Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation,” the “Company,” “TSM,” “we,” “our,” and “us” refers to Triple-S Management Corporation and its subsidiaries. The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months ended March 31, 2021. Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2020 and the MD&A included therein, and our unaudited condensed consolidated interim financial statements and accompanying notes as of and for the three months ended March 31, 2021 included in this Quarterly Report on Form 10-Q.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other of our publicly available documents may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations. These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control. These statements may address, among other things, future financial results, strategy for growth, and market position. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form. We are under no obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, the development of the COVID-19 outbreak, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.
Triple-S is a health services company and one of the top players in the Puerto Rico health care industry. With more than 60 years of experience, we are the premier health care brand and serve more people through the most attractive provider networks on the island. We have the exclusive right to use the Blue Cross and Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands (USVI), Costa Rica, the British Virgin Islands (BVI) and Anguilla, and we offer a broad portfolio of managed care and related products in the Commercial, Medicare Advantage and Medicaid markets. In the Commercial market, we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Insurance Plan, a government of Puerto Rico and U.S. federal government funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S. (Medicaid or the Government health plan).
Our commitment to our valued customers and provider partners, backed by our heritage of excellent care, access and service have positioned Triple-S for continued growth in the healthcare arena. Our progressive use of technology and clinical data, value-based partnerships with care providers and initial investments in ambulatory and primary care assets are a strong foundation for differentiation and growth through the development of an integrated delivery system over the next several years. We believe continued investment and focus on delivering an excellent healthcare experience and great service, coupled with health management programs that improve outcomes and quality of life while reducing the total cost of care, will separate Triple-S from our competition and strengthen the financial performance of our business well into the future.
As of March 31, 2021, we served approximately 989,000 managed care members in Puerto Rico. For the three months ended March 31, 2021 and 2020, our Managed Care segment represented approximately 92% of our total consolidated premiums earned.
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS), Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB). TSS, TSA and TSB are Blue Cross Blue Shield Association (BCBSA) licensees.
Triple-S is also a well-known brand in the life insurance and property and casualty insurance markets, with a significant share in each. We participate in the life insurance market through our subsidiary Triple-S Vida (TSV), and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad (TSP).
Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. Except as otherwise indicated, the reported balances for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations. These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment but are eliminated in consolidation and do not change net income. See Note 13 of the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
Our revenue primarily consists of premiums earned, net and investment income. Premiums are derived from the sale of managed care products and property and casualty and life insurance contracts. Substantially all our earnings are generated in Puerto Rico.
Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and policyholders. Each segment’s results of operations depend to a significant extent on management’s ability to accurately predict and effectively manage claims. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period. Operating expenses consist primarily of compensation, commission payments to brokers and other overhead business expenses.
We use operating income as a measure of performance of the underwriting and investment functions of our segments. We also use the loss ratio and the operating expense ratio as measures of performance. The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100. The operating expense ratio is operating expenses divided by premiums earned net and administrative service fees, multiplied by 100.
COVID-19
COVID-19 Situation in Puerto Rico
As of May 3, 2021, the Puerto Rico Department of Health reported 117,225 and 15,822 confirmed (RT-PCR+) and probable (antigen) COVID-19 cases, respectively, and a total of 2,315 confirmed and probable COVID-19-related deaths in Puerto Rico.
Puerto Rico was under a stay-at-home order (as amended and extended, the “Order”) from March 15, 2020 until June 16, 2020. The Order required the closure of non-essential businesses for the same period of time. On May 1, 2020, the Governor issued a new order providing for the gradual re-opening of the economy beginning on May 4, 2020. The Governor has issued several other executive orders establishing the rules to continue the gradual re-opening of the economy, the latest of which is effective until May 9, 2021.
Health care is considered an essential service under the Order; therefore, all functions of our Managed Care business, other than sales, were excluded from closure. Our Life Insurance and Property & Casualty businesses, which had been closed since March 16, 2020, re-opened on May 5, 2020, subject to compliance with certain safety and risk management measures.
