UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No.1)

☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

☐ 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

 

1441 F.D. Roosevelt Avenue, San Juan, PR 00920

(787) 749-4949

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

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐  Yes  ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.☐  Yes  ☑  No

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐  Yes  ☑  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016 was approximately $577,239,532 for the Class B common stock (the only stock of the registrant that trades in a public market) and $950,968 for the Class A common stock (valued at its par value of $1.00 since it is not publicly traded).

As of February 28, 2017, the registrant had 950,968 of its Class A common stock outstanding and 23,320,899 of its Class B common stock outstanding.

 

---

Explanatory Note

This amendment No. 1 on Form 10-K/A (“Amended Filing”) amends our original Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 9, 2017 (“Original Filing”). The purpose of this Amended Filing is to (i) amend and restate management’s conclusions regarding the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2016, and (ii) file the amended and restated “Report of Independent Registered Certified Public Accounting Firm” of Deloitte & Touche LLP regarding the effectiveness of our internal control over financial reporting as of December 31, 2016. As required by Rule 12b-15, the Company’s principal executive officer and principal financial officer are providing new currently dated certifications. In addition, the Company is filing new consents of Independent Registered Public Accounting Firm from Deloitte & Touche LLP and PricewaterhouseCoopers LLP.  Accordingly, the Company hereby amends and replaces in its entirety Items 9A and 15 in the Original Filing.

Except as described above, this Amended Filing does not amend, modify or change any items or disclosures contained in our Original Filing and does not intend to reflect any information or events subsequent to the filing date of the Original Filing. As such, the Company’s consolidated financial statements as of and for the year ended December 31, 2016, which were included in the Original Filing, have not changed as a result of the identification of the material weakness. This Amended Filing should be read in conjunction with the Original Filing and reports filed with the U.S. Securities and Exchange Commission subsequent to the Original Filing, including any amendment to those filings.

As described in Item 9A of this Amended Filing, subsequent to our Original Filing, as the result of an inspection from the Public Company Accounting Oversight Board, our independent registered public accounting firm requested that we re-evaluate certain internal controls related to the review process of the Managed Care claims paid data input in our incurred but not reported (“IBNR”) actuarial model. As a result, management has concluded that disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2016 due to a material weakness in its internal control over financial reporting identified subsequent to the issuance of the Original Filing. The Company’s consolidated financial statements as of and for the year ended December 31, 2016, which were included in the Original Filing, have not changed as a result of the identification of the material weakness.

Part II

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

There have been no changes in or disagreements with our independent registered public accounting firm on accounting or financial disclosures.

Item 9A.

Controls and Procedures

 

In connection with the preparation of the Original Filing and, subsequently, of this Annual Report on Form 10-K/A, management, under the supervision and with the participation of the chief executive officer and the chief financial officer, conducted an evaluation of the effectiveness of our “disclosure controls and procedures” as of the end of this period (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the issuer in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on the evaluation at the time of the Original Filing, our chief executive officer and chief financial officer concluded that as of December 31, 2016, which is the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective to a reasonable level of assurance. Subsequent to this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2016 because of the material weakness in internal control over financial reporting described below.

Notwithstanding the material weakness in our internal control over financial reporting as of December 31, 2016, management has concluded that the consolidated financial statements included in the Original Filing and in this Form 10-K/A present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of “internal control over financial reporting,” as defined under Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s chief executive officer and chief financial officer, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”), and includes those policies and procedures that:

·

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, under the supervision and with the participation of the chief executive officer and chief financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 based on criteria described in the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on May 14, 2013.  Based on that assessment and those criteria, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2016 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with GAAP due to the material weakness described below.

 

Subsequent to our Original Filing, as the result of an inspection from the Public Company Accounting Oversight Board, our independent registered public accounting firm requested that we re-evaluate certain internal controls related to the review process of the Managed Care claims paid data input in our IBNR actuarial model. As the result of this re-evaluation, management determined that controls are not appropriately designed to validate that the claims paid information in the lag triangles used in the IBNR actuarial models is reviewed with enough precision to ascertain data is accurately presented by incurred date.  This deficiency was determined to be a material weakness as of December 31, 2016. The Company’s consolidated financial statements as of and for the year ended December 31, 2016, as included in the Original Filing, have not changed as a result of the identification of this material weakness.

The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche, LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K/A.

The main factor contributing to the material weakness were changes in our actuarial department during 2016. As a consequence, the preventive control over the accuracy of the incurred date component of the Managed Care claims paid data within the claim lags ceased to be fully effective. Although we engaged an external actuarial consulting firm to support our claims reserving process, we did not ask them to do detailed testing over the incurred date component in order to ascertain the preciseness of the lag triangles. Even though this control deficiency is considered a material weakness, there is no adjustment to the previously issued financial statements.

Management has designed a remediation plan to correct the material weakness described above and improve the design of internal controls. The remedial activities put in place include the following:

·

After hiring additional personnel in the actuarial department, effective 2017 we reinforced the review process over the accuracy of the claims paid data within the claim lags.

·

In addition, we strengthened the claims paid reconciliation process to include the incurred date component within the claim lags on a monthly and historical basis.

We have completed the aforementioned activities as of the date of this amendment and believe that we have strengthened the Company’s internal control over financial reporting addressing the identified material weakness. However, control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We will continue to monitor the effectiveness of these remediation measures and we will make any changes to the design of this plan and take such other actions that we deem appropriate given the circumstances.

 

No changes in our internal control over financial reporting (as such term is defined in the Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended December 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Triple-S Management Corporation:

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our report dated March 9, 2017, we expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.  As described in the following paragraph, the Company subsequently identified a material weakness in its internal control over financial reporting. Accordingly, management has revised its assessment about the effectiveness of the Company’s internal control over financial reporting and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, as expressed herein, is different from that expressed in our previous report.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.  The following material weakness has been identified and included in management's assessment: the managed care segment controls are not appropriately designed to validate that the claims paid information in the lag triangles used in the IBNR actuarial models is reviewed with enough precision to ascertain data is accurately presented by incurred date. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016, of the Company and this report does not affect our report on such consolidated financial statements and financial statement schedules.

In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016 of the Company and our report dated March 9, 2017 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/ DELOITTE & TOUCHE LLP

San Juan, Puerto Rico

March 9, 2017 (August 9, 2017 as to the material weakness)

Stamp No. E286206

affixed to original.

 

Part III

Item 15.

Exhibits and Financial Statements Schedules

 

 

 

Schedule I – Summary of Investments was omitted because the information is disclosed in the notes to the audited consolidated financial statements.  Schedule VI – Supplemental Information Concerning Property Casualty Insurance Operations was omitted because the schedule is not applicable to the Corporation.

 

 

 

 

 

All other exhibits for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable, and therefore have been omitted.

