Further details of the calculation of basic and diluted earnings per share are set forth in Notes 2 and 22 of the audited consolidated financial statements for the years ended December 31, 2018, 2017 and 2016.
We participate in the managed care market through our subsidiaries, TSS, TSB and TSA. TSS, TSA, and TSB are BCBSA licensees.
Consolidated premiums earned, net increased 4.0% year over year, to $2.9 billion, primarily reflecting higher Managed Care premiums;
Consolidated operating expenses for the year were $554.7 million and the operating expense ratio was 18.8%.
Net loss for the year was $63.3 million, a decrease from a net income of $54.5 million for the prior year, primarily reflecting the unfavorable prior period reserve development in the Property and Casualty segment related to the aforementioned hurricanes, the lower Managed Care utilization experienced in 2017 due to the aftermath of the hurricanes, and the impact of the net unrealized losses on equity investments. The unrealized loss on equity investments is due to the implementation effective January 1, 2018 of new accounting guidance that requires the change in unrealized gain (loss) of equity investments, previously recognized through comprehensive income, to be recorded through earnings.
Premium Revenue. Our revenue primarily consists of premiums earned from the sale of managed care products to the Commercial, Medicare Advantage and Medicaid sectors. We receive a monthly payment from or on behalf of each member enrolled in our managed care plans (excluding ASO). We recognize all premium revenue in our Managed Care segment during the month in which we are obligated to provide services to an enrolled member. Premiums we receive in advance of that date are recorded as unearned premiums.
Our results of operations depend in large part on our ability to maintain or grow our membership. In addition to driving revenues, membership growth is necessary to successfully introduce new products, maintain an extensive network of providers and achieve economies of scale. Our ability to maintain or grow our membership is affected principally by the competitive environment, the economy, and general market conditions.
Premiums earned, net increased by $111.7 million, or 4.0%, to $2.9 billion. This increase primarily reflects higher premiums in the Managed Care segment by $99.1 million. Most of the growth in managed care premiums was experienced in the Medicare business, reflecting the achievement of a four-star rated Medicare Advantage HMO contract this year, resulting in a 5% bonus applied to the benchmark used in the premium calculation, as well as an increase in the 2018 Medicare reimbursement rates. This increase was partially offset by lower managed care membership.
Net investment income increased $10.3 million, or 20.0%, to $61.9 million as a result of higher invested balances and interest rates.
The $36.5 million in consolidated net unrealized investment losses on equity investments reflects the impact of new accounting guidance implemented effective January 1, 2018, which requires the change in unrealized gain (loss) of equity investments, previously recorded through comprehensive income, to be recorded through earnings.
Premiums earned, net decreased by $63.7 million, or 2.2%, to $2.8 billion. This decrease primarily reflects lower premiums in the Managed Care segment by $58.5 million mainly due to lower membership in the segment’s Medicaid and Commercial businesses, the impact of the suspension of the HIP fee pass through, and lower Medicare additional risk score revenue. These decreases were partially offset by higher average premium rates in the Commercial and Medicaid businesses as well as by higher Medicare membership. Property and casualty premiums decreased by $10.7 million year over year, mostly reflecting the $9.2 million estimated catastrophe reinsurance reinstatement costs following the impact of Hurricanes Irma and Maria in September 2017.
We offer our products in the Managed Care segment to three distinct market sectors in Puerto Rico: Commercial, Medicare Advantage and Medicaid. For the year ended December 31, 2018, the Commercial, Medicare and Medicaid sectors represented 26.6%, 38.5% and 26.4% of our consolidated premiums earned, net, respectively.
Medical premiums earned increased by $99.1 million, or 3.8%, to $2.7 billion. This increase is principally the result of the following:
Medical premiums generated by the Commercial business decreased by $20.5 million, or 2.6%, to $782.8 million. This fluctuation primarily reflects lower fully-insured enrollment during the year of approximately 206,000 member months offset in part by $12.1 million related to the reinstatement of the HIP fee pass-through in 2018 and higher average premium rates.
Medical premiums generated by the Medicare business increased by $95.0 million, or 9.2%, to $1,130.3 million,
Medical premiums generated by the Medicaid business increased by $24.6 million, or 3.3%, to $776.0 million. This increase primarily reflects higher premiums rates effective July 1, 2017 and $14.5 million related to the reinstatement of the HIP fee pass-through. These increases were offset in part by a lower enrollment by approximately 76,000 in member months and the impact of the profit sharing accrual, which lowered 2018 premiums by $4.3 million. The lower membership reflects the lower membership assigned by ASES when implementing the current Medicaid contract, which was effective November 1, 2018. At the effective date of the current agreement TSS was assigned by ASES approximately 280,000 subscribers. After this date, subscribers had approximately three months to select their insurance carrier, during which time TSS was able to compete for membership across Puerto Rico. As of December 31, 2018, our Medicaid membership was approximately 319,000 members.