Puerto Rico began its COVID-19 vaccination program in December 2020 and as of April 12, 2021, all citizens 16 years old and older are eligible to receive the vaccine. The Puerto Rico Department of Health reported on April 20, 2021 that over 2 million vaccine doses have been administered Island-wide. This statistic includes doses registered in the local and federal registration systems.
We have implemented our business continuity and risk mitigation plans and are closely monitoring outbreak developments in order to ensure the health and safety of our employees and visitors.
Economic Impact
As mentioned below, the 2021 Fiscal Plan (defined below) estimates that, while the COVID-19 pandemic and the measures taken in response to the same severely reduced economic activity and caused an unprecedented increase in unemployment in Puerto Rico, pandemic-related federal and local stimulus measures, some of which are summarized below, have more than offset the estimated income loss due to reduced economic activity and have caused a temporary increase in personal income on a net basis. However, it is still too early to fully assess the ultimate medium- and long-term impact of the pandemic and lockdown in the Puerto Rico economy. See Item 1A. Risk Factors – Risks Related to our Business – Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us. included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Funding and Economic Relief for Puerto Rico
The Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, makes approximately $182.9 million available for Puerto Rico’s Medicaid Program and increases the percentage of federal government funding for its Medicaid program expenditures from 76% to approximately 82% during the emergency period. The Coronavirus Aid, Relief, and Economic Security or CARES Act, enacted on March 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, enacted on December 27, 2020, and the American Rescue Plan, enacted on March 11, 2021 include a series of direct relief and financial assistance measures for Puerto Rico residents and businesses. The CARES Act also assigns $2.2 billion to the Government of Puerto Rico to cover necessary expenditures related to COVID-19 and not included in the territory’s budget, among other measures. The Puerto Rico government has earmarked approximately $1 billion for its COVID-19 response.
Measures Impacting our Business
The FFCRA and CARES Act also require health plans and insurers to cover testing for COVID-19 without imposing cost-sharing or prior authorization requirements. On April 16, 2020, the Puerto Rico Government enacted Act number 43, which requires health plans and insurers to cover COVID-19-related diagnostic and treatment services, including hospitalization, without cost-sharing. Our regulators have also issued regulations or circular letters requiring waivers of pre-authorizations for certain services and drugs, requiring temporary coverage of certain out-of-network providers and services, and limiting cost-sharing for certain services. See Item 1A. Risk Factors – Risks Related to our Business – Pandemics, like the COVID-19 pandemics and local, state and federal governments’ response to the pandemics may have a material adverse effect on our business, financial condition and results of operations. included on our Annual Report on Form 10-K for the year ended December 31, 2020.
Puerto Rico Economy
The Puerto Rico economy entered a recession in the fourth quarter of fiscal year 2006. Puerto Rico’s gross national product (GNP) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. Pursuant to the latest Puerto Rico Planning Board (the Planning Board) estimates, dated March 2021, the Commonwealth’s real GNP increased by 1.8% in fiscal year 2019, primarily due to federal disaster recovery spending related to Hurricanes Irma and María. The Planning Board estimates, however, that the Commonwealth’s real GNP decreased by approximately 3.2% in fiscal year 2020 due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same, and that the negative effects of COVID-19 will continue through the current fiscal year, resulting in a contraction in real GNP of approximately -2%.
Puerto Rico’s population has also been in decline over the past decade. Estimates by the U.S. Census Bureau indicate the population has decreased by 14.3%, or approximately 530,000 people, from April 1, 2010 to July 1, 2019. The 2021 Fiscal Plan (as defined below) projects that population will continue to steadily decline at an average rate of approximately 1.2% per year, due to a combination of outmigration and economic factors. The weakness of Puerto Rico’s economy has also adversely affected employment. Total average annual employment, as measured by the Puerto Rico Department of Labor and Human Resources (the DLHR) has decreased approximately 20% since 2007. The reduction in total employment began in the fourth quarter of fiscal year 2007, when total employment was 1,244,425, and continued consistently until the first half of fiscal year 2015, after which it mostly stabilized. According to the most recent data from DLHR, Puerto Rico’s average total employment as of February 2021 was 952,000, a decrease of 13,000 from total employment of 965,000 as of February 2020. The DLHR also reported an average unemployment rate of approximately 9.2% as of February 2021, up from a 9.0% unemployment rate reported by the DLHR as of February 2020.
