments in 2016 and 2015, the MLR would have decreased by 150 basis points, reflecting the continuity of our underwriting discipline and premium trends higher than claims trends.

·
The medical claims incurred of the Medicare business increased by $4.8 million, or 0.7%, during 2016 and its MLR was 90.0%, which is 370 basis points higher than the MLR for the prior period.  Adjusting for the effect of prior period reserve developments, and moving the 2015 final risk score revenue adjustments to its corresponding period, our Medicare MLR would have been 90.2%, about 310 basis points higher than last year. The higher MLR primarily reflects higher Part B drug costs, mainly related to cancer and rheumatoid arthritis, and the effect of the decrease in 2016 Medicare reimbursement rates.  The impact of the lower reimbursement rates was partially offset by a change in benefit design in the 2016 products.

Medical Operating Expenses

Medical operating expenses decreased by $10.1 million, or 3.5%, to $279.4 million.  The decrease mostly reflects lower expenses following the change in the Medicaid membership after we elected to decrease the number of regions we serve from eight regions under an ASO agreement to only two regions when the contract was changed to a fully-insured model.  The lower operating expenses also includes the effect of a decrease in the provision for doubtful accounts, mostly due to the strengthening of the allowance for doubtful receivables in the 2015 period, as well as to a $4.4 million contingency accrual recorded in 2015.  These decreases were partially offset by a new business-to-business tax implemented in Puerto Rico during the third quarter of 2015 and an increase in the Health Insurance Providers Fee, reflecting the at-risk Medicaid enrollment after the model changed in 2015.  The operating expense ratio decreased 140 basis points to 13.8% in 2016 as a result of the increase in premiums and lower expenses.
 
Life Insurance Operating Results

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(dollar amounts in millions)
 
2016
   
2015
   
2016
   
2015
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums earned
 
$
40.8
   
$
38.2
   
$
120.3
   
$
115.1
 
Assumed earned premiums
   
0.4
     
-
     
3.1
     
2.2
 
Ceded premiums earned
   
(2.3
)
   
(2.5
)
   
(6.6
)
   
(7.4
)
Premiums earned, net
   
38.9
     
35.7
     
116.8
     
109.9
 
Net investment income
   
6.4
     
5.8
     
18.7
     
17.7
 
Total operating revenues
   
45.3
     
41.5
     
135.5
     
127.6
 
Operating costs:
                               
Policy benefits and claims incurred
 
$
22.5
     
19.8
     
65.8
     
60.5
 
Underwriting and other expenses
   
18.6
     
17.4
     
54.8
     
52.7
 
Total operating costs
   
41.1
     
37.2
     
120.6
     
113.2
 
Operating income
 
$
4.2
   
$
4.3
   
$
14.9
   
$
14.4
 
Additional data:
                               
Loss ratio
   
57.8
%
   
55.5
%
   
56.3
%
   
55.1
%
Operating expense ratio
   
47.8
%
   
48.7
%
   
46.9
%
   
48.0
%

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Operating Revenues

Premiums earned, net increased by $3.2 million, or 9.0%, to $38.9 million, reflecting improved policy retention and higher sales principally in the segment’s Individual Life and Cancer lines of business, as well as the growth in the Costa Rica operations.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred increased by $2.7 million, or 13.6%, to $22.5 million, mostly as the result of the higher volume of business during the year, particularly in the Individual Life and Cancer lines of business, as well as to an increase in actuarial reserves.  The loss ratio for the period increased from 55.5% in 2015 to 57.8% in 2016, or 230 basis points, reflecting the higher volume in the Cancer line of business, which has a higher loss ratio, and higher claims experience in the Individual Life business.

Underwriting and Other Expenses

Increase in underwriting and other expenses of $1.2 million, or 6.9% to $18.6 million is mostly reflecting higher commissions following the segment’s premium growth mentioned above.  The operating expense ratio decreased 90 basis points from 48.7% in 2015 to 47.8% in 2016, reflecting the increase in premiums during the period.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Operating Revenues

Premiums earned, net increased by $6.9 million, or 6.3% to $116.8 million as the result of premium improved policy retention and higher sales in the segment’s Individual Life and Cancer lines of business, premiums assumed on reinsurance agreements, as well as growth in the Costa Rica operations.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred increased by $5.3 million, or 8.8%, to $65.8 million, mostly reflecting a higher volume of business during the year, particularly in the Cancer line of business, and in premiums assumed under reinsurance agreements, which carry a higher loss ratio, as well as to an increase in actuarial reserves.  The loss ratio for the period increased 120 basis points to 56.3% in 2016.
 
Underwriting and Other Expenses

Underwriting and other expenses increased by $2.1 million, or 4.0%, primarily reflecting an increase in commissions expense following the segment’s premium growth during these period.  In addition, the segment has incurred in higher development and marketing expenses related to the development of the Costa Rica operations.  The segment’s operating expense ratio decreased 110 basis points to 46.9% in 2016, reflecting the increase in premiums during the period.
 
