TRIPLE-S MANAGEMENT CORP - 10-Q Quarterly Report

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004


[ ]		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: 0-49762

Triple-S Management Corporation

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0555678
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)


1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico		00920
(Address of principal executive offices)		(Zip code)

(787) 749-4949
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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. þ Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Title of each class		Outstanding at June 30, 2004

Common Stock, $40.00 par value		8,906

Part I – Financial Information

Item 1. Financial Statements

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data)


	(Unaudited)
	June 30,		December 31,
	2004		2003
ASSETS
Investments and cash:
Securities held for trading, at fair value:
Fixed maturities	$	68,818		68,681
Equity securities		80,385		66,824
Securities available for sale, at fair value:
Fixed maturities		389,606		407,530
Equity securities		54,581		56,040
Securities held to maturity, at amortized cost:
Fixed maturities		4,784		4,941
Cash and cash equivalents		56,788		48,280

Total investments and cash		654,962		652,296

Premiums and other receivables, net		104,822		93,491
Deferred policy acquisition costs		17,461		16,671
Property and equipment, net		33,127		34,212
Other assets		43,814		37,953

Total assets	$	854,186		834,623

LIABILITIES AND STOCKHOLDERS’ EQUITY
Claim liabilities:
Claims processed and incomplete	$	134,699		121,015
Unreported losses		130,972		112,449
Unpaid loss-adjustment expenses		14,717		14,456

Total claim liabilities		280,388		247,920

Unearned premiums		78,792		78,704
Individual retirement annuities		32,841		26,661
Liability to Federal Employees Health Benefits Program		4,315		7,471
Accounts payable and accrued liabilities		100,231		88,342
Income tax payable		—		32,222
Net deferred tax liability		1,448		1,892
Additional minimum pension liability		10,081		10,081
Short-term borrowings		38,700		38,700
Loans payable to bank		46,687		48,375

Total liabilities		593,483		580,368

Stockholders’ equity:
Common stock, $40 par value. Authorized 12,500 shares; issued and outstanding 8,906 at June 30, 2004 and 9,030 at December 31, 2003		356		361
Additional paid-in capital		150,407		150,407
Retained earnings		101,363		88,728
Accumulated other comprehensive income		8,577		14,759

Total stockholders’ equity		260,703		254,255

Total liabilities and stockholders’ equity	$	854,186		834,623

See accompanying notes to unaudited consolidated financial statements.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings (Unaudited)

For the three months and six months ended June 30, 2004 and 2003

(Dollar amounts in thousands, except per share data)


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
REVENUES:
Premiums earned, net	$	322,896			313,789			641,542			629,345
Amounts attributable to self-funded arrangements		46,045			40,181			89,083			80,184
Less amounts attributable to claims under self-funded arrangements		(42,485	)		(37,191	)		(83,067	)		(74,550	)

		326,456			316,779			647,558			634,979
Net investment income		6,393			6,286			12,975			12,384
Net realized investment gains		1,365			6,644			2,748			3,621
Net unrealized investment gain (loss) on trading securities		(3,252	)		7,276			(1,433	)		9,368
Other income, net		1,120			1,524			1,686			2,374

Total revenue		332,082			338,509			663,534			662,726

BENEFITS AND EXPENSES:
Claims incurred		286,246			259,172			561,994			530,003
Operating expenses, net of reimbursement for services		42,635			39,917			82,473			78,407
Interest expense		931			765			1,832			1,468

Total benefits and expenses		329,812			299,854			646,299			609,878

Income before taxes		2,270			38,655			17,235			52,848

INCOME TAX EXPENSE (BENEFIT):
Current		1,248			63,909			4,546			64,286
Deferred		(457	)		(1,968	)		54			(1,629	)

Total income taxes		791			61,941			4,600			62,657

Net income (loss)	$	1,479			(23,286	)		12,635			(9,809	)

Basic net income (loss) per share	$	166			(2,514	)		1,411			(1,055	)