PROMESA and the Oversight Board
The Commonwealth has been enduring a fiscal and economic crisis for over a decade. Such crisis prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in June 2016. PROMESA, among other things, created a federal fiscal oversight board (the Oversight Board) with broad powers over the Commonwealth’s fiscal affairs and established two mechanisms for the restructuring of the obligations of the Commonwealth, its instrumentalities and municipalities, contained in Titles III and VI of PROMESA. The Commonwealth and several of its instrumentalities have been in the process of restructuring their debts through the mechanisms provided by PROMESA for some time.
Commonwealth Fiscal Plan and Plan of Adjustment
The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated April 23, 2021 (the 2021 Fiscal Plan). The 2021 Fiscal Plan provides that, while the COVID-19 pandemic and the measures taken in response to the same severely reduced economic activity and caused an unprecedented increase in unemployment in Puerto Rico, pandemic-related federal and local stimulus funding have more than offset the estimated income loss due to reduced economic activity and are estimated to have caused a temporary increase in personal income on a net basis. As a result, the 2021 Fiscal Plan’s economic projections incorporate adjustments for the short-term income effects caused by such stimulus programs. For example, the 2021 Fiscal Plan estimates that real GNP contracted by 3% in fiscal year 2020 but estimates the GNP contraction adjusted for short-term income effects to have been approximately 1.1%. For fiscal years 2021 and 2022, the 2021 Fiscal Plan projects that real GNP will grow 1% and 0.6%, respectively, but projects that growth adjusted for income effects for such years will be approximately 3.8% and 1.5%, respectively.
The 2021 Fiscal Plan projects that, if the fiscal measures and structural reforms contemplated by the plan are not successfully implemented, the Commonwealth will have a pre-contractual debt service deficit starting in fiscal year 2023. It estimates that the fiscal measures could drive approximately $10 billion in savings and extra revenue over fiscal years 2022 through 2026 and that the structural reforms could drive a cumulative 0.90% increase in growth by fiscal year 2051 (equal to approximately $30.7 billion). However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2021 Fiscal Plan projects that there will be an annual deficit starting in fiscal year 2036.
In March 2021, the Oversight Board filed a plan of adjustment for the Commonwealth, the Employees Retirement System of the Government of the Commonwealth (ERS) and the Puerto Rico Public Buildings Authority (PBA) in the pending debt restructuring proceedings under Title III of PROMESA. The plan, which has substantial support from several creditor constituencies but is still subject to confirmation in the Title III proceeding, seeks to restructure approximately $35 billion of debt and other claims against the Commonwealth, PBA and ERS, and more than $50 billion of pension liabilities.
Property & Casualty Litigation
As of March 31, 2021, our Property and Casualty subsidiary had been served in a total of 480 cases relating to Hurricane Maria. Of those, 287 remained open as of March 31, 2021. See Item 1A. Risk Factors – Risks Related to our Business – Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. and We face risks related to litigation. included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Property and Casualty Reinsurance Program
The Company’s Property and Casualty segment completed the renewal of its reinsurance property and catastrophe program with an effective date of April 1, 2021 with a term of twelve-months ending on March 31, 2022. The reinsurance program provides the segment with a catastrophe loss protection of $811.5 million in excess of $5 million. The cost of entering into the new reinsurance program is estimated to remain similar to the expiring program.