 

*

Filed herein.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities 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

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Triple-S Management Corporation

Consolidated Financial Statements

December 31, 2016, 2015, and 2014

 

	Page(s)
Reports of Independent Registered Public Accounting Firm	1
Consolidated Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Earnings	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Stockholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9–82

 

Assets		2016				2015
Investments and cash
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $1,104,303 in 2016 and $1,088,258 in 2015)		$	1,151,643			$	1,133,645
Equity securities (cost of $240,699 in 2016 and $169,593 in 2015)			270,349				197,071
Securities held to maturity, at amortized cost:
Fixed maturities (fair value of $3,012 in 2016 and $3,124 in 2015)			2,836				2,929
Policy loans			8,564				7,901
Cash and cash equivalents			103,428				197,818
Total investments and cash			1,536,820				1,539,364
Premium and other receivables, net			286,365				282,646
Deferred policy acquisition costs and value of business acquired			194,787				190,648
Property and equipment, net			66,369				73,953
Deferred tax asset			57,768				52,361
Goodwill			25,397				25,397
Other assets			51,493				41,776
Total assets		$	2,218,999			$	2,206,145
Liabilities and Stockholders’ Equity
Claim liabilities			487,943				491,765
Liability for future policy benefits			321,232				289,530
Unearned premiums			79,310				80,260
Policyholder deposits			179,382				179,287
Liability to Federal Employees’ Health Benefits and Federal Employees' Programs			34,370				26,695
Accounts payable and accrued liabilities			169,449				176,910
Deferred tax liability			18,850				15,070
Long term borrowings			35,085				36,827
Liability for pension benefits			30,892				62,945
Total liabilities			1,356,513				1,359,289
Commitments and contingencies
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 December 31, 2016 and 2015			951				951
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 23,321,163 and 24,047,755 shares at December 31, 2016 and 2015, respectively			23,321				24,048
Additional paid-in capital			65,592				83,438
Retained earnings			730,904				713,466
Accumulated other comprehensive income, net			42,395				25,623
Total Triple-S Management Corporation stockholders' equity			863,163				847,526
Non-controlling interest in consolidated subsidiary			(677	)			(670	)
Total stockholders' equity			862,486				846,856
Total liabilities and stockholders’ equity		$	2,218,999			$	2,206,145

The accompanying notes are an integral part of these financial statements.

 

		2016				2015				2014
Revenues:
Premiums earned, net		$	2,890,641			$	2,783,154			$	2,128,566
Administrative service fees			17,843				44,705				119,302
Net investment income			48,913				45,174				47,540
Other operating revenues			3,461				3,719				4,232
Total operating revenues			2,960,858				2,876,752				2,299,640
Net realized investment gains (losses):
Total other-than-temporary impairment losses on securities			(1,434	)			(5,212	)			(1,170	)
Net realized gains, excluding other-than-temporary impairment losses on securities			18,813				24,153				19,401
Total net realized investment gains on sale of securities			17,379				18,941				18,231
Other income, net			6,569				7,043				2,243
Total revenues			2,984,806				2,902,736				2,320,114
Benefits and expenses:
Claims incurred			2,472,191				2,318,715				1,747,595
Operating expenses			493,894				518,721				497,194
Total operating costs			2,966,085				2,837,436				2,244,789
Interest expense			7,635				8,169				9,274
Total benefits and expenses			2,973,720				2,845,605				2,254,063
Income before taxes			11,086				57,131				66,051
Income tax (benefit) expense			(6,345	)			5,099				745
Net income			17,431				52,032				65,306
Less: Net loss attributable to non-controlling interest			7				89				354
Net income attributable to Triple-S Management Corporation		$	17,438			$	52,121			$	65,660
Earnings per share attributable to Triple-S Management Corporation
Basic net income per share		$	0.71			$	2.03			$	2.42
Diluted net income per share		$	0.71			$	2.02			$	2.41

The accompanying notes are an integral part of these financial statements.

 

---

 

		2016				2015				2014
Net income		$	17,431			$	52,032			$	65,306
Other comprehensive income (loss), net of tax:
Net unrealized change in fair value of available for sale securities, net of taxes			(107	)			(38,989	)			35,883
Defined benefit pension plan:
Actuarial gain (loss), net			18,232				16,105				(18,967	)
Prior service credit, net			(1,353	)			(269	)			(269	)
Total other comprehensive income (loss), net of tax			16,772				(23,153	)			16,647
Comprehensive income			34,203				28,879				81,953
Comprehensive loss attributable to non-controlling interest			7				89				354
Comprehensive income attributable to Triple-S Management Corporation		$	34,210			$	28,968			$	82,307

The accompanying notes are an integral part of these financial statements.

 

		Class A Common Stock				Class B Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Triple-S Management Corporation Stockholders’ Equity				Non-controlling Interest in Consolidated Subsidiary				Total Stockholders’ Equity
Balance, December 31, 2013		$	2,378			$	25,091			$	130,098			$	595,685			$	32,129			$	785,381			$	(178	)		$	785,203
Share-based compensation			-				135				2,236				-				-				2,371				-				2,371
Stock issued upon exercise of stock options			-				199				2,686				-				-				2,885				-				2,885
Repurchase and retirement of common stock			-				(771	)			(13,615	)			-				-				(14,386	)			-				(14,386	)
Net change in comprehensive income (loss)			-				-				-				65,660				16,647				82,307				(354	)			81,953
Balance, December 31, 2014		$	2,378			$	24,654			$	121,405			$	661,345			$	48,776			$	858,558			$	(532	)		$	858,026
Share-based compensation			-				202				8,088				-				-				8,290				-				8,290
Stock issued upon exercise of stock options			-				13				166				-				-				179				-				179
Common stock conversion			(1,427	)			1,427				-				-				-				-				-				-
Repurchase and retirement of common stock			-				(2,248	)			(46,221	)			-				-				(48,469	)			-				(48,469	)
Non-controlling interest decrease related to retirement of consolidated subsidiary common stock			-				-				-				-				-				-				(49	)			(49	)
Net change in comprehensive income (loss)			-				-				-				52,121				(23,153	)			28,968				(89	)			28,879
Balance, December 31, 2015		$	951			$	24,048			$	83,438			$	713,466			$	25,623			$	847,526			$	(670	)		$	846,856
Share-based compensation			-				223				2,576				-				-				2,799				-				2,799
Stock issued upon exercise of stock options			-				4				51				-				-				55				-				55
Repurchase and retirement of common stock			-				(954	)			(20,473	)			-				-				(21,427	)			-				(21,427	)
Net change in comprehensive income (loss)			-				-				-				17,438				16,772				34,210				(7	)			34,203
Balance, December 31, 2016		$	951			$	23,321			$	65,592			$	730,904			$	42,395			$	863,163			$	(677	)		$	862,486

The accompanying notes are an integral part of these financial statements.

 

		2016				2015				2014
Cash flows from operating activities
Net income		$	17,431			$	52,032			$	65,306
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			14,120				16,379				24,400
Net amortization of investments			8,671				6,854				6,091
Additions to the allowance for doubtful receivables			1,601				16,121				14,819
Deferred tax benefit			(8,326	)			(5,070	)			(21,806	)
Net realized investment gains on sale of securities			(17,379	)			(18,941	)			(18,231	)
Interest credited to policyholder deposits			3,794				5,690				3,510
Share-based compensation			2,463				8,290				2,371
(Increase) decrease in assets
Premium and other receivables, net			(5,320	)			6,399				(45,046	)
Deferred policy acquisition costs and value of business acquired			(7,286	)			(6,548	)			(6,811	)
Deferred taxes			(4,799	)			3,616				1,954
Other assets			(9,009	)			(2,630	)			8,630
(Decrease) increase in liabilities
Claim liabilities			(3,822	)			101,679				(30,335	)
Liability for future policy benefits			31,702				18,146				23,930
Unearned premiums			(950	)			(2,396	)			(4,706	)
Liability to FEHBP			7,675				11,029				7,518
Accounts payable and accrued liabilities			(24,095	)			18,444				6,397
Net cash provided by operating activities			6,471				229,094				37,991

The accompanying notes are an integral part of these financial statements.