See accompanying notes to unaudited consolidated financial statements.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2004 and 2003

(Dollar amounts in thousands, except per share data)


	Six months ended
	June 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected	$	631,773			614,467
Cash paid to suppliers and employees		(84,127	)		(82,367	)
Claims, losses and benefits paid		(529,526	)		(526,488	)
Interest received		13,487			12,561
Income taxes paid		(40,638	)		(1,308	)
Proceeds from trading securities sold or matured:
Fixed maturities sold		31,611			31,148
Equity securities		15,526			10,512
Acquisitions of investments in trading portfolio:
Fixed maturities		(33,686	)		(49,452	)
Equity securities		(27,048	)		(11,217	)
Interest paid		(1,362	)		(785	)
Expense reimbursement from Medicare		7,547			6,270
Contingency reserve funds from FEHBP		—			13,023

Net cash (used in) provided by operating activities		(16,443	)		16,364

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold		21,464			42,555
Fixed maturities matured		46,441			124,619
Equity securities		1,476			9,675
Securities held to maturity:
Fixed maturities matured		2,762			150
Acquisitions of investments:
Securities available for sale:
Fixed maturities		(55,415	)		(193,820	)
Equity securities		(1,024	)		(4,010	)
Securities held to maturity:
Fixed maturities		(2,612	)		—
Capital expenditures		(1,676	)		(2,525	)
Proceeds from sale of property and equipment		6			45

Net cash provided by (used in) investing activities		11,422			(23,311	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in outstanding checks in excess of bank balances		9,512			666
Payments of long term debt		(1,688	)		(683	)
Redemption of common stock		(5	)		(4	)
Proceeds from individual retirement annuities		7,975			5,716
Surrenders of individual retirement annuities		(2,265	)		(1,088	)

Net cash provided by financing activities		13,529			4,607

Net increase (decrease) in cash and cash equivalents		8,508			(2,340	)
Cash and cash equivalents at beginning of the period		48,280			82,776

Cash and cash equivalents at end of the period	$	56,788			80,436

See accompanying notes to unaudited consolidated financial statements.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004

(Dollar amounts in thousands, except per share data)

(Unaudited)

(1) Basis of Presentation

The accompanying consolidated interim financial statements prepared by Triple-S Management Corporation (TSM) and its subsidiaries (the Corporation) are unaudited, except for the balance sheet information as of December 31, 2003, which is derived from the Corporation’s audited consolidated financial statements, pursuant to the rules and regulations of the United States Securities and Exchange Commission. The consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such consolidated interim financial statements have been included. The results of operations for the three months and six months ended June 30, 2004 are not necessarily indicative of the results for the full year.

(2) Segment Information

Separate disclosure of information about operating segments is required for any operating segment that meets any of the quantitative thresholds determined by FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131). In determining whether information about segments is required for a particular year, the evaluation should be based on comparability between years. Thus, information would be required in the current period - even if immaterial pursuant to the provisions of SFAS No. 131 - - if a segment has been significant in the immediate preceding period and is expected to be significant in the future. Based on the requirements of SFAS No. 131, the only reportable segments for TSM are: the Health Insurance - Commercial, the Health Insurance - Healthcare Reform and the Property and Casualty Insurance segments. The Life and Disability Insurance Segment is not presented as a reportable segment in the 2004 periods since it did not meet any of the quantitative thresholds in the years 2003 and 2002 and is not expected to meet them in the year 2004. The segment information for the 2003 periods was restated to present the results of operations and financial position of the Life and Disability operating segment within the other non-reportable operating segments of the Corporation.