Recent Accounting Standards
For a description of recent accounting standards, see Note 2 of the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
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|
As of March 31,
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|
|
|
2021
|
|
|
2020
|
|
Managed Care enrollment
|
|
|
|
|
|
|
Commercial 1
|
|
|
416,376
|
|
|
|
435,013
|
|
Medicare
|
|
|
135,977
|
|
|
|
135,710
|
|
Medicaid
|
|
|
436,772
|
|
|
|
355,512
|
|
Total
|
|
|
989,125
|
|
|
|
926,235
|
|
Managed Care enrollment by funding arrangement
|
|
|
|
|
|
|
|
|
Fully insured
|
|
|
890,696
|
|
|
|
816,475
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|
Self-insured
|
|
|
98,429
|
|
|
|
109,760
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|
Total
|
|
|
989,125
|
|
|
|
926,235
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|
(1)
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Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, Federal government employees and local government employees.
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Consolidated Operating Results
The following table sets forth our consolidated operating results. Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.
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Three months ended
March 31,
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(dollar in millions)
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|
2021
|
|
|
2020
|
|
Revenues
|
|
|
|
|
|
|
Premiums earned, net
|
|
$
|
1,008.4
|
|
|
$
|
875.9
|
|
Administrative service fees
|
|
|
2.8
|
|
|
|
2.2
|
|
Net investment income
|
|
|
13.6
|
|
|
|
14.3
|
|
Other operating revenues
|
|
|
2.8
|
|
|
|
4.0
|
|
Total operating revenues
|
|
|
1,027.6
|
|
|
|
896.4
|
|
Net realized investment gains (losses)
|
|
|
0.2
|
|
|
|
(0.5
|
)
|
Net unrealized investment gains (losses) on equity investments
|
|
|
8.6
|
|
|
|
(56.8
|
)
|
Other income, net
|
|
|
3.1
|
|
|
|
3.6
|
|
Total revenues
|
|
|
1,039.5
|
|
|
|
842.7
|
|
Benefits and expenses
|
|
|
|
|
|
|
|
|
Claims incurred
|
|
|
850.6
|
|
|
|
714.5
|
|
Operating expenses
|
|
|
151.1
|
|
|
|
162.2
|
|
Total operating expenses
|
|
|
1,001.7
|
|
|
|
876.7
|
|
Interest expense
|
|
|
2.0
|
|
|
|
1.9
|
|
Total benefits and expenses
|
|
|
1,003.7
|
|
|
|
878.6
|
|
Income (loss) before taxes
|
|
|
35.8
|
|
|
|
(35.9
|
)
|
Income tax expense (benefit)
|
|
|
12.5
|
|
|
|
(9.7
|
)
|
Net income (loss) attributable to TSM
|
|
$
|
23.3
|
|
|
$
|
(26.2
|
)
|
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Operating Revenues
Consolidated premiums earned, net increased by $132.5 million, or 15.1%, to $1,008.4 million. This increase primarily reflects higher premiums in the Managed Care segment by $122.2 million. The growth in Managed Care premiums reflects higher average premiums rates across all lines of business and an increase in Medicaid membership.
Net Unrealized Investment Gains (Losses) on Equity Investments
The $8.6 million in consolidated net unrealized investment gains on equity investments reflect the impact of changes in equity markets.
Claims Incurred
Consolidated claims incurred increased by $136.1 million, or 19.0%, to $850.6 million. The consolidated loss ratio increased 280 basis points, to 84.4%, reflecting higher Managed Care claim trends and utilization of services because of COVID-19-related testing and treatments costs, the waiver of medical and payment policies (see Recent Developments - COVID-19 - Measures Impacting our Business included in this quarterly report on Form 10-Q), increased benefits in the 2021 Medicare product offerings, the effect of the elimination of the Health Insurance Providers Fee (HIP fee) pass-through in 2021 and the return of deferred utilization. In addition, the loss ratio in 2020 was favorably impacted by lower utilization of Managed Care services during the last two weeks of the quarter as the result of the government-enforced lockdown because of the COVID-19 pandemic.
Operating Expenses
Consolidated operating expenses decreased by $11.1 million, or 6.8%, to $151.1 million. The decrease in operating expenses mostly results from the elimination in 2021 of the HIP fee of $16.3 million. The consolidated operating expense ratio decreased 360 basis points to 14.9% mostly reflecting the increase in premiums earned, net.