 

Triple-S Management Corporation

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

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		2016				2015				2014
Cash flows from investing activities
Proceeds from investments sold or matured
Securities available for sale
Fixed maturities sold		$	400,848			$	355,045			$	235,282
Fixed maturities matured			56,988				67,615				31,329
Equity securities sold			109,049				100,152				113,942
Securities held to maturity
Fixed maturities matured			1,538				640				4,127
Other investments			-				-				8,925
Acquisition of investments
Securities available for sale
Fixed maturities			(482,252	)			(469,198	)			(288,507	)
Equity securities			(163,119	)			(92,844	)			(69,101	)
Securities held to maturity
Fixed maturities			(1,445	)			(624	)			(935	)
Other investments			(2,493	)			(2,427	)			(483	)
Net disbursements for policy loans			(663	)			(641	)			(555	)
Net capital expenditures			(4,750	)			(9,094	)			(4,783	)
Net cash (used in) provided by investing activities			(86,299	)			(51,376	)			29,241
Cash flows from financing activities
Repurchase and retirement of common stock			(21,371	)			(48,287	)			(11,337	)
Change in outstanding checks in excess of bank balances			12,250				(1,786	)			(4,858	)
Repayments of long-term borrowings			(1,742	)			(37,640	)			(14,835	)
Proceeds from policyholder deposits			18,224				16,563				9,551
Surrenders of policyholder deposits			(21,923	)			(18,787	)			(10,072	)
Net cash used in financing activities			(14,562	)			(89,937	)			(31,551	)
Net (decrease) increase in cash and cash equivalents			(94,390	)			87,781				35,681
Cash and cash equivalents
Beginning of year			197,818				110,037				74,356
End of year		$	103,428			$	197,818			$	110,037

The accompanying notes are an integral part of these financial statements.

 

1.	Nature of Business

Triple-S Management Corporation (the Corporation, the Company or TSM) was incorporated under the laws of the Commonwealth of Puerto Rico to engage, among other things, as the holding company of entities primarily involved in the insurance industry.

The Company has the following wholly owned subsidiaries: (1) Triple-S Salud, Inc. (TSS) and Socios Mayores en Salud Holdings, Inc. (from now on referred to as Triple-S Advantage or TSA), managed care organizations that provide health benefits services to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations; (2) Triple-S Vida, Inc. (TSV) and Triple-S Blue, Inc. (TSB) (formerly known as Atlantic Southern Insurance Company (ASICO)), which are engaged in the underwriting of life and accident and health insurance policies and the administration of annuity contracts; and (3)  Triple-S Propiedad, Inc. (TSP), which is engaged in the underwriting of property and casualty insurance policies.  The Company, TSS and TSA are members of the Blue Cross and Blue Shield Association (BCBSA). The Company and the above mentioned subsidiaries are subject directly or indirectly to the regulations of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance), the General Superintendence of Insurance of Costa Rica, the British Virgin Islands (BVI) Financial Services Commission, and the Anguilla Financial Services Commission

The Company also owns a controlling interest in a health clinic in Puerto Rico, as part of our strategic initiatives.  The clinic is a member of the Mayo Clinic network.

Through our subsidiary TSS, we provide services to participants of the Commonwealth of Puerto Rico Health Insurance Plan (similar to Medicaid) (Medicaid).  In 2011, TSS entered into a contract with an agency of Commonwealth of Puerto Rico (the government of Puerto Rico or the Commonwealth), the Administración de Servicios de Salud de Puerto Rico (ASES), to administer the provision of the physical health component of this program in five service regions in Puerto Rico on an Administrative Service Only (ASO) basis, under which TSS receives a monthly per-member, per-month administrative fee for its services and does not bear the insurance risk of the program.  On July 1, 2013, TSS amended its contract extending the administration of the provision of the physical health component of the Medicaid program for a 12-month period expiring on June 30, 2014. This amendment also transferred the administration of three additional regions to TSS upon completion of a transition period, which ended on October 1, 2013.  On June 30, 2014, the contract was extended for a nine-month period expiring March 31, 2015.  Effective April 1, 2015, the government changed the Medicaid delivery model from an ASO to a risk based model.  Under the risk based delivery model, TSS provides healthcare services to only two service regions.

The Company also has two other wholly owned subsidiaries, Interactive Systems, Inc. (ISI), and TSM International, LLC (TSM International).  ISI is mainly engaged in providing data processing services to the Company and its subsidiaries.  TSM International is an International Banking Entity, as licensed by the government of Puerto Rico, and currently has limited operations.

 

A substantial majority of the Company’s business activity is within Puerto Rico, and as such, the Company is subject to the risks associated with the Puerto Rico economy.

 

2.	Significant Accounting Policies

The following are the significant accounting policies followed by the Company and its subsidiaries:

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).

The consolidated financial statements include the financial statements of the Company and its subsidiaries.  Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period.  Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid debt instruments with maturities of three months or less at the date of acquisition to be cash equivalents.  Cash equivalents of $24,486 and $113,040 at December 31, 2016 and 2015, respectively, consist principally of money market funds and certificates of deposit with original maturities of three months or less.

Investments

Investment in securities at December 31, 2016 and 2015 consists mainly of obligations of government‑sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, obligations of the Commonwealth of Puerto Rico and its instrumentalities, municipal securities, corporate bonds, residential mortgage-backed securities, collateralized mortgage obligations, and equity securities.  The Company classifies its debt and equity securities in one of three categories: trading, available for sale, or held to maturity.  Trading securities are bought and held principally for the purpose of selling them in the near term.  Securities classified as held to maturity are those securities in which the Company has the ability and intent to hold the security until maturity.  All other securities not included in trading or held to maturity are classified as available for sale.

Trading and available-for-sale securities are recorded at fair value.  The fair values of debt securities (both available for sale and held to maturity investments) and equity securities are based on quoted market prices for those or similar investments at the reporting date.  Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts, respectively.  Unrealized holding gains and losses on trading securities are included in earnings.  Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized.  Realized gains and losses from the sale of available-for-sale securities are included in earnings and are determined on a specific‑identification basis.

Transfers of securities between categories are recorded at fair value at the date of transfer.  Unrealized holding gains and losses are recognized in earnings for transfers into trading securities.  Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of other comprehensive income.  The unrealized holding gains or losses included in the separate component of other comprehensive income for securities transferred from available for sale to held to maturity, are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.

 

If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings.  For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that such securities will not have to be sold, but the Company expects not to fully recover the amortized cost basis, the credit component of the other-than temporary impairment is recognized in other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.  Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition.

 

The unrealized gains or losses on the Company’s equity securities classified as available-for-sale are included in accumulated other comprehensive income as a separate component of  stockholders’ equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such equity securities until their full cost can be recovered, in which case such equity securities are written down to fair value and the loss is charged to other-than-temporary impairment losses recognized in earnings.

A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.  To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.  Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, market conditions, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method.  Dividend and interest income are recognized when earned.

The Company regularly invests in mortgaged-backed securities and other securities subject to prepayment and call risk.  Significant changes in prevailing interest rates may adversely affect the timing and amount of cash flows on such securities.  In addition, the amortization of market premium and accretion of market discount for mortgaged-backed securities is based on historical experience and estimates of future payment speeds on the underlying mortgage loans.  Actual prepayment speeds may differ from original estimates and may result in material adjustments to amortization or accretion recorded in future periods.

 

Revenue Recognition

a.

Managed Care

Subscriber premiums on the managed care business are billed in advance of their respective coverage period and the related revenue is recorded as earned during the coverage period.  Managed care premiums are billed in the month prior to the effective date of the policy with a grace period of up to two months.  If the insured fails to pay, the policy can be cancelled at the end of the grace period at the option of the Company.  Premiums for the Medicaid business are based on a bid contract with ASES and billed in advance of coverage period.  Under the risk-based Medicaid contract, there is an excess profit agreement which stipulates that the profit of TSS for each fiscal year of the contract term shall not exceed two and a half percentage (2.5%) of the fixed amount paid by ASES for each member.  In the event that the profit exceeds this amount, TSS and ASES shall share the excess profit in proportions of fifty percent (50%), subject to the compliance by TSS with certain quality metrics.  ASES retains the right to determine the outcome of the excess profit agreement that is based on audited financial statements of the contracted services submitted annually by TSS and the validation of the Incurred-But-Not-Reported (“IBNR”) reserve by ASES’s actuary.  We estimate the effect of the following arrangements on a monthly basis and reflect the adjustments to premium revenue in current operations.  We report any estimated net amounts due to ASES within accounts payable and accrued liabilities in the consolidated balance sheets. As the contract year progresses and additional information becomes available, any excess profit will be recorded in the operating results of the period in which the information becomes available.