The following tables summarize the operations by major operating segment for the three months and six months ended June 30, 2004 and 2003:

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)


	Operating Segments
	Health			Health
	Insurance			Insurance			Property
	Commercial			Reform			and Casualty
	Program			Program			Insurance			Other *			Total
THREE MONTHS ENDED JUNE 30, 2004
Premiums earned, net	$	179,017			119,601			20,209			4,069			322,896
Amounts attributable to self-funded arrangements		46,045			—			—			—			46,045
Less: Amounts attributable to claims under self-funded arrangements		(42,485	)		—			—			—			(42,485	)
Intersegment premiums earned/service revenues		1,077			—			—			12,316			13,393

		183,654			119,601			20,209			16,385			339,849
Net investment income		3,025			768			1,834			680			6,307
Realized gain (loss) on sale of securities		1,494			(83	)		(14	)		(32	)		1,365
Unrealized loss on trading securities		(3,158	)		—			(24	)		(70	)		(3,252	)
Other		142			(7	)		710			95			940

Total revenues	$	185,157			120,279			22,715			17,058			345,209

Net income (loss)	$	(130	)		727			1,445			(502	)		1,540

Claims incurred	$	162,616			109,605			10,501			3,524			286,246

Operating expenses	$	22,619			9,050			10,719			13,559			55,947

Depreciation expense, included in operating expenses	$	934			—			121			28			1,083

Interest expense	$	286			80			—			248			614

Income tax expense (benefit)	$	(234	)		817			50			229			862

* Includes segments which are not required to be reported separately. These segments include the life and disability insurance segment, the data processing services organization as well as the third party administrator of health insurance services.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)


	Operating Segments
	Health			Health
	Insurance			Insurance			Property
	Commercial			Reform			and Casualty
	Program			Program			Insurance		Other *			Total
THREE MONTHS ENDED JUNE 30, 2003
Premiums earned, net	$	168,478			122,852			18,254		4,205			313,789
Amounts attributable to self-funded arrangements		40,181			—			—		—			40,181
Less: Amounts attributable to claims under self-funded arrangements		(37,191	)		—			—		—			(37,191	)
Intersegment premiums earned/service revenues		551			—			—		11,027			11,578

		172,019			122,852			18,254		15,232			328,357
Net investment income		2,654			1,279			1,700		557			6,190
Realized gain on sale of securities		4,737			189			620		448			5,994
Unrealized gain (loss) on trading securities		5,028			1,385			956		(93	)		7,276
Other		77			(8	)		1,391		(98	)		1,362

Total revenues	$	184,515			125,697			22,921		16,046			349,179

Net income	$	19,435			3,505			2,899		1,918			27,757

Claims incurred	$	138,164			108,786			10,645		1,577			259,172

Operating expenses	$	21,861			8,428			8,966		12,301			51,556

Depreciation expense, included in operating expenses	$	1,054			—			66		31			1,151

Interest expense	$	168			104			—		158			430

Income tax expense	$	4,887			4,874			411		92			10,264

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)


	Operating Segments
	Health			Health
	Insurance			Insurance			Property
	Commercial			Reform			and Casualty
	Program			Program			Insurance		Other *			Total
SIX MONTHS ENDED JUNE 30, 2004
Premiums earned, net	$	353,522			238,999			40,992		8,029			641,542
Amounts attributable to self-funded arrangements		89,083			—			—		—			89,083
Less: Amounts attributable to claims under self-funded arrangements		(83,067	)		—			—		—			(83,067	)
Intersegment premiums earned/service revenues		1,981			—			—		23,853			25,834

		361,519			238,999			40,992		31,882			673,392
Net investment income		6,170			1,608			3,688		1,338			12,804
Realized gain (loss) on sale of securities		2,643			128			21		(44	)		2,748
Unrealized gain (loss) on trading securities		(1,756	)		—			258		65			(1,433	)
Other		194			(17	)		1,272		128			1,577

Total revenues	$	368,770			240,718			46,231		33,369			689,088

Net income (loss)	$	5,917			2,371			4,773		(263	)		12,798

Claims incurred	$	315,856			218,820			21,128		6,190			561,994

Operating expenses	$	44,613			17,802			19,428		26,621			108,464

Depreciation expense, included in operating expenses	$	1,903			—			242		56			2,201

Interest expense	$	575			149			—		470			1,194

Income tax expense	$	1,809			1,576			902		351			4,638

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)