Income Taxes
Consolidated income taxes increased by $22.2 million, to an expense of $12.5 million for the three months ended March 31, 2021. The year over year change in income taxes reflects the loss before taxes in the 2020 period resulting from the net unrealized investment losses on equity investments.
Man
aged Care Segment Operating Results
|
|
Three months ended
March 31,
|
|
(dollar in millions)
|
|
2021
|
|
|
2020
|
|
Operating revenues
|
|
|
|
|
|
|
Medical premiums earned, net
|
|
|
|
|
|
|
Medicare
|
|
$
|
402.3
|
|
|
$
|
387.8
|
|
Medicaid
|
|
|
322.7
|
|
|
|
220.9
|
|
Commercial
|
|
|
207.0
|
|
|
|
201.1
|
|
Medical premiums earned, net
|
|
|
932.0
|
|
|
|
809.8
|
|
Administrative service fees
|
|
|
3.0
|
|
|
|
3.3
|
|
Net investment income
|
|
|
5.1
|
|
|
|
5.0
|
|
Total operating revenues
|
|
|
940.1
|
|
|
|
818.1
|
|
Medical operating costs
|
|
|
|
|
|
|
|
|
Medical claims incurred
|
|
|
811.4
|
|
|
|
677.8
|
|
Medical operating expenses
|
|
|
110.0
|
|
|
|
126.1
|
|
Total medical operating costs
|
|
|
921.4
|
|
|
|
803.9
|
|
Medical operating income
|
|
$
|
18.7
|
|
|
$
|
14.2
|
|
Additional data
|
|
|
|
|
|
|
|
|
Member months enrollment
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
408,781
|
|
|
|
407,907
|
|
Medicaid
|
|
|
1,296,189
|
|
|
|
1,068,016
|
|
Commercial
|
|
|
|
|
|
|
|
|
Fully insured
|
|
|
956,947
|
|
|
|
978,342
|
|
Self-funded
|
|
|
295,837
|
|
|
|
330,232
|
|
Total Commercial
|
|
|
1,252,784
|
|
|
|
1,308,574
|
|
Total member months
|
|
|
2,957,754
|
|
|
|
2,784,497
|
|
Medical loss ratio
|
|
|
87.1
|
%
|
|
|
83.7
|
%
|
Operating expense ratio
|
|
|
11.8
|
%
|
|
|
15.5
|
%
|
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Medical Premiums Earned, Net
Medical premiums earned, net increased by $122.2 million, or 15.1%, to $932.0 million. This increase is principally the result of the following:
•
|
Premiums generated by the Medicaid business increased by $101.8 million, or 46.1%, primarily reflecting higher average premium rates following two premium rates increases that were effective in May 2020 and July 2020 and an increase in enrollment of approximately 228,000 member months. In addition, following a reconciliation process with ASES this quarter we recognized premiums corresponding to prior periods. These increases were partially offset by the elimination of the HIP fee pass-through in 2021.
|
•
|
Premiums generated by the Medicare business increased by $14.5 million, or 3.7%, mostly due to higher average premium rates reflecting an increase in the premium rate benchmark and membership risk score. Membership remained in line when compared with the prior-year period.
|
•
|
Premiums generated by the Commercial business increased by $5.9 million, or 2.9%, mainly reflecting higher average premium rates in the 2021 period. This increase was partially offset by a reduction of approximately 21,000 fully insured member months and the elimination of the HIP fee pass-through in 2021.
|
Medical Claims Incurred
Managed Care claims incurred increased by $133.6 million, or 19.7%, to $811.4 million when compared to the three months ended March 31, 2020. The medical loss ratio (MLR) of the segment increased 340 basis points during 2021 period, to 87.1%. This fluctuation is primarily attributed to the net effect of the following:
•
|
Claims incurred in the Medicaid business increased by $82.3 million, or 41.3% and its MLR decreased 300 basis points, to 87.3%. The increase in claim cost is due to higher member months. The lower MLR, reflects the premium rates increases and prior period premiums recognized this quarter, partially offset by COVID-19-related testing and treatment costs, the waiver of medical and payment policies and the elimination of the HIP fee pass-through in 2021.