Medical premiums earned decreased by $58.5 million, or 2.2%, to $2.6 billion. This decrease is principally the result of the following:
Medical premiums generated by the Medicare business increased by $11.4 million, or 1.1%, to $1,035.3 million, primarily reflecting an increase in member months enrollment of approximately 63,100 lives. This increase is partially offset by lower additional risk score revenue by $30.9 million as well as lower average premium rates due to a reduction in the 2017 Medicare reimbursement rates.
Medical claims incurred decreased by $129.2 million, or 5.5%, to $2.2 billion. The MLR of the segment decreased 300 basis points during the 2017 period, to 85.6%. These fluctuations are primarily attributed to the net effect of the following:
The medical claims incurred of the Commercial business decreased by $94.5 million, or 13.2%, during the 2017 period and its MLR, at 77.5%, was 770 basis points lower than the same period last year. Adjusting for the effect of prior period reserve developments, the Commercial MLR would have been 77.9%, 590 basis points lower than the adjusted MLR for last year, primarily reflecting the estimated decrease in utilization caused by Hurricanes Irma and Maria in September 2017 as well as the ongoing claim trends that are lower than our premium trends following the continuity of our underwriting discipline. The estimated decrease in utilization related to the aforementioned hurricanes account for approximately 340 of the 590 basis-points decrease in the adjusted MLR.
Premiums earned, net increased by $4.9 million, or 3.1% to $161.8 million, as the result of premium growth in the segment’s Individual Life and Cancer lines of business, as well as growth in the Costa Rica operations.
Total premiums written decreased by $4.0 million, or 2.8%, to $139.8 million, driven by lower sales of Commercial Package products, mostly the result of selective and disciplined underwriting of Commerical risks.
Underwriting and other operating expenses increased by $2.6 million, or 6.2%, to $44.5 million mostly due to higher acquisition expenses, professional services, and personnel costs. The operating expense ratio decreased by 100 basis points, to 53.3% in 2018.
The premiums ceded to reinsurers increased by $16.3 million, or 35.4%, mostly reflecting higher premiums written in Commercial products during 2017 as well as adjustments related to the catastrophe reinsurance, including $9.2 million for catastrophe reinsurance reinstatement costs.
Year ended December 31, 2018 compared to year ended December 31, 2017
In August 2017, the Company’s Board of Directors authorized a $30.0 million repurchase program of its Class B common stock (2017 Repurchase Program) and in February 2018 the Company’s Board of Directors authorized a $25.0 million expansion of this program. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the year 2018, the Company repurchased and retired 903,888 shares of our Class B Common Stock shares at an average per share price of $24.76, for an aggregate cost of $22.4 million.
Increase in Other is due to the change in outstanding checks in excess of bank balances.
Year ended December 31, 2017 compared to year ended December 31, 2016
On April 18, 2017, TSA entered into a $10.0 million revolving loan agreement with a commercial bank in Puerto Rico. This line of credit has an interest rate of 30-day LIBOR plus 25 basis points contains certain financial and non-financial covenants that are customary for this type of facility. This line of credit had an original maturity date of April 17, 2018 and was renewed for an additional year, maturing on April 30, 2019.
Other long-term liabilities - Due to the indeterminate nature of their cash outflows, $79.4 million of other long-term liabilities are not reflected in the following table, consisting of $31.3 million of liability for pension benefits, $3.2 million in deferred tax liabilities, and $44.9 million in liabilities to the Federal Employees’ Health Benefits Plan Program.
As of December 31, 2018, our long-term borrowings consist of a credit agreement entered with a commercial bank in Puerto Rico. See the “Financing and Financing Capacity” section for additional information regarding our long-term borrowings.
Claim liabilities represent the amount of our claims processed and incomplete as well as an estimate of the amount of incurred but not reported claims and loss-adjustment expenses. This amount does not include an estimate of claims to be incurred subsequent to December 31, 2018. The expected claims payments are an estimate and may differ materially from the actual claims payments made by us in the future. Also, claim liabilities are presented gross, and thus do not reflect the effects of reinsurance under which $325.0 million of reserves had been ceded at December 31, 2018.
Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance of Puerto Rico. These regulations, among other things, require insurance companies to maintain certain levels of capital, thereby restricting the amount of earnings that can be distributed by the insurance subsidiaries to TSM. As of December 31, 2018, our insurance subsidiaries, except for TSP, were in compliance with such minimum capital requirements. TSP is currently under a plan to increase its statutory capital and surplus and RBC scores. Please refer to “Item 1. Business - Capital and Reserve Requirements”.
The $35.5 million credit agreement limits the amount of dividends or other distributions (including share repurchases) payable by the Corporation to $50 million per year.
We do not expect that any of the previously described dividend restrictions will have a significant effect on our ability to meet our cash obligations.
Pursuant to the Puerto Rico Insurance Code, our Property and Casualty subsidiary is a member of Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de Responsabilidad Profesional Médico-Hospitalaria (SIMED). The syndicate was organized for the purpose of underwriting medical-hospital professional liability insurance. As a member, the Property and Casualty segment shares risks with other member companies and, accordingly, is contingently liable in the event the syndicate cannot meet their obligations. During 2018, 2017 and 2016, no assessment or payment was made for this contingency. It is the opinion of management that any possible future syndicate assessments will not have a material effect on our operating results and/or cash flows, although there is no ceiling on these payment obligations. In December 2018, SIMED declared a distribution to its members; the Company’s share of this distribution was $2.9 million, which is presented with other income in the accompanying consolidated statement of earnings.
Management continually evaluates the potential impact of changes in the factors considered for its claim liabilities estimates, both positive and negative, and uses the results of these evaluations to adjust recorded claim liabilities and underwriting criteria. Our profitability depends in large part on our ability to accurately predict and effectively manage the amount of claims incurred, particularly those of the Managed Care segment and the losses arising from the Life and Property and Casualty segments. Management regularly reviews its premiums and benefits structure to reflect our underlying claims experience and revised actuarial data; however, several factors could adversely affect our underwriting results. Some of these factors are beyond management’s control and could adversely affect its ability to accurately predict and effectively control claims incurred. Examples of such factors include changes in health practices, economic conditions, change in utilization trends including those caused by epidemic conditions, healthcare costs, the advent of natural disasters, and malpractice litigation. Costs in excess of those anticipated could have a material adverse effect on our results of operations.
At December 31, 2018, claim liabilities for the life segment amounted to $46.2 million and represented 5.0% of total consolidated claim liabilities and 2.4% of our total consolidated liabilities.
At December 31, 2018, the claim liabilities of the Property and Casualty segment fall within the actuarial reserve range determined by the actuaries. Management reviews the results of the reserve estimates in order to determine any appropriate adjustments in the recording of reserves. Adjustments to reserve estimates are made after management’s consideration of numerous factors, including but not limited to the magnitude of the difference between the actuarial indication and the recorded reserves, improvement or deterioration of actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular line of business. In general, changes are made more quickly to more mature accident years and less volatile lines of business. Varying the net expected loss ratio by +/-1% in all lines of business for the six most recent accident years would increase/decrease the claims incurred by approximately $5.0 million.
Due to the subjective nature of our analysis, along with the judgment that must be applied in the analysis, it is possible that we could reach a different conclusion whether or not to impair a security if we had access to additional information about the investee. Additionally, it is possible that the investee’s ability to meet future contractual obligations may be different than what we determined during its analysis, which may lead to a different impairment conclusion in future periods.
During the year ended December 31, 2018, we were not required to recognize an other-than-temporary impairment. During the years ended December 31, 2017 and 2016, we recognized other-than-temporary impairments on equity securities amounting to $49 thousand and $1.4 million, respectively. The impairment analysis indicated that, none of the securities whose carrying amount exceeded its estimated fair value was considered other-than-temporarily impaired as of that date; however, several factors are beyond management’s control, such as the following: financial condition of the issuers, movement of interest rates, specific situations within corporations, among others. Over time, the economic and market environment may provide additional insight regarding the estimated fair value of certain securities, which could change management’s judgment regarding impairment. This could result in realized losses related to other-than-temporary declines being charged against future income.
Our fixed maturity securities are sensitive to interest rate and credit risk fluctuations, which impact the fair value of individual securities. Our equity securities are sensitive to equity price risks, for which potential losses could arise from adverse changes in the value of equity securities. For additional information on the sensitivity of our investments, see “
For our audited consolidated financial statements as of December 31, 2018 and 2017 and for each of the three years ended December 31, 2018, 2017 and 2016 see Index to consolidated financial statements in “Item 15. Exhibits and Financial Statements Schedules” to this Annual Report on Form 10-K.