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GTS > SEC Filings for GTS > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for TRIPLE-S MANAGEMENT CORP

Form 10-Q for TRIPLE-S MANAGEMENT CORP


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), the "Corporation", the "Company", "TSM", "we", "us" and "our" refer to Triple-S Management Corporation and its subsidiaries. The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and nine months ended September 30, 2012. Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2011 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the nine months ended September 30, 2012 included in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding Forward-Looking Information

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

Overview

We are one of the most significant players in the managed care industry in Puerto Rico with over 50 years of experience in this industry. We offer a broad portfolio of managed care and related products in the Commercial and Medicare (including Medicare Advantage and the Part D stand-alone prescription drug plan ("PDP")) markets. In the Commercial market we are the largest provider of managed care products. We offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Reform (a government of Puerto Rico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) ("Medicaid"), by administering the provision of the physical health component in designated service regions in Puerto Rico. For the nine months ended September 30, 2012, operating income generated under the Medicaid program represented 54% of our consolidated operating income. See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011 under the sub-caption "We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business."

We have the exclusive right to use the Blue Cross Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands. As of September 30, 2012 we serve approximately 1,700,000 members across all regions of Puerto Rico and U.S. Virgin Islands. For the nine months ended September 30, 2012, our managed care segment represented approximately 91% of our total consolidated premiums earned. We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. ("TSS") and Socios Mayores en Salud Holdings, Inc. (from now on referred to as "American Health" or "AH"). TSS is a Blue Cross Blue Shield Association ("BCBSA") licensee, which provides us with exclusive use of the Blue Cross Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands.


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We also have significant positions in the life insurance and property and casualty insurance markets. Our life insurance segment had a market share of approximately 13% (in terms of direct premiums) during the year ended December 31, 2011. Our property and casualty segment had a market share of approximately 8% (in terms of direct premiums) for the year ended December 31, 2011. We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. ("TSV") and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. ("TSP"), each one representing approximately 5% and 4%, respectively, of our consolidated premiums earned, net for the nine months ended September 30, 2012.

Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. Except as otherwise indicated, the numbers for each segment presented in this Quarterly Report on Form 10-Q do not reflect intersegment eliminations. These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income. The following table shows premiums earned, net and net fee revenue and operating income for each segment, as well as the intersegment premiums earned, service revenues and other intersegment transactions, which are eliminated in the consolidated results:

                                              Three months ended            Nine months ended
                                                 September 30,                September 30,
(Dollar amounts in millions)                  2012           2011          2012          2011
Premiums earned, net:
Managed care                               $    508.5      $   472.4     $ 1,532.8     $ 1,364.4
Life insurance                                   31.8           28.8          92.5          83.7
Property and casualty insurance                  25.9           24.9          71.7          74.5
Intersegment premiums earned                     (0.6 )         (0.7 )        (1.8 )        (2.1 )
Consolidated premiums earned, net          $    565.6      $   525.4     $ 1,695.2     $ 1,520.5
Administrative service fees:
Managed care                                     28.4      $     6.4     $    86.0     $    22.0
Intersegment administrative service fees         (1.2 )         (1.2 )        (3.5 )        (3.2 )
Consolidated administrative service fees   $     27.2      $     5.2     $    82.5     $    18.8
Operating income:
Managed care                               $      7.3      $    11.2     $    33.3     $    32.6
Life insurance                                    4.1            5.3          12.5          13.2
Property and casualty insurance                   1.9           (1.1 )         4.1           2.0
Intersegment and other                            2.2            1.2          (1.4 )         2.9
Consolidated operating income              $     15.5      $    16.6     $    48.5     $    50.7

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

Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. Each segment's results of operations depend in significant part on their ability to accurately predict and effectively manage claims. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period. Operating expenses consist primarily of compensation expenses, commission payments to brokers and other overhead business expenses.