|
•
|
Claims incurred in the Medicare business increased by $30.7 million, or 9.6%, during the 2021 period and its MLR increased 460 basis points, to 87.3%. The higher MLR reflects improved benefits in the 2021 product offerings, COVID-19-related testing and treatment costs and the waiver of medical and payment policies. In addition, the 2020 MLR was favorably impacted by the lower utilization of services during the last two weeks of the quarter as the result of the government-enforced lockdown because of the COVID-19 pandemic. These increases were partially offset by favorable prior period reserve development in the 2021 period.
|
•
|
Claims incurred in the Commercial business increased by $20.6 million, or 13.1%, during 2021 and its MLR increased 770 basis points, to 86.1%. The higher MLR mostly reflects higher claim trends, the return of deferred utilization, COVID-19-related testing and treatment costs, the waiver of medical and payment policies and the elimination of the HIP fee pass-through in 2021. In addition, the 2020 MLR was favorably impacted by the lower utilization of services during the last two weeks of the quarter as the result of the government-enforced lockdown because of the COVID-19 pandemic.
|
Medical Operating Expenses
Managed Care operating expenses decreased by $16.1 million, or 12.8%, to $110.0 million. The decrease in operating expenses mostly results from the elimination in 2021 of the HIP fee of $16.3 million. The operating expense ratio decreased by 370 basis points to 11.8% in 2021 reflecting the increase in premiums earned, net.
Life Insurance Segment Operating Results
|
|
Three months ended
March 31,
|
|
(dollar in millions)
|
|
2021
|
|
|
2020
|
|
Operating revenues
|
|
|
|
|
|
|
Premiums earned, net
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
55.2
|
|
|
$
|
49.0
|
|
Ceded premiums earned
|
|
|
(2.7
|
)
|
|
|
(2.3
|
)
|
Premiums earned, net
|
|
|
52.5
|
|
|
|
46.7
|
|
Net investment income
|
|
|
6.4
|
|
|
|
6.9
|
|
Total operating revenues
|
|
|
58.9
|
|
|
|
53.6
|
|
Operating costs
|
|
|
|
|
|
|
|
|
Policy benefits and claims incurred
|
|
|
29.4
|
|
|
|
27.4
|
|
Underwriting and other expenses
|
|
|
23.7
|
|
|
|
21.1
|
|
Total operating costs
|
|
|
53.1
|
|
|
|
48.5
|
|
Operating income
|
|
$
|
5.8
|
|
|
$
|
5.1
|
|
Additional data:
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
56.0
|
%
|
|
|
58.7
|
%
|
Operating expense ratio
|
|
|
45.1
|
%
|
|
|
45.2
|
%
|
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Operating Revenues
Premiums earned, net increased by $5.8 million, or 12.4% to $52.5 million mostly as the result of higher sales across all lines of business, particularly in the Individual Life and Cancer lines of business. In addition, during the second quarter of 2020, TSV acquired an insurance portfolio that contributed additional premiums in the Cancer and Group Life lines of business.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred increased by $2.0 million, or 7.3%, to $29.4 million, mostly as the result of higher actuarial reserves following improved portfolio persistency and growth during the current quarter. The segment’s loss ratio decreased 270 basis point to 56.0%.
Underwriting and Other Expenses
Underwriting and other expenses increased $2.6 million, or 12.3%, to $23.7 million mostly reflecting higher amortization of deferred acquisition costs. The segment’s operating expense ratio decreased 10 basis points to 45.1%.
