● Net income for the year was $92.9 million, an increase from a net loss of $63.3 million for the prior year. The increase in net income primarily reflects the 2018 $128.7 million unfavorable prior period reserve development recognized in the Property and Casualty segment related to Hurricane Maria and the impact of the net unrealized gains on equity investments.
● Consolidated operating expenses for the year were $569.4 million and the operating expense ratio was 17.5%, 130 basis points lower than last year.
Consolidated operating expenses increased by $77.5 million, or 16.2%, to $554.7 million. The higher operating expenses are mostly the result of the reinstatement of the HIP Fee in 2018 and higher professional services and personnel costs related to the ongoing managed care initiatives. The consolidated expense ratio increased 200 basis points to 18.8%.
Consolidated income tax benefit for the year ended December 31, 2018 was $29.8 million, compared to an expense of $24.5 million during 2017, primarily due to a change in the effective tax rate of certain deferred tax liabilities in the Company’s Property and Casualty segment in order to reflect the expected tax rate at which they will reverse, and a change in the enacted tax rate, from 39% to 37.5% following the Puerto Rico income tax reform enacted in December 2018. These changes increased the deferred tax expense by approximately $9.5 million. The consolidated income tax expense also reflects the tax impact of net unrealized losses on equity investments and the lower operating income of the Managed Care segment.
● The medical claims incurred of the Medicaid business increased by $55.5 million, or 8.1%, during the 2019 period. The MLR at 95.4% was 690 basis points higher than the same period last year. The increased MLR reflects the higher required target MLR of the current Medicaid contract, the impact of the elimination of the HIP fee pass-through in 2019, and a timing difference in the recognition of member acuity in premiums. The current Medicaid contract requires a minimum MLR of 92%, including allocation of healthcare quality improvements expenses.
● The medical claims incurred of the Commercial business increased by $15.6 million, or 2.4%, during the 2019 period and its MLR, remained steady at 82.4% despite impact of the elimination of the HIP fee pass-through in 2019. The HIP Fee pass-through lowered the 2018 MLR by approximately 130 basis points.
● Medical premiums generated by the Medicare business increased by $95.0 million, or 9.2%, to $1,130.3 million, primarily reflecting an increase in the 2018 Medicare reimbursement rates fee-for-service benchmark for the first time since 2012, an increase in rates as the result of attaining a four-star rating in the Company’s 2018 HMO product, and higher average membership risk score. These increases were partially offset by lower enrollment by approximately 120,000 member months.
(1) As of December 31, 2019, our long-term borrowings consist of a credit agreement with a commercial bank in Puerto Rico. Short-term borrowings represents the outstanding balance of short-term facilities available to address timing differences between cash receipts and disbursements. See the “Financing and Financing Capacity” section for additional information regarding our long-term borrowings
As described above, completion factors and claims trend factors can have a significant impact on the determination of our claim liabilities. The following example provides the estimated impact on our December 31, 2019 claim liabilities, assuming the indicated hypothetical changes in completion and trend factors:
Claim reserve reviews are generally conducted on a quarterly basis, in light of continually updated information. Our actuary certifies reserves for both current and prior accident years using current claims data. These reviews incorporate a variety of actuarial methods, judgments, and analysis. For each line of business, a variety of actuarial methods are used, with the final selections of ultimate losses that are appropriate for each line of business selected based on the current circumstances affecting that line of business. These selections incorporate input from management, particularly from the claims, underwriting and operations divisions, about reported loss cost trends and other factors, including the severity and frequency of such claims, that could affect the reserve estimates.