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


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Recent Developments

Federal Regulation

On April 12, 2012, Centers for Medicare and Medicaid Services ("CMS") issued a final rule (the "2012 Final Rule"), effective June 1, 2012, to implement certain changes to the Medicare Advantage and Part D programs mandated by the Patient Protection and Affordable Care Act of 2010, as amended ("ACA"), including strengthening CMS' ability to remove poor performers from the Medicare Advantage and Part D programs beginning in 2015. Under the 2012 Final Rule, beginning with Medicare contract year 2015, CMS will have the authority to terminate its contract with any Medicare Advantage or Part D plan for substantial contract non-compliance, or refuse to renew such plan, if the plan fails to achieve an overall Star Rating of three stars (out of five) for any consecutive three (3) year period. Although CMS has issued annual Star Ratings for Part D plans since 2007 and for Medicare Advantage plans since 2008, CMS will use Star Ratings issued for Medicare contract years 2013 and beyond in implementing the 2012 Final Rule. Thus, contract year 2015 will be the first year in which CMS will have the authority under the 2012 Final Rule to terminate a Medicare Advantage or Part D plan from participation in the federal program based on a plan's ratings for contract years 2013, 2014 and 2015. CMS issues Star Ratings on a prospective basis, typically in the fall preceding the contract year. The 2012 Final Rule provides CMS the authority to use the lower Star Ratings as a means to invoke its existing authority under Section 1857(c)(2) of the Social Security Act to terminate a contract when CMS determines that the Medicare Advantage or Part D plan has failed to substantially carry out the contract or is carrying out the contract in a manner that is inconsistent with the efficient or effective administration of the Medicare Advantage or Part D program.

See Item 1A of Part II of this quarterly report on Form 10Q for the impact this regulatory development may potentially have on our Medicare Advantage and Part D plans.

Business Acquisition

On January 18, 2012, TSM completed the acquisition of 90.8% of the outstanding capital stock of a health clinic in Puerto Rico. The cost of this acquisition was approximately $3.5 million, funded with unrestricted cash. The consolidated results of operations and financial condition of the Corporation included in this Quarterly Report on Form 10-Q reflects the results of operations of this acquisition from January 18, 2012 and were included within our other non-reportable segments. We are currently in the process of completing the identification and valuation of intangible assets; thus, as of this date it is not possible to determine the allocation of the purchase price to the net assets acquired. For additional information regarding this acquisition, please see note 14 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Recent Accounting Standards

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


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Managed Care Membership

                                                     As of September 30,
                                                     2012           2011
Managed care enrollment:
Commercial 1                                          708,643       704,992
Medicare 2                                            122,925       107,053
Medicaid 3                                            872,496             -
Total                                               1,704,064       812,045
Managed care enrollment by funding arrangement:
Fully-insured                                         606,028       583,382
Self-insured                                        1,098,036       228,663
Total                                               1,704,064       812,045

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

(2) Includes Medicare Advantage as well as stand-alone PDP plan membership.

(3) We did not participate in the Medicaid segment during the first nine months of 2011. We resumed our participation in this sector in November 2011. All are self-funded members. For a description of the miSalud contract, see Item 1 of Part I of the Annual Report on Form 10-K for the year ended December 31, 2011 under the captions "General Description of Business and Recent Developments" and "Business-Customers-Medicaid."

Consolidated Operating Results

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

                                              Three months ended            Nine months ended
                                                 September 30,                September 30,
(Dollar amounts in millions)                  2012           2011          2012          2011
Revenues:
Premiums earned, net                       $    565.6      $   525.4     $ 1,695.2     $ 1,520.5
Administrative service fees                      27.2            5.2          82.5          18.8
Net investment income                            11.6           12.0          34.3          36.5
Other operating revenues                          1.2              -           3.3             -
Total operating revenues                        605.6          542.6       1,815.3       1,575.8
Net realized investment gains                       -            5.6           2.2          18.5
Net unrealized investment loss on
trading securities                                  -           (6.0 )           -          (7.3 )
Other income, net                                 0.6           (0.2 )         1.5           0.3
Total revenues                                  606.2          542.0       1,819.0       1,587.3
Benefits and expenses:
Claims incurred                                 485.5          442.4       1,457.4       1,272.9
Operating expenses                              104.6           83.6         309.4         252.2
Total operating expenses                        590.1          526.0       1,766.8       1,525.1
Interest expense                                  2.9            2.5           8.1           8.6
Total benefits and expenses                     593.0          528.5       1,774.9       1,533.7
Income before taxes                              13.2           13.5          44.1          53.6
Income tax expense                                1.5            1.9           7.8          14.5
Net income attributable to TSM             $     11.7      $    11.6     $    36.3     $    39.1


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Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Operating Revenues

Consolidated premiums earned, net increased by $40.2 million, or 7.7%, to $565.6 million during the three months ended September 30, 2012 when compared to the three months ended September 30, 2011; mostly due to an increase in Managed Care premiums resulting from higher member months enrollment in the Commercial and Medicare businesses and higher average Commercial per member per month premiums.