Property and Casualty Insurance Segment Operating Results
|
|
Three months ended
March 31,
|
|
(dollar in millions)
|
|
2021
|
|
|
2020
|
|
Operating revenues
|
|
|
|
|
|
|
Premiums earned, net
|
|
|
|
|
|
|
Premiums written
|
|
$
|
36.6
|
|
|
$
|
33.2
|
|
Premiums ceded
|
|
|
(15.0
|
)
|
|
|
(16.4
|
)
|
Change in unearned premiums
|
|
|
3.7
|
|
|
|
3.8
|
|
Premiums earned, net
|
|
|
25.3
|
|
|
|
20.6
|
|
Net investment income
|
|
|
2.0
|
|
|
|
2.1
|
|
Total operating revenues
|
|
|
27.3
|
|
|
|
22.7
|
|
Operating costs
|
|
|
|
|
|
|
|
|
Claims incurred
|
|
|
9.5
|
|
|
|
10.9
|
|
Underwriting and other expenses
|
|
|
14.0
|
|
|
|
12.0
|
|
Total operating costs
|
|
|
23.5
|
|
|
|
22.9
|
|
Operating income (loss)
|
|
$
|
3.8
|
|
|
$
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Additional data:
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
37.5
|
%
|
|
|
52.9
|
%
|
Operating expense ratio
|
|
|
55.3
|
%
|
|
|
58.3
|
%
|
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Operating Revenues
Total premiums written increased by $3.4 million, or 10.2%, to $36.6 million, mostly driven by higher premiums particularly in Commercial Liability and Commercial Property products.
The premiums ceded to reinsurers decreased by $1.4 million, or 8.5%, mostly due to $3.0 million of reinsurance reinstatement premiums following the January 2020 earthquakes experienced in Puerto Rico, offset in part by an increase in cost of catastrophe reinsurance protection.
Claims Incurred
Claims incurred decreased by $1.4 million, or 12.8%, to $9.5 million mostly due to a favorable loss experience in the 2021 period and the recognition in the 2020 quarter of earthquake losses after the January 2020 events. As a result, the loss ratio decreased by 1,540 basis points, to 37.5% during this period.
Underwriting and Other Expenses
Underwriting and other operating expenses increased by $2.0 million, or 16.7%, to $14.0 million mostly due to higher net commissions following the segment’s increase in premiums earned. The operating expense ratio was 55.3%, 300 basis points lower than prior year.
Liquidity and Capital Resources
Cash Flows
A summary of our major sources and uses of cash for the periods indicated is presented in the following table:
|
|
Three months ended
March 31,
|
|
(dollar in millions)
|
|
2021
|
|
|
2020
|
|
Sources (uses) of cash:
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
68.7
|
|
|
$
|
6.5
|
|
Net purchases of investment securities
|
|
|
(96.6
|
)
|
|
|
(75.9
|
)
|
Net capital expenditures
|
|
|
(5.2
|
)
|
|
|
(4.6
|
)
|
Capital contribution on equity method investees
|
|
|
-
|
|
|
|
(4.9
|
)
|
Payments of long-term borrowings
|
|
|
(1.1
|
)
|
|
|
(0.8
|
)
|
Proceeds from policyholder deposits
|
|
|
5.1
|
|
|
|
10.3
|
|
Surrenders of policyholder deposits
|
|
|
(2.5
|
)
|
|
|
(4.1
|
)
|
Repurchase and retirement of common stock
|
|
|
-
|
|
|
|
(9.0
|
)
|
Net change in short-term borrowings
|
|
|
7.0
|
|
|
|
24.0
|
|
Other
|
|
|
32.4
|
|
|
|
53.3
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
7.8
|
|
|
$
|
(5.2
|
)
|
The increase of approximately $62.2 million in net cash provided by operating activities is mostly due to higher premium collections, lower cash paid to suppliers and employees, offset in part by higher claims paid in the Managed Care segment.
The net purchases of investments in securities are part our asset/liability management strategy.
The decrease in capital contribution reflects capital contributions made in the 2020 period in exchange for a participation in equity method investees.
The net change in short-term borrowings represents the repayment of short-term facilities available to address timing differences between cash receipts and disbursements.
The fluctuation in other sources of cash reflects the $32.4 million change in outstanding checks in excess of bank balances.
Stock Repurchase Program
In August 2017 the Company’s Board of Directors authorized a $30.0 million repurchase program of its Class B common stock and in February 2018 the Company’s Board of Directors authorized a $25.0 million expansion of this program. In October 2019 the Company’s Board of Directors authorized an additional expansion to this program increasing its remaining balance up to a total of $25.0 million, effective November 2019. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the three months ended March 31, 2020, the Company repurchased and retired under this program 577,447 shares at an average per share price of $15.57, for an aggregate cost of $9.0 million. The program was completed in 2020.