Premiums for the Medicare Advantage (MA) business are based on a bid contract with the Centers for Medicare and Medicaid Services (CMS) and billed in advance of the coverage period.  MA contracts provide for a risk factor to adjust premiums paid for members that represent a higher or lower risk to the Company.  Retroactive rate adjustments are made periodically based on the aggregate health status and risk scores of the Company’s MA membership.  These risk adjustments are evaluated quarterly, based on actuarial estimates.  Actual results could differ from these estimates.  We recognize periodic changes to risk-adjusted premiums as revenue when the amounts are determinable and collections is reasonably assured, which is possible as additional diagnosis code information is reported to CMS, when the ultimate adjustments settlements are received from CMS, or we receive notification of such settlement amounts. The data provided to CMS to determine members’ risk scores is subject to audit by CMS even after the annual settlement occur, which may result in the refund of premiums to CMS. As additional information becomes available, the recorded estimate is revised and reflected in operating results in the period in which it becomes available.

Prescription drug coverage is offered to Medicare eligible beneficiaries as part of MA plans (MA-PD) and until 2014, on a stand-alone basis (stand-alone PDP).  Premiums are based on a bid contract with CMS that considers the estimated costs of providing prescription drug benefits to enrolled participants.  MA-PD and stand-alone PDP premiums are subject to adjustment, positive or negative, based upon the application of risk corridors that compare the estimated prescription drug costs included in the bids to CMS to actual prescription drug costs.  Variances exceeding certain thresholds may result in CMS making additional payments or in CMS requesting a refund for a portion of the premiums collected.  The Company estimates and records adjustments to earned premiums related to estimated risk corridor payments based upon actual prescription drug costs for each reporting period as if the annual contract were to end at the end of each reporting period.

 

Administrative service fees include revenue from certain groups which have managed care contracts that provide for the group to be at risk for all or a portion of their claims experience.  For these groups, the Company is not at risk and only handles the administration of managed care coverage for an administrative service fee.  The Company pays claims under commercial self-funded arrangements from its own funds, and subsequently receives reimbursement from these groups.  Until March 31, 2015, the claims related to the administration of the Medicaid business under the ASO delivery model were paid from a bank account owned and funded by the Government of Puerto Rico.  Claims paid under self-funded arrangements are excluded from the claims incurred in the accompanying consolidated financial statements.  Administrative service fees under the self-funded arrangements are recognized based on the group’s membership or incurred claims for the period multiplied by an administrative fee rate plus other fees.  In addition, some of these self-funded groups purchase aggregate and/or specific stop-loss coverage.  In exchange for a premium, the group’s aggregate liability or the group’s liability on any one episode of care is capped for the year.  Premiums for the stop-loss coverage are actuarially determined based on experience and other factors and are recorded as earned over the period of the contract in proportion to the coverage provided.  This fully insured portion of premiums is included within the premiums earned, net in the accompanying consolidated statements of earnings.  The Medicaid contract with the Government of Puerto Rico to administer the provision of the physical health component of this program contained a savings-sharing provision whereby the Government of Puerto Rico shared with TSS a portion of the medical cost savings obtained with the administration of the regions served on an administrative service basis.  Any savings-sharing amount was recorded when earned as administrative service fees in the accompanying consolidated statements of earnings.

b.

Life and Accident and Health Insurance

Premiums on life insurance policies are billed in advance of their respective coverage period and the related revenue is recorded as earned when due.  Premiums on accident and health and other short‑term policies are recognized as earned primarily on a pro rata basis over the contract period.  Premiums on credit life policies are recognized as earned in proportion to the amounts of insurance in‑force.  Revenues from universal life and interest sensitive policies represent amounts assessed against policyholders, including mortality charges, surrender charges actually paid, and earned policy service fees.  The revenues for limited payment contracts are recognized over the period that benefits are provided rather than on collection of premiums.

c.

Property and Casualty Insurance

Premiums on property and casualty contracts are billed in advance of their respective coverage period and they are recognized as earned on a pro rata basis over the policy term.  The portion of premiums related to the period prior to the end of coverage is recorded in the consolidated balance sheets as unearned premiums and is transferred to premium revenue as earned.

 

Allowance for Doubtful Receivables

The allowance for doubtful receivables is based on management’s evaluation of the aging of accounts and such other factors which deserve current recognition, including the continued deterioration of the local economy, the exposure to government accounts, and the challenging business environment in the island.  This evaluation is performed individually on larger accounts and includes the use of all available information such as the customer’s credit worthiness and other relevant information.  Actual losses could differ from these estimates.  Receivables are charged-off against their respective allowance accounts when deemed to be uncollectible.

Deferred Policy Acquisition Costs and Value of Business Acquired

Certain direct costs for acquiring successful life and accident and health, and property and casualty insurance segment are deferred by the Company.  Substantially all acquisition costs related to the managed care segment are expensed as incurred.

In the life and accident and health segment deferred acquisition costs consist of commissions and certain expenses related to the production of life, annuity, accident and health, and credit business.  In the event that future premiums, in combination with policyholder reserves and anticipated investment income, could not provide for all future maintenance and settlement expenses, the amount of deferred policy acquisition costs would be reduced to provide for such amount.  The related amortization is provided over the anticipated premium-paying period of the related policies in proportion to the ratio of annual premium revenue to expected total premium revenue to be received over the life of the policies.  Interest is considered in the amortization of deferred policy acquisition cost and value of business acquired.  For these contracts interest is considered at a level rate at the time of issue of each contract, 5.15% for 2016, from 4.50% to 4.90% for 2015 and 4.90% for 2014, and, in the case of the value of business acquired, at the time of any acquisition.

For certain other long-duration contracts, deferred amounts are amortized at historical and forecasted credited interest rates.  Expected premium revenue is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits.  The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated net realizable value.  In determining estimated net realizable value, the computations give effect to the premiums to be earned, related investment income, losses and loss-adjustment expenses, and certain other costs expected to be incurred as the premium is earned.

Costs deferred on universal life and interest sensitive products are amortized as a level percentage of the present value of anticipated gross profits from investment yields, mortality, expenses and surrender charges.  Estimates used are based on the Company’s experience as adjusted to provide for possible adverse deviations.  These estimates are periodically reviewed and compared with actual experience.  When it is determined that future expected experience differs significantly from that assumed, the estimates are updated for current and future issues which may result in a change or release of deferred policy acquisition costs amortization through the consolidated statement of earnings.

The value assigned to the life insurance in-force at the date of the acquisition is amortized using methods similar to those used to amortize the deferred policy acquisition costs of the life and accident and health segment.

In the property and casualty segment, acquisition costs consist of commissions incurred during the production of business and are deferred and amortized ratably over the terms of the policies.

 

 

Property and Equipment

Property and equipment are stated at cost.  Maintenance and repairs are expensed as incurred.  Depreciation is calculated on the straight-line method over the estimated useful lives of the assets.  Costs of computer equipment, programs, systems, installations, and enhancements are capitalized and amortized straight-line over their estimated useful lives.  The following is a summary of the estimated useful lives of the Company’s property and equipment:

Asset Category		Estimated Useful Life
Buildings		20 to 50 years
Building improvements		3 to 5 years
Leasehold improvements		Shorter of estimated useful
Office furniture		life or lease term 5 years
Computer software		3 to 10 years
Computer equipment, equipment, and automobiles		3 years

Long-Lived Assets, including Goodwill

Long‑lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of would be separately presented in the balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.  The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheets.

During 2014, the Company identified events that indicated that the carrying amount of the intangible assets purchased as part of the health clinic acquisition may not be recoverable.  As such, the Company performed an impairment analysis on those intangible assets and based on the results of the test, an impairment charge of $2,221 was recorded caused by the carrying value being greater than its fair value.  After the impairment charge, which is included within the consolidated operating expenses, there is no remaining carrying value of the acquired intangible assets as of December 31, 2014 related to the health clinic acquisition.  During 2016 and 2015, impairment tests on the remaining intangible assets were performed and based on the results of the tests no impairment was recorded.

Goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.  For goodwill, the impairment determination is made at the reporting unit level.  The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test.  The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.  If determined to be necessary, the two-step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).   First, the Company determines the fair value of a reporting unit and compares it to its carrying amount.  Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.  The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.  The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

 

The annual impairment test is based on an evaluation of estimated future discounted cash flows.  The estimated discounted cash flows are based on the best information available, including supportable assumptions and projections we believe are reasonable. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account the operating plans and strategies of our operating segments. Certain other key assumptions utilized, including changes in membership, premium, health care costs, operating expenses, fees, assessments and taxes and effective tax rates, are based on estimates consistent with those utilized in our annual budgeting and planning process that we believe are reasonable. However, if we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion of our goodwill, which would adversely affect our operating results in the period of impairment. Impairments, if any, would be classified as an operating expense.

Claim Liabilities

Claim liabilities for managed care policies represent the estimated amounts to be paid to providers based on experience and accumulated statistical data.  Loss-adjustment expenses related to such claims are currently accrued based on estimated future expenses necessary to process such claims. Managed care claim liabilities also include a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of reserves. This provision for adverse deviation is intended to capture the potential adverse development from known environmental factors such as our entry into new geographical markets, changes in our geographic or product mix, the introduction of new customer populations, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional situations that require judgmental adjustments in setting the reserves for claims.

The Company contracts with various independent practice associations (IPAs) for certain medical care services provided to some policies subscribers.  The IPAs are compensated on a capitation basis and capitation payables are included in claim liabilities.

Claim liabilities include unpaid claims and loss-adjustment expenses of the life and accident and health segment based on a case-basis estimate for reported claims, and on estimates, based on experience, for unreported claims and loss-adjustment expenses.  The liability for policy and contract claims and claims expenses has been established to cover the estimated net cost of insured claims.

Also included within the claim liabilities is the liability for losses and loss-adjustment expenses for the property and casualty segment which represents individual case estimates for reported claims and estimates for unreported losses, net of any salvage and subrogation based on past experience modified for current trends and estimates of expenses for investigating and settling claims.

 

Claim liabilities are necessarily based on estimates and, while management believes that the amounts are adequate, the ultimate liability may be in excess of or less than the amounts provided.  The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in the consolidated statements of earnings in the period determined.

Future Policy Benefits

The liability for future policy benefits has been computed using the level‑premium method based on estimated future investment yield, mortality, morbidity and withdrawal experience.  The assumptions are established at the time the policy is issued and are generally not changed during the life of the policy.  The Company periodically reviews the adequacy of reserves for these policies on an aggregate basis using actual experience. If actual experience is significantly adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required. The interest rate assumption ranges between 3.90% and 5.75% for all years in issue.

Mortality has been calculated principally on select and ultimate tables in common usage in the industry.  Withdrawals have been estimated principally based on industry tables, modified by Company’s experience.  The Company periodically reviews the adequacy of reserves for these policies on an aggregate basis using actual experience. If actual experience is significantly adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required.

Policyholder Deposits

Amounts received for annuity contracts are considered deposits and recorded as a liability along with the accrued interest and reduced for charges and withdrawals.  Interest incurred on such deposits, which amounted to $3,182, $3,379, and $3,510, during the years ended December 31, 2016, 2015, and 2014, respectively, is included within the interest expense in the accompanying consolidated statements of earnings.

Policyholder account balances for universal life and interest sensitive products are equal to policy account values. The policy account primarily comprises cumulative deposits received and interest credited to the policyholder less cumulative contract benefits, surrenders, withdrawals, maturities and contract charges for mortality or administrative expenses.  Interest rates credited to policyholder account balances during 2016 range from 1.25% to 4.5%, and during 2015 range from 2.0% to 4.5% for universal life and interest sensitive products.  The universal life and interest sensitive products represented $69,445 and $62,840 of the policyholder deposits balance on the consolidated balance sheets as of December 31, 2016 and 2015, respectively.

Reinsurance

In the normal course of business, the insurance-related subsidiaries seek to limit their exposure that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.

Reinsurance premiums, commissions, and expense reimbursements, related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.  Accordingly, reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of insurance protection provided.

 

 

Premiums ceded and recoveries of losses and loss-adjustment expenses have been reported as a reduction of premiums earned and losses and loss-adjustment expenses incurred, respectively.  Property and casualty commission and expense allowances received in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly.  Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy.

Income Taxes

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of earnings in the period that includes the enactment date.  The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.  Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.  Changes in recognition or measurement are reflected in the period in which the change in circumstances occurs.

The Company records any interest and penalties related to unrecognized tax benefits within the operating expenses in the consolidated statement of earnings.

The holding company within the TSA group of companies is a U.S.-based company that has not recorded a U.S. deferred tax liability for the excess of the book basis over the tax basis of its investments in Puerto Rico corporations.  TSA has not recorded a deferred tax liability to the extent that the basis difference results from outside basis difference created as a result of the business combination and earnings that meet the indefinite reversal criteria. The indefinite reversal criteria is met if the Puerto Rico subsidiary has invested, or will invest, the undistributed earnings indefinitely. The decision as to the amount of undistributed earnings intended to be maintained in Puerto Rico corporations takes into account several items including, but not limited to, actual results of operations, forecasts and budgets of financial needs of cash for working capital, liquidity plans, capital improvement programs, merger and acquisition plans as well as expected cash requirements in the U.S. or in other Puerto Rico subsidiaries from the U.S.-based company.

Health Insurance Providers Fee

The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (ACA) mandates an annual Health Insurance Providers Fee (HIP Fee).  The annual HIP Fee, which was effective January 1, 2014, becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk each applicable calendar year.  The initial estimated annual fee is accrued as of January 1, with a corresponding deferred cost that is amortized over 12 months on a straight line basis. The fee payment is due on September 30 of each year. The Company incurred approximately $44,100, $34,500 and $27,700 of such fees in 2016, 2015 and 2014, respectively, which are presented within the consolidated operating expenses.

 

 

Insurance-Related Assessments

The Company records a liability for insurance-related assessments when the following three conditions are met: (1) the assessment has been imposed or the information available prior to the issuance of the financial statements indicates it is probable that an assessment will be imposed; (2) the event obligating an entity to pay (underlying cause of) an imposed or probable assessment has occurred on or before the date of the financial statements; and (3) the amount of the assessment can be reasonably estimated.  A related asset is recognized when the paid or accrued assessment is recoverable through either premium taxes or policy surcharges.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.  Legal costs incurred in connection with loss contingencies are expensed as incurred.  Recoveries of costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related liability.

Share‑Based Compensation

Share-based compensation is measured at the fair value of the award and recognized as an expense in the financial statements over the vesting period.

Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income available to all classes of common stockholders by the weighted average number of all classes of common shares outstanding for the period, excluding non-vested restricted stocks.  Diluted earnings per share is computed in the same manner as basic earnings per share except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.  Dilutive common shares are included in the diluted earnings per share calculation using the treasury stock method.

Recently Issued Accounting Standards

On January 5, 2016, the 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, if any, 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. Companies are required to adopt the new guidance using a modified retrospective approach for annual and interim periods beginning after December 31, 2018.  We are currently evaluating the impact, if any, the adoption of this guidance may have on the Company's consolidated financial statements.

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.  The guidance related to when excess tax benefits are recognized will be adopted through a modified retrospective approach by means of a cumulative-effect adjustment to equity as of January 1, 2017.  The provisions related to the recognition of excess tax benefits in the income statements and classification in the statement of cash flows will be adopted prospectively.  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.  As the majority of the Company’s revenues are not subject to the new guidance, the adoption of this guidance should not have a material impact on the Company’s consolidated financial position, result of operations, equity or cash flows. 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.