	Operating Segments
	Health			Health
	Insurance			Insurance			Property
	Commercial			Reform			and Casualty
	Program			Program			Insurance		Other *			Total
SIX MONTHS ENDED JUNE 30, 2003
Premiums earned, net	$	343,983			238,647			37,307		9,408			629,345
Amounts attributable to self-funded arrangements		80,184			—			—		—			80,184
Less: Amounts attributable to claims under self-funded arrangements		(74,550	)		—			—		—			(74,550	)
Intersegment premiums earned/service revenues		1,246			—			—		22,143			23,389

		350,863			238,647			37,307		31,551			658,368
Net investment income		5,273			2,553			3,344		1,080			12,250
Realized gain (loss) on sale of securities		2,434			(109	)		195		451			2,971
Unrealized gain (loss) on trading securities		6,578			1,622			1,261		(93	)		9,368
Other		109			(15	)		2,097		(55	)		2,136

Total revenues	$	365,257			242,698			44,204		32,934			685,093

Net income	$	24,289			7,920			5,466		3,819			41,494

Claims incurred	$	292,721			212,953			20,455		3,874			530,003

Operating expenses	$	43,020			16,746			17,485		24,517			101,768

Depreciation expense, included in operating expenses	$	2,034			—			202		60			2,296

Interest expense	$	340			205			—		314			859

Income tax expense	$	4,887			4,874			798		410			10,969

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)


	Operating Segments
	Health			Health
	Insurance			Insurance			Property
	Commercial			Reform			and Casualty
	Program			Program			Insurance			Other *			Total
AS OF JUNE 30, 2004
Segment assets	$	416,724			77,703			252,337			82,435			829,199

Significant noncash item - net change in unrealized gain on securities available for sale	$	(3,708	)		(908	)		(1,283	)		(569	)		(6,468	)

AS OF DECEMBER 31, 2003
Segment assets	$	407,031			86,535			239,478			74,530			807,574

Significant noncash item:
Net change in unrealized gain on securities available for sale	$	(5,226	)		—			(527	)		220			(5,533	)
Net change in minimum pension liability		2,385			—			(23	)		(55	)		2,307

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

RECONCILIATION OF REPORTABLE SEGMENT TOTALS
WITH FINANCIAL STATEMENTS


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
TOTAL REVENUES
Total revenues for reportable segments	$	328,151			333,133			655,719			652,159
Total revenues for other segments		17,058			16,046			33,369			32,934

		345,209			349,179			689,088			685,093
Elimination of intersegment earned premiums		(1,077	)		(551	)		(1,981	)		(1,246	)
Elimination of intersegment service revenues		(12,316	)		(11,027	)		(23,853	)		(22,143	)
Unallocated amount - revenues from external sources		266			908			280			1,022

		(13,127	)		(10,670	)		(25,554	)		(22,367	)

Consolidated total revenues	$	332,082			338,509			663,534			662,726

NET INCOME
Net income for reportable segments	$	2,042			25,839			13,061			37,675
Net income (loss) for other segments		(502	)		1,918			(263	)		3,819

		1,540			27,757			12,798			41,494

Elimination of TSM charges:
Rent expense		1,310			1,487			2,883			3,051
Interest expense		158			168			317			340

		1,468			1,655			3,200			3,391

Unallocated amounts related to TSM:
General and administrative expenses		(1,391	)		(1,426	)		(2,726	)		(3,079	)
Income tax expense		71			(51,677	)		38			(51,688	)
Interest expense		(475	)		(503	)		(955	)		(949	)
Other revenues from external sources		266			908			280			1,022

		(1,529	)		(52,698	)		(3,363	)		(54,694	)

Consolidated net income (loss)	$	1,479			(23,286	)		12,635			(9,809	)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS


	Three months ended June 30, 2004
	Segment					Consolidated
	Totals		Adjustments *			Totals
Claims incurred	$	286,246		—			286,246
Operating expenses		55,947		(13,312	)		42,635
Depreciation expense		1,083		281			1,364
Interest expense		614		317			931
Income tax benefit		862		(71	)		791