Property and Casualty Insurance Operating Results

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(Dollar amounts in millions)
 
2016
   
2015
   
2016
   
2015
 
Operating revenues:
                       
Premiums earned, net:
                       
Premiums written
 
$
32.4
   
$
32.3
   
$
100.9
   
$
99.3
 
Premiums ceded
   
(11.8
)
   
(12.0
)
   
(35.3
)
   
(35.3
)
Change in unearned premiums
   
1.4
     
1.4
     
(0.6
)
   
3.0
 
Premiums earned, net
   
22.0
     
21.7
     
65.0
     
67.0
 
Net investment income
   
2.3
     
2.0
     
6.6
     
6.1
 
Total operating revenues
   
24.3
     
23.7
     
71.6
     
73.1
 
Operating costs:
                               
Claims incurred
   
9.4
     
10.3
     
30.0
     
32.9
 
Underwriting and other expenses
   
10.9
     
10.8
     
32.1
     
33.6
 
Total operating costs
   
20.3
     
21.1
     
62.1
     
66.5
 
Operating income
 
$
4.0
   
$
2.6
   
$
9.5
   
$
6.6
 
Additional data:
                               
Loss ratio
   
42.7
%
   
47.5
%
   
46.2
%
   
49.1
%
Operating expense ratio
   
49.5
%
   
49.8
%
   
49.4
%
   
50.1
%
Combined ratio
   
92.2
%
   
97.3
%
   
95.6
%
   
99.2
%

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Operating Revenues

Total premiums written increased by $0.1 million, or 0.3%, to $32.4 million, mostly resulting from higher sales of Commercial Auto insurance products, offset by lower sales in the Commercial Package insurance products.

The premiums ceded to reinsurers decreased by $0.2 million, or 1.7%, mostly reflecting favorable pricing in the market for nonproportional reinsurance treaties.

Claims Incurred

Claims incurred decreased by $0.9 million, or 8.7%, to $9.4 million.  The loss ratio decreased 480 basis points, to 42.7%, during this period, primarily as a result of favorable loss experience in the Medical Malpractice line of business.

Underwriting and Other Expenses

Underwriting and other operating expenses increased by $0.1 million, or 0.9%, mostly due to the timing of the receipt of a refund distribution from the Joint Underwriting Association (JUA), which was received during the second quarter in 2016 and during the third quarter in 2015.
 
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Operating Revenues

Total premiums written increased by $1.6 million, or 1.6%, to $100.9 million, mostly reflecting higher sales of the Compulsory Vehicle Liability and Commercial Package insurance product.

The change in unearned premiums presents a decrease of $3.6 million mostly reflecting the segment’s higher volume of premiums written in 2016.

Claims Incurred

Claims incurred decreased by $2.9 million, or 8.8%, to $30.0 million. The loss ratio decreased by 290 basis points, to 46.2% during this period, mostly reflecting a favorable loss experience in the Commercial Auto line of business.

Underwriting and Other Expenses

Underwriting and other operating expenses decreased by $1.5 million, or 4.5%, to $32.1 million mostly due to lower net commission expenses driven by a decrease in net premiums earned.

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 amounts in millions)
 
2016
   
2015
 
Sources (uses) of cash:
           
Cash provided by operating activities
 
$
83.0
   
$
171.5
 
Net purchases of investment securities
   
(86.6
)
   
(17.6
)
Net capital expenditures
   
(3.5
)
   
(5.6
)
Payments of long-term borrowings
   
(1.2
)
   
(12.2
)
Proceeds from policyholder deposits
   
12.5
     
5.6
 
Surrenders of policyholder deposits
   
(13.5
)
   
(10.5
)
Repurchase and retirement of common stock
   
(21.4
)
   
(41.0
)
Other
   
(1.6
)
   
(5.8
)
Net (decrease) increase in cash and cash equivalents
 
$
(32.3
)
 
$
84.4
 

Cash flow from operating activities decreased as a result of higher claims paid by $240.4 million and an increase in cash paid to suppliers and employees by $25.0 million, offset in part by an increase in premium collections of $165.8 million.  The increase in claims paid and premiums collected is principally the result of the change in the Medicaid delivery model from an ASO agreement to a fully insured model effective April 1, 2015.

Increase in net purchases of investments in securities are part of our asset/liability management strategy using cash on hand.

Payments of long-term borrowings decreased by $11.0 million during the nine months ended September 30, 2016, primarily due to an $11.0 million repayment of certain senior unsecured notes principal during the 2015 period.

In November 2015 the Company’s Board of Directors authorized a $25.0 million repurchase program of our Class B common stock. 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 nine months ended September 30, 2016, the Company repurchased and retired 951,831 shares of our Class B Common Stock at an average per share price of $22.54, for an aggregate cost of $21.4 million.  This program was completed on September 14, 2016.
 
Financing and Financing Capacity

We have several short-term facilities available to address timing differences between cash receipts and disbursements.  These short-term facilities are mostly in the form of arrangements to sell securities under repurchase agreements.  As of September 30, 2016, we had $60.0 million of available credit under these facilities.  There are no outstanding short-term borrowings under these facilities as of September 30, 2016.