The consolidated administrative service fees of $27.2 million is $22.0 million, or 423.1%, higher in the 2012 period reflecting our higher amount of self-insured contracts after resuming our participation in the Medicaid sector.

Claims Incurred

Consolidated claims incurred increased by $43.1 million, or 9.7%, to $485.5 million during the three months ended September 30, 2012 when compared to the claims incurred during the three months ended September 30, 2011. This increase is primarily due to higher claims in the Managed Care segment resulting from higher utilization and cost trends in the Medicare and Commercial businesses. The claims incurred in the Life segment also increased during this period as the result of higher claims received in the Individual and Cancer lines of business and an increase in the liability for future policy benefits. The consolidated loss ratio increased by 160 basis points to 85.8%.

Operating Expenses

Consolidated operating expenses during the three months ended September 30, 2012 increased by $21.0 million, or 25.1%, to $104.6 million as compared to the operating expenses during the three months ended September 30, 2011. For the three months ended September 30, 2012, the consolidated operating expense ratio increased by 180 basis points to 17.6%, reflecting a higher amount of self-insured contracts after resuming our participation in the Medicaid sector.

Income Tax Expense

Consolidated income tax expense during the three months ended September 30, 2012 decreased by $0.4 million, to $1.5 million, as compared to the income tax expense during the three months ended September 30, 2011, as a result of a 270 basis points decrease in the effective tax rate, to 11.4% during the three months ended September 30, 2012. The lower effective tax rate results from a lower pretax income in the Managed Care segment, which operates at a higher effective tax rate.

Nine months Ended September 30, 2012 Compared to Nine months Ended September 30, 2011

Operating Revenues

Consolidated premiums earned, net increased by $174.7 million, or 11.5%, to $1,695.2 million during the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011. The increase was mostly the result of the higher member month enrollment in the Medicare and Commercial business, attributed to the new members acquired from AH on February 2011 and organic growth, as well as to the receipt of higher risk score adjustments from CMS in 2012 as compared to 2011.

The increase in administrative service fees of $63.7 million, or 338.8%, to $82.5 million in the 2012 period, is due to higher amount of self-insured contracts after resuming our participation in the Medicaid sector.

Net Realized Investment Gains

Consolidated net realized investment gains of $2.2 million during the 2012 period are the result of net realized gains from the sale of debt and equity securities.

Claims Incurred

Consolidated claims incurred increased by $184.5 million, or 14.5%, to $1,457.4 million during the nine months ended September 30, 2012 when compared to the claims incurred during the nine months ended September 30, 2011. This increased claims incurred of the Managed Care segment result from the additional business related to the AH acquisition and higher utilization and cost trends in the Medicare business. The Life and Property and Casualty segments also experienced increases in claims incurred. The consolidated loss ratio increased by 230 basis points to 86.0%.


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Operating Expenses

Consolidated operating expenses during the nine months ended September 30, 2012 increased by $57.2 million, or 22.7%, to $309.4 million as compared to the operating expenses during the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the consolidated operating expense ratio increased by 100 basis points to 17.4%, reflecting a higher amount of self-insured contracts after resuming our participation in the Medicaid sector effective November 1, 2011.

Income Tax Expense

Consolidated income tax expense during the nine months ended September 30, 2012 decreased by $6.7 million to $7.8 million as compared to the income tax expense during the nine months ended September 30, 2011. The consolidated income tax expense for the nine months ended September 30, 2011 includes a one-time charge of $6.4 million resulting from a reduction of the net deferred tax assets following the enactment of the new Puerto Rico tax reform, which was effective January 2011, that reduced the maximum corporate income tax rate from 39% to approximately 30%. This is offset in part by a higher contribution from the Managed Care segment, which operates at a higher effective tax rate.