Financing and Financing Capacity
Long-Term Borrowings
TSM has $35.5 million credit agreement (the Loan) with a commercial bank in Puerto Rico. The agreement consists of three term loans: (i) Term Loan A in the principal amount of $11.2 million, (ii) Term Loan B in the principal amount of $20.2 million, and (iii) Term Loan C in the principal amount of $4.1 million. Term Loan A matures in October 2023 while Term Loans B and C mature in January 2024. Pursuant to the credit agreement, interest is payable on the outstanding balance of the Loan at the following annual rate: (i) 100 basis points over LIBOR for Term Loan A, (ii) 275 basis points over LIBOR for Term Loan B, and (iii) 325 basis points over LIBOR for Term Loan C. The loan includes certain financial and non-financial covenants, which are customary for this type of facility, including negative covenants imposing certain restrictions on the Company’s business. Failure to meet these covenants may trigger the accelerated payment of the outstanding balance. The Company was in compliance with these covenants as of March 31, 2021.
As detailed above, the three term loans under our credit agreement with a commercial bank in Puerto Rico bear interest rates in relation to 1-month and 3-month LIBOR, a widely used interest rate benchmark.
In July 2017, the Financial Conduct Authority (FCA) in the United Kingdom, which regulates LIBOR, announced that it would phase out this benchmark by the end of 2021. In response, the U.S. Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a working group comprised of private market participants, to ensure a transition to a new reference rate.
The ARRC has recommended the use of the Secured Overnight Financing Rate (SOFR), which is an index based on the cost of borrowing overnight cash collateralized by U.S. Treasury securities. Currently, there is no definitive information regarding the future use of SOFR as a widely accepted benchmark or any other replacement rate.
If LIBOR rates are no longer available and we have not agreed with the bank on a replacement rate, we are subject to an alternative benchmark rate, as defined in the credit agreement of our long-term bank loan. At this time we cannot assess the impact, if any, on the interest paid on this loan. We are in regular contact with the lender about this subject, but at this point the bank has not yet determined a course of action. Alternatively, the loan could be refinanced by us without prepayment penalties.
We will closely follow any new developments regarding the LIBOR phase out.
On June 19, 2020, TSM entered into a $31.4 million Credit Agreement with a commercial bank in Puerto Rico. The proceeds were used by the Company to partially finance the acquisition of a building. The Credit Agreement is guaranteed by a mortgage over the building, a pledge of all collateral related to the building and an assignment of the rents collected for the lease of office space in the building. Approximately 64.25% of the acquired building is currently leased to third parties. The Company expects to move during this year some of its offices currently leased to third parties to the new building and together with the leased space to fully occupy the new facilities. Pursuant to the Credit Agreement, interest is payable on the outstanding principal balance of the Loan at an annual rate equal to the Prime Rate. Monthly interest payments commenced on July 1, 2020, and will continue to be paid each month until the principal of the Loan has been paid in full.
The Company may, at its option and at any time, upon notice as specified in the Credit Agreement, prepay prior to maturity, all or any part of the Loan upon the payment of a penalty fee of the outstanding principal amount at the time of the prepayment of 3% during the first year, 2% during the second year, 1% during the third year and thereafter at par.
The Credit Agreement includes certain customary financial and non-financial covenants, including negative covenants imposing certain restrictions on the Corporation’s business. The Company was in compliance with these covenants as of March 31, 2021.
For further details, see Note 13, Borrowings, of the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2020.
Short-Term Facilities
We have several short-term facilities available to address timing differences between cash receipts and disbursements, consisting of collateralized advances from the Federal Home Loan Bank of New York (FHLBNY), repurchase agreements and a revolving credit facility. See Note 8 of the unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for details of available short-term facilities.
We anticipate that we will have sufficient liquidity to support our currently expected needs.