On December 14, 2016, the FASB issued guidance that amended the Master Glossary of the Accounting Standards Codification (ASC), including simplification and minor improvements to Codification topics and subtopics regarding insurance and troubled debt restructuring that result in numerous editorial changes to the Codification, but are not expected to affect current accounting practice or result in any significant costs.  However, there are six amendments that clarify guidance or correct references in the Codification, and could potentially result in changes in current practice because of either misapplication or misunderstanding of current guidance, including amendments to (1) Property, Plant, and Equipment—Real Estate Sales; (2) Fair Value Measurement; (3) Transfers and Servicing —Sales of Financial Assets; (4) Liabilities—Obligations Resulting from Joint and Several Liability Arrangements; (5) Transfers and Servicing—Servicing Assets and Liabilities; and (6) Intangibles—Goodwill and Other— Internal-Use Software.  The transition guidance for the first five amendments must be applied prospectively because they could potentially involve the use of hindsight that includes fair value measurements.  Other than as indicated above, the amendments in this guidance are effective upon issuance for both public entities and nonpublic entities.  The Company adopted this guidance upon issuance with no impact on our financial position and results of operations.

Other than the accounting pronouncements disclosed above, there were no other new accounting pronouncements issued that could have a material impact in the Company’s financial position, operating results or financials statement disclosures.

 

3.	Investment in Securities

 

The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at December 31, 2016 and 2015, were as follows:

		2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Securities available for sale
Fixed maturities
Obligations of government-sponsored enterprises		$	41,442			$	87			$	(15	)		$	41,514
U.S. Treasury securities and obligations of U.S. government instrumentalities			85,652				157				(9	)			85,800
Obligations of the Commonwealth of Puerto Rico and its instrumentalities			17,930				2,189				(68	)			20,051
Municipal securities			650,175				34,187				(559	)			683,803
Corporate bonds			263,351				12,182				(661	)			274,872
Residential mortgage-backed securities			684				34				-				718
Collateralized mortgage obligations			45,069				58				(242	)			44,885
Total fixed maturities			1,104,303				48,894				(1,554	)			1,151,643
Equity securities-Mutual funds			240,699				30,101				(451	)			270,349
Total		$	1,345,002			$	78,995			$	(2,005	)		$	1,421,992

 

		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

		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 instrumentalties		$	619			$	158			$	-			$	777
Residential mortgage-backed securities			191				18				-				209
Certificates of deposits			2,026				-				-				2,026
		$	2,836			$	176			$	-			$	3,012

 

		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 instrumentalties		$	620			$	178			$	-			$	798
Residential mortgage-backed securities			191				17				-				208
Certificates of deposits			2,118				-				-				2,118
		$	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 December 31, 2016 and 2015 were as follows:

		2016
		Less than 12 months												12 months or longer												Total
		Estimated Fair Value				Gross Unrealized Loss				Number of Securities				Estimated Fair Value				Gross Unrealized Loss				Number of Securities				Estimated Fair Value				Gross Unrealized Loss				Number of Securities
Securites available for sale
Fixed maturities
Obligations of government-sponsored enterprises		$	9,483			$	(15	)			1			$	-			$	-				-			$	9,483			$	(15	)			1
U.S. Treasury securities and obligations of U.S. governmental instrumentalities			12,937				(9	)			1				-				-				-				12,937				(9	)			1
Obligations of the Commonwealth of Puerto Rico and its instrumentalities			7,758				(68	)			5				-				-				-				7,758				(68	)			5
Municipal securities			84,252				(559	)			13				-				-				-				84,252				(559	)			13
Corporate bonds			105,054				(661	)			22				-				-				-				105,054				(661	)			22
Collateralized mortgage obligations			32,120				(239	)			8				784				(3	)			1				32,904				(242	)			9
Total fixed maturities			251,604				(1,551	)			50				784				(3	)			1				252,388				(1,554	)			51
Equity securities-Mutual funds			22,615				(451	)			4				-				-				-				22,615				(451	)			4
Total for securities available for sale		$	274,219			$	(2,002	)			54			$	784			$	(3	)			1			$	275,003			$	(2,005	)			55

 

		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

		Amortized Cost				Estimated Fair Value
Securities available for sale
Due in one year or less		$	11,010			$	11,116
Due after one year through five years			343,904				347,140
Due after five years through ten years			144,748				152,225
Due after ten years			558,888				595,559
Residential mortgage-backed securities			684				718
Collateralized mortgage obligations			45,069				44,885
		$	1,104,303			$	1,151,643
Securities held to maturity
Due in one year or less		$	2,026			$	2,026
Due after ten years			619				777
Residential mortgage-backed securities			191				209
		$	2,836			$	3,012

		2016				2015				2014
Realized gains (losses)
Fixed maturity securities
Securities available for sale
Gross gains from sales		$	3,086			$	8,208			$	5,118
Gross losses from sales			(2,744	)			(646	)			(5,884	)
Gross losses from other-than-temporary impairments			-				(4,267	)			(1,170	)
Total fixed maturity securities			342				3,295				(1,936	)
Equity securities
Securities available for sale
Gross gains from sales			19,674				17,903				20,848
Gross losses from sales			(1,203	)			(1,312	)			(2,106	)
Gross losses from other-than-temporary impairments			(1,434	)			(945	)			-
Total equity securities			17,037				15,646				18,742
Net realized gains on securities available for sale			17,379				18,941				16,806
Gross gain from other investment			-				-				1,425
Net realized gains on securities		$	17,379			$	18,941			$	18,231

		2016				2015				2014
Changes in unrealized gains (losses)
Recognized in accumulated other comprehensive income (loss)
Fixed maturities – available for sale			1,953				(25,227	)			46,220
Equity securities – available for sale			2,172				(19,479	)			(5,620	)
		$	4,125			$	(44,706	)		$	40,600
Not recognized in the consolidated financial statements
Fixed maturities – held to maturity		$	(19	)		$	(24	)		$	49

		Years ended December 31
		2016				2015				2014
Fixed maturities		$	37,139			$	36,256			$	38,559
Equity securities			9,666				7,146				7,660
Policy loans			619				557				545
Cash equivalents and interest-bearing deposits			257				143				117
Other			1,232				1,072				659
Total		$	48,913			$	45,174			$	47,540

		2016				2015
Premium		$	91,528			$	92,600
Self-funded group receivables			57,728				73,552
FEHBP			14,321				13,859
Agent balances			25,495				25,424
Accrued interest			13,668				12,624
Reinsurance recoverable			58,295				48,506
Other			62,637				53,325
			323,672				319,890
Less allowance for doubtful receivables:
Premium			27,320				28,944
Other			9,987				8,300
			37,307				37,244
Premium and other receivables, net		$	286,365			$	282,646

		DPAC				VOBA				Total
Balance, December 31, 2013		$	140,928			$	36,361			$	177,289
Additions			48,723				-				48,723
VOBA interest at an average rate of 5.17%			-				1,726				1,726
Amortization			(37,895	)			(5,743	)			(43,638	)
Net change			10,828				(4,017	)			6,811
Balance, December 31, 2014			151,756				32,344				184,100
Additions			48,599				-				48,599
VOBA interest at an average rate of 5.15%			-				1,543				1,543
Amortization			(38,624	)			(4,970	)			(43,594	)
Net change			9,975				(3,427	)			6,548
Balance, December 31, 2015			161,731				28,917				190,648
Additions			47,742				-				47,742
VOBA interest at an average rate of 5.15%			-				1,381				1,381
Amortization			(40,848	)			(4,136	)			(44,984	)
Net change			6,894				(2,755	)			4,139
Balance, December 31, 2016		$	168,625			$	26,162			$	194,787

Year ending December 31:
2017		$	3,582
2018			2,597
2019			2,279
2020			2,009
2021			2,075