On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes due December 2020 (the 6.6% notes).  On October 1, 2010 and May 14, 2015 we repaid $25.0 million and $11.0 million, respectively, of the principal of these senior unsecured notes.  Amount currently outstanding is $24.0 million.  The 6.6% notes contain certain non-financial covenants with which we are in compliance at September 30, 2016.

In addition, we are a party to a secured term loan with a commercial bank in Puerto Rico.  This secured loan, with original principal balance of $41.0 million, bears interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 100 basis points and requires monthly principal repayments of $0.1 million.  As of September 30, 2016, this secured loan had an outstanding balance of $11.6 million and average annual interest rate of 1.44%.  This secured loan is guaranteed by a first lien on our land, buildings and substantially all leasehold improvements, as collateral for the term of the agreements under a continuing general security agreement.  This secured loan contains certain non-financial covenants that are customary for this type of facility, including, but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control.  As of September 30, 2016 we are in compliance with these covenants.  Failure to meet these covenants may trigger the accelerated payment of the outstanding balance.

On November 4, 2015, TSS entered into a $50.0 million revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit has an interest rate of LIBOR plus 250 basis points, matures on November 4, 2016, and contains certain financial and non-financial covenants that are customary for this type of facility. The agreement stipulates that any unused balance would become unavailable should TSS stop collecting payments under the Medicaid contract for four consecutive weeks.

On March 11, 2016, TSS entered into a $30.0 million revolving loan agreement with a commercial bank in Puerto Rico. This line of credit, unused as of June 30, 2016, has an interest rate of LIBOR plus 220 basis points, matures on March 11, 2017, and contains certain financial and non-financial covenants that are customary for this type of facility.

We anticipate that we will have sufficient liquidity to support our currently expected needs.

Further details regarding the senior unsecured notes and the credit agreements are incorporated by reference to “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015.
                                                        
Critical Accounting Estimates – Goodwill and Other Intangible Asset
                                                          
Our consolidated goodwill and intangible assets as of September 30, 2016 were $25.4 million and $5.3 million, respectively, primarily related to the TSA acquisition in 2011. We perform our annual test of goodwill impairment during the fourth quarter, using October 1 as the measurement date.  The result of the annual impairment test performed in 2015 indicated that the fair value of the TSA unit exceeded its carrying value by approximately 30%. Certain interim impairment tests are also performed when potential impairment indicators exist or other changes in our business occur. TSA, through which we manage the Medicare business of our Managed Care segment, has experienced net losses in 2016 largely due to unfavorable prior period reserve developments. If this business continues experiencing net losses, it is possible that the related goodwill or long-lived assets could result in a future impairment charge.  On the other hand, in October 2016 the TSA HMO contract scored 4.0 overall on a 5.0 star rating system, increasing 1.0 versus the prior year, and achieved 5 stars in Part D, all of this is expected to generate additional premiums in 2018.  See discussion regarding goodwill and other intangible assets in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2015.
                                                           
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, 2015.  A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2015.

In 2016 we have increased our market risk exposure to equity instruments to include certain mutual funds, whose underlying assets are mostly comprised of US and international common equities, preferred equity, debt instruments and loan participations, and private investments.  We hold these positions in our available-for-sale portfolio.  The mutual funds invest primarily in equity and debt securities issued or guaranteed by corporations and financial institutions that are either unrated or have non-investment grade ratings from either Standard & Poor’s or Moody’s. The private investments are comprised of private equity style closed end funds, which make direct equity and debt investments.  Our additional investments increase our exposure to equity price risk and credit risk.  We manage this indirect exposure to credit risk by closely monitoring the performance of these mutual funds.  Assuming an immediate decrease of 10% in the market value of our investments in equity securities as of September 30, 2016 and December 31, 2015, the hypothetical loss in the fair value of these investments would have been approximately $30.2 million and $19.7 million, respectively.  See note 3 to consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
 
Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures conducted under the supervision and with the participation of management, the chief executive officer (CEO) and the chief financial officer (CFO) concluded that, as of September 30, 2016, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the report that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

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 CEO and CFO 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, 2016 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 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, 2015.
 
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
   
Average
Price
Paid per
Share
   
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Programs ¹
   
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs
 
                         
July 1, 2016 to July 31, 2016
   
-
   
$
-
     
-
   
$
6.8
 
August 1, 2016 to August 31, 2016
   
174,500
     
22.93
     
174,500
     
2.8
 
September 1, 2016 to September 30, 2016
   
125,384
     
22.31
     
125,384
     
-
 

¹  In November 2015 the Company's Board of Directors authorized a $25.0 million Share Repurchase Program of its Class B common stock.  This program was completed on September 14, 2016.

Item 3.
Defaults Upon Senior Securities

Not applicable.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

Not applicable.

Item 6.
Exhibits

Exhibits
Description
   
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, 2016 and 2015 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.
 
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, 2016
 
By:
/s/ Roberto García-Rodríguez
 
       
Roberto García-Rodríguez
 
       
President and Chief Executive Officer
 
           
Date:
November 4, 2016
 
By:
/s/ Juan J. Román-Jiménez
 
       
Juan J. Román-Jiménez
 
       
Executive Vice President and Chief Financial Officer
 
 
 
45