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Managed Care Operating Results

                                               Three months ended               Nine months ended
                                                  September 30,                   September 30,
(Dollar amounts in millions)                  2012            2011             2012            2011
Operating revenues:
Medical premiums earned, net:
Commercial                                 $     240.5     $     234.4     $      724.9     $     703.2
Medicare                                         268.0           238.0            807.9           658.5
Medicaid                                             -               -                -             2.7
Medical premiums earned, net                     508.5           472.4          1,532.8         1,364.4
Administrative service fees                       28.4             6.4             86.0            22.0
Net investment income                              3.9             4.5             11.7            13.5
Total operating revenues                         540.8           483.3          1,630.5         1,399.9
Medical operating costs:
Medical claims incurred                          456.0           414.1          1,373.5         1,196.2
Medical operating expenses                        77.5            58.0            223.7           171.1
Total medical operating costs                    533.5           472.1          1,597.2         1,367.3
Medical operating income                   $       7.3     $      11.2     $       33.3     $      32.6
Additional data:
Member months enrollment:
Commercial:
Fully-insured                                1,448,985       1,440,393        4,375,260       4,362,829
Self-funded                                    676,007         670,150        2,007,635       2,058,365
Total Commercial member months               2,124,992       2,110,543        6,382,895       6,421,194
Medicare:
Medicare Advantage                             342,180         291,628        1,011,150         823,264
Stand-alone PDP                                 25,502          26,444           76,197          79,648
Total Medicare member months                   367,682         318,072        1,087,347         902,912
Medicaid member months - Self-funded         2,631,532               -        7,886,395               -
Total member months                          5,124,206       2,428,615       15,356,637       7,324,106
Medical loss ratio                                89.7 %          87.7 %           89.6 %          87.7 %
Operating expense ratio                           14.4 %          12.1 %           13.8 %          12.3 %

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Medical Operating Revenues

Medical premiums earned for the three months ended September 30, 2012 increased by $36.1 million, or 7.6%, to $508.5 million when compared to the medical premiums earned during the three months ended September 30, 2011. This increase is principally the result of the following:

? Medical premiums generated by the Medicare business increased during the three months ended September 30, 2012 by $30.0 million, or 12.6%, to $268.0 million. This fluctuation primarily results from the overall increase in the member months enrollment of this business by 49,610, or 15.6%, when compared with the same period in 2011. Increase in member months enrollment was attributed to increased sales across all our Medicare Advantage products, but mostly in the member months enrollment in our dual-eligible offerings, which increased by 31,984, or 24.5%, during the 2012 period.

? Medical premiums generated by the Commercial business increased by $6.1 million, or 2.6%, to $240.5 million during the three months ended September 30, 2012, primarily resulting from an increase in average premium rates in rated group policies of approximately 2% and to higher member months enrollment in the 2012 period.

Administrative service fees increased by $22.0 million, or 343.8%, to $28.4 million during the three months ended September 30, 2012. This fluctuation primarily results from the member months enrollment from the miSalud contract, which we resumed servicing effective November 1, 2011.


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Medical Claims Incurred

Medical claims incurred during the three months ended September 30, 2012 increased by $41.9 million, or 10.1%, to $456.0 million when compared to the three months ended September 30, 2011. The medical loss ratio ("MLR") of the segment increased 200 basis points during the 2012 period, to 89.7%. These fluctuations are primarily attributed to the effect of the following:

? The medical claims incurred of the Medicare business increased by $29.2 million, or 13.9% during 2012 and its MLR increased by 100 basis points, to 89.4% for the three months ended September 30, 2012. Excluding the effect of risk-score premium adjustments and prior period reserve developments the MLR increased by 610 basis points mostly as the result of higher utilization and cost trends, particularly in the pharmacy services across most of our offerings.

? The medical claims incurred of the Commercial business increased by $11.3 million, or 5.6%, during the 2012 period and its MLR increased by 250 basis points, primarily due to increased utilization trends and cost trends in 2012, . . .

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