		2016				2015
Land		$	10,976			$	10,976
Buildings and leasehold improvements			64,828				63,967
Office furniture and equipment			24,234				22,869
Computer equipment and software			114,749				113,223
Automobiles			593				494
			215,380				211,529
Less accumulated depreciation and amortization			149,011				137,576
Property and equipment, net		$	66,369			$	73,953

		2016
		Level 1				Level 2				Level 3				Total
Securities available for sale
Fixed maturity securities
Obligations of government-sponsored enterprises		$	-			$	41,514			$	-			$	41,514
U.S. Treasury securities and obligations of U.S. government instrumentalities			85,800				-				-				85,800
Obligations of the Commonwealth of Puerto Rico and its instrumentalities			-				20,051				-				20,051
Municipal securities			-				683,803				-				683,803
Corporate Bonds			-				274,872				-				274,872
Residential agency mortgage-backed securities			-				718				-				718
Collaterized mortgage obligations			-				44,885				-				44,885
Total fixed maturities			85,800				1,065,843				-				1,151,643
Equity securities - Mutual funds			166,595				76,222				27,532				270,349
		$	252,395			$	1,142,065			$	27,532			$	1,421,992

		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
Collaterized 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
		$	330,352			$	992,406			$	7,958			$	1,330,716

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		2016				2015				2014
Balance as of January 1,		$	7,958			$	13,349			$	17,910
Realized gains			324				1,538				2,552
Unrealized in other accumulated comprehensive income			(1,458	)			(4,207	)			(2,937	)
Purchases			23,991				1,207				501
Sales			-				-				-
Capital Distributions			(3,283	)			(3,929	)			(4,677	)
Balance as of December 31,		$	27,532			$	7,958			$	13,349

		2016
		Carrying				Fair Value
		Value				Level 1				Level 2				Level 3				Total
Assets:
Policy loans		$	8,564			$	-			$	8,564			$	-			$	8,564
Liabilities:
Policyholder deposits		$	179,382			$	-			$	179,382			$	-			$	179,382
Long-term borrowings:
Loans payable to bank - variable			11,187				-				11,187				-				11,187
6.6% senior unsecured notes payable			24,000				-				24,000				-				24,000
Total long-term borrowings			35,187				-				35,187				-				35,187
Total liabilities		$	214,569			$	-			$	214,569			$	-			$	214,569

		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

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance										As of December 31, 2016
		Incurred amount												(in thousands)
Incurred Year		(unaudited) 2015					2016			Total of IBNR Liabilities Plus Expected Development on Reported Claims				Cumulative Number of Reported Claims
2015		$	2,216,330				2,207,283				75,431				17,830
2016							2,356,592				273,040				16,633
		Total				$	4,563,875

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Incurred Year			(unaudited) 2015					2016
2015			$	1,868,607				2,131,852
2016								2,083,552
			Total				$	4,215,404
All outstanding liabilities before 2015, net of reinsurance								576
Liabilities for claims and claim adjustment expenses, net of reinsurance							$	349,047

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																																										As of December 31, 2016
Incurred Year		Incurred amount																																								Total of IBNR Plus Expected Development on Reported Claims				Cumulative Number of reported claims
		(unaudited)				(unaudited)				(unaudited)				(unaudited)				(unaudited)				(unaudited)				(unaudited)				(unaudited)				(unaudited)
		2007				2008				2009				2010				2011				2012				2013				2014				2015				2016
2007		$	51,531			$	49,555			$	47,673			$	45,836			$	45,380			$	45,654			$	45,534			$	45,534			$	45,515			$	45,604			$	27				15,762
2008							49,095				48,812				46,443				45,941				45,541				47,658				45,909				45,535				45,571				142				16,089
2009											51,778				51,760				50,848				51,298				51,564				51,315				51,485				51,293				177				18,013
2010															54,226				54,090				55,266				56,400				57,115				57,386				57,242				482				20,918
2011																			51,315				50,287				51,105				50,776				51,895				52,099				656				20,222
2012																							49,040				49,856				48,900				49,817				48,945				1,565				22,366
2013																											52,343				51,030				49,606				49,168				2,274				22,045
2014																															48,430				45,410				43,707				3,377				20,085
2015																																			45,067				40,175				6,160				18,912
2016																																							48,127				16,806				19,897
																																		Total				$	481,931

Cumulative Paid claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Incurred Year
		(unaudited) 2007				(unaudited) 2008				(unaudited) 2009				(unaudited) 2010				(unaudited) 2011				(unaudited) 2012				(unaudited) 2013				(unaudited) 2014				(unaudited) 2015				2016
2007		$	20,912			$	31,298			$	36,287			$	39,477			$	41,918			$	43,203			$	44,007			$	44,470			$	44,835			$	45,133
2008							23,715				32,834				37,420				40,332				41,847				43,787				44,426				44,703				44,867
2009											23,843				35,327				41,810				45,838				48,637				49,709				50,196				50,371
2010															27,118				38,964				45,409				49,808				52,890				54,027				54,996
2011																			24,534				34,835				41,606				44,996				47,908				49,598
2012																							22,677				33,620				40,406				43,663				45,607
2013																											21,376				33,249				38,979				42,840
2014																															18,752				28,657				33,809
2015																																			17,063				24,935
2016																																							20,099
																																						$	412,255
																			All Outstanding liabilities before 2007, net of reinsurance																				1,415
																			Liabilities for claims and claims adjustment expenses, net of reinsurance																			$	71,091

		(unaudited) 2007				(unaudited) 2008				(unaudited) 2009				(unaudited) 2010				(unaudited) 2011				(unaudited) 2012				(unaudited) 2013				(unaudited) 2014				(unaudited) 2015				(unaudited) 2016
Average			45.6	%			21.6	%			11.9	%			7.1	%			4.8	%			2.9	%			1.5	%			0.7	%			0.6	%			0.7	%

		As of December 31, 2016
Net outstanding liabilities
Managed Care		$	349,047
Property and Casualty			71,091
Other short-duration insurance lines			102
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance			420,240
Reinsurance recoverable on unpaid claims - Property and Casualty			25,885
Insurance lines other than short-duration			42,757
Intersegment Elimination			(939	)
Total gross liability for unpaid claims and claim adjustment expense		$	487,943

		2016				2015
Senior unsecured notes payable of $60,000 issued on
December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%.		$	24,000			$	24,000
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.23% at December 31, 2015.)			-				12,827
Secured loan payable of $11,187, payable in monthly installments of $137 through October 1, 2023, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.77% at December 31, 2016.)			11,187				-
Total borrowings			35,187				36,827
Less unamortized debt issuance costs			102				-
		$	35,085			$	36,827

Year ending December 31
2017			1,640
2018			1,640
2019			1,640
2020			25,640
2021			1,640
Thereafter			2,987
		$	35,187

		Premiums Earned												Claims Incurred(1)
		2016				2015				2014				2016				2015				2014
Gross		$	2,949,673			$	2,847,288			$	2,199,351			$	2,458,447			$	2,313,191			$	1,748,972
Ceded			(59,032	)			(64,134	)			(70,785	)			(15,008	)			(19,430	)			(25,184	)
Net		$	2,890,641			$	2,783,154			$	2,128,566			$	2,443,439			$	2,293,761			$	1,723,788

		2016				2015				2014
Current income tax expense		$	1,981			$	10,169			$	22,551
Deferred income tax benefit			(8,326	)			(5,070	)			(21,806	)
Total income tax (benefit) expense		$	(6,345	)		$	5,099			$	745

		2016				2015				2014
Income before taxes		$	11,086			$	57,131			$	66,051
Statutory tax rate			39.00	%			39.00	%			39.00	%
Income tax expense at statutory rate			4,324				22,281				25,760
Increase (decrease) in taxes resulting from
Exempt interest income, net			(5,158	)			(6,041	)			(7,139	)
Effect of taxing life insurance operations as a qualified domestic life insurance company instead of as a regular corporation			(5,033	)			(4,936	)			(5,572	)
Effect of taxing capital gains at a preferential rate			(3,799	)			(7,432	)			(14,248	)
Dividends received deduction			-				270				173
Adjustment to deferred tax assets and liabilities for changes in effective tax rates			1,669				(1,576	)			5,466
Other adjustments to deferred tax assets and liabilities			2,852				(58	)			(707	)
Effect of extraordinary dividend distribution from the Association - reported net of taxes in other income			(151	)			(875	)			-
Tax credit benefit			(709	)			(537	)			(1,482	)
Tax returns to provision true up			(181	)			(1,084	)			-
Effect of reassessment of unused credits for alternative minimum taxes paid			-				-				(6,486	)
Subtotal			(10,510	)			(22,269	)			(29,995	)
Other permanent disallowances, net:
Disallowed resolution agreements expense			-				1,716				-
Disallowance of expenses related to exempt interest income			58				-				46
Disallowed dividend received deduction			-				3,598				4,815
Disallowed interest expense			8				12				21
Other			-				61				282
Total other permanent differences			66				5,387				5,164
Other adjustments			(225	)			(300	)			(184	)
Total income tax (benefit) expense		$	(6,345	)		$	5,099			$	745

		2016				2015
Deferred tax assets
Allowance for doubtful receivables		$	10,070			$	13,434
Liability for pension benefits			10,624				21,416
Employee benefits plan			1,580				3,177
Postretirement benefits			772				1,252
Deferred compensation			2,041				1,818
Accumulated depreciation			1,137				1,240
Impairment loss on investments			2,035				1,749
Contingency reserves			-				30
Share-based compensation			4,393				4,875
Alternative minimum income tax credit			1,991				2,066
Purchased tax credits			6,062				931
Net operating loss			33,081				12,721
Difference in tax basis of investments portfolio			3,049				6,843
Accrued liabilities			2,133				2,402
Other			772				591
Gross deferred tax assets			79,740				74,545
Less: valuation allowance			(8,016	)			(7,839	)
Deferred tax assets			71,724				66,706
Deferred tax liabilities
Deferred policy acquisition costs			(6,621	)			(3,673	)
Catastrophe loss reserve			(8,020	)			(7,664	)
Unrealized gain on securities available for sale			(15,804	)			(15,021	)
Unamortized debt issue costs			(152	)			(29	)
Intangible asset			(2,195	)			(3,013	)
Accumulated depreciation			(14	)			(15	)
Gross deferred tax liabilities			(32,806	)			(29,415	)
Net deferred tax asset		$	38,918			$	37,291

		2016				2015
Change in benefit obligation
Benefit obligation at beginning of year		$	184,782			$	205,254
Service cost			3,640				4,137
Interest cost			8,749				8,281
Benefit payments			(12,911	)			(7,591	)
Actuarial (gain) loss			14,709				(25,299	)
Liability gain due to curtailment			(35,092	)			-
Benefit obligation at end of year		$	163,877			$	184,782
Accumulated benefit obligation at end of year		$	163,877			$	152,851
Change in fair value of plan assets
Fair value of plan assets at beginning of year		$	130,061			$	128,108
Actual return on assets			13,248				1,544
Employer contributions			10,000				8,000
Benefit payments			(12,911	)			(7,591	)
Fair value of plan assets at end of year		$	140,398			$	130,061
Funded status at end of year		$	(23,479	)		$	(54,721	)
Amounts in accumulated other comprehensive income not yet recognized as a component of net periodic pension cost
Development of prior service credit
Balance at beginning of year		$	(2,223	)		$	(2,673	)
Amortization			450				450
Curtailment/Settlement			1,773				-
Net prior service credit			-				(2,223	)
Development of actuarial loss
Balance at beginning of year			55,716				80,118
Amortization			(4,028	)			(5,939	)
(Gain)/Loss arising during the year			10,464				(18,463	)
Curtailment/Settlement gain during the year			(35,092	)			-
Actuarial net loss			27,060				55,716
Sum of deferrals		$	27,060			$	53,493
Net amount recognized		$	3,581			$	(1,228	)

		2016				2015
Discount rate			4.50	%			4.75	%
Rate of compensation increase			N/A			Graded; 3.50		%
						to 8.00		%

		2016				2015
Pension liability		$	23,479			$	54,721
Accumulated other comprehensive loss, net of a deferred tax of $7,191 and $17,500 in 2016 and 2015, respectively			19,869				35,993

		2016				2015				2014
Components of net periodic benefit cost
Service cost		$	3,640			$	4,137			$	3,589
Interest cost			8,749				8,281				8,287
Expected return on plan assets			(9,003	)			(8,380	)			(7,496	)
Prior service benefit			(450	)			(450	)			(450	)
Actuarial loss			4,028				5,939				4,134
Net periodic benefit cost		$	6,964			$	9,527			$	8,064

		2016				2015				2014
Discount rate			4.75	%			4.25	%			5.25	%
Expected return on plan assets			7.00	%			7.00	%			7.00	%
Rate of compensation increase		Graded; 3.50		%		Graded; 3.50		%		Graded; 3.50		%
		to 8.00		%		to 8.00		%		to 8.00		%

		2016
		Level 1				Level 2				Level 3				Total
Government obligations		$	-			$	6,276			$	-			$	6,276
Non-agency backed securities			-				715				-				715
Corporate obligations			-				7,243				-				7,243
Partnership/Joint venture			-				-				932				932
Limited Liability Corporations			-				98,188				-				98,188
Real estate			-				-				6,617				6,617
Registered investments			3,839				1,869				-				5,708
Common/Collective trusts			-				7,334				-				7,334
Hedge funds			-				4,581				-				4,581
Common stocks			1,515				1				-				1,516
Preferred stocks			107				12				-				119
Forward foreign currency contracts			-				(1	)			-				(1	)
Interest-bearing cash			2,224				-				-				2,224
Derivatives			-				27				-				27
		$	7,685			$	126,245			$	7,549			$	141,479

		2015
		Level 1				Level 2				Level 3				Total
Government obligations		$	-			$	9,009			$	-			$	9,009
Non-agency backed securities			-				745				-				745
Corporate obligations			-				10,865				-				10,865
Partnership/Joint venture			-				-				567				567
Limited Liability Corporations			-				60,417				-				60,417
Real estate			-				-				5,929				5,929
Registered investments			6,224				5,927				-				12,151
Common/Collective trusts			-				16,479				-				16,479
Hedge funds			-				8,284				-				8,284
Common stocks			1,985				-				-				1,985
Preferred stocks			121				-				-				121
Forward foreign currency contracts			-				3				-				3
Interest-bearing cash			550				-				-				550
Derivatives			-				(28	)			-				(28	)
		$	8,880			$	111,701			$	6,496			$	127,077

		Government Obligations				Corporate Obligations				Partnership/ Joint Venture				Real Estate				Hedge Funds				Total
Beginning balance at December 31, 2014		$	.				.				1,097				6,197				-			$	7,294
Actual return on program assets:
Relating to assets still held at the reporting date			-				-				103				384				-				487
Relating to assets sold during the period			-				-				(39	)			636				-				597
Purchases, issuances, and settlements			-				-				(594	)			(1,288	)			-				(1,882	)
Transfer in and/or out			-				-				-				-				-				-
Ending balance at December 31, 2015			-				-				567				5,929				-				6,496
Actual return on program assets:
Relating to assets still held at the reporting date			-				-				19				501				-				520
Relating to assets sold during the period			-				-				1				72				-				73
Purchases, issuances, and settlements			-				-				345				324				-				669
Transfer in and/or out			-				-				-				(209	)			-				(209	)
Ending balance at December 31, 2016		$	-			$	-			$	932			$	6,617			$	-			$	7,549

Year ending December 31
2017		$	8,253
2018			8,748
2019			9,047
2020			9,322
2021			9,314
2022 – 2026			49,252