	Three months ended June 30, 2003
	Segment					Consolidated
	Totals		Adjustments *			Totals
Claims incurred	$	259,172		—			259,172
Operating expenses		51,556		(11,639	)		39,917
Depreciation expense		1,151		278			1,429
Interest expense		430		335			765
Income tax expense		10,264		51,677			61,941


	Six months ended June 30, 2004
	Segment					Consolidated
	Totals		Adjustments *			Totals
Claims incurred	$	561,994		—			561,994
Operating expenses		108,464		(25,991	)		82,473
Depreciation expense		2,201		560			2,761
Interest expense		1,194		638			1,832
Income tax expense		4,638		(38	)		4,600


	Six months ended June 30, 2003
	Segment					Consolidated
	Totals		Adjustments *			Totals
Claims incurred	$	530,003		—			530,003
Operating expenses		101,768		(23,361	)		78,407
Depreciation expense		2,296		556			2,852
Interest expense		859		609			1,468
Income tax expense		10,969		51,688			62,657

* Adjustments represent TSM operations and the elimination of intersegment charges.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS


	June 30,			December 31,
	2004			2003
ASSETS
Total assets for reportable segments	$	746,764			733,044
Total assets for other segments		82,435			74,530

		829,199			807,574

Elimination entries - intersegment receivables and others		(13,180	)		(9,565	)

Unallocated amounts related to TSM:
Parent cash, cash equivalents and investments		10,426			9,665
Parent net property and equipment		26,113			26,656
Parent other assets		1,628			293

		38,167			36,614

Consolidated assets	$	854,186			834,623

OTHER SIGNIFICANT ITEMS


	As of June 30, 2004
	Segment						Consolidated
	Totals			Adjustments *			Totals
Significant noncash item — net change in unrealized gain on securities available for sale	$	(6,468	)		(87	)		(6,555	)


	As of December 31, 2003
	Segment						Consolidated
	Totals			Adjustments *			Totals
Significant noncash items:
Net change in unrealized gain on securities available for sale	$	(5,533	)		(489	)		(6,022	)
Net change in minimum pension liability		2,307			(15	)		2,292

* Adjustments represent TSM operations and the elimination of intersegment charges.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands)
(Unaudited)

(3) Investment in Securities

The Corporation’s investment in securities at June 30, 2004 and December 31, 2003, consist of the following:


	(Unaudited)
	June 30,		December 31,
	2004		2003
Trading securities, at fair value	$	149,203		135,505
Available for sale, at fair value		444,187		463,570
Held to maturity, at amortized cost		4,784		4,941

Total investments	$	598,174		604,016

The amortized cost for debt securities and equity securities, gross unrealized gain, gross unrealized losses, and estimated fair value for trading, available for sale and held to maturity securities by major security type and class of security at June 30, 2004 and December 31, 2003, were as follows:

June 30, 2004 (Unaudited)

Gross

Amortized

unrealized

Estimated fair

cost

gains

losses

value

Trading securities:

Fixed maturities

68,588

1,071

(841

)

68,818

Equity securities

71,563

10,515

(1,693

)

80,385

140,151

11,586

(2,534

)

149,203

June 30, 2004 (Unaudited)

Gross

Amortized

unrealized

Estimated fair

cost

gains

losses

value

Securities available for sale:

Fixed maturities

392,921

1,872

(5,187

)

389,606

Equity securities

34,409

20,369

(197

)

54,581

427,330

22,241

(5,384

)

444,187

June 30, 2004 (Unaudited)

Gross

Amortized

unrealized

Estimated fair

cost

gains

losses

value

Securities held to maturity:

Fixed maturities

4,784

175

(46

)

4,913

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

December 31, 2003

Gross

Amortized

unrealized

Estimated fair

cost

gains

losses

value

Trading securities:

Fixed maturities

66,919

2,264

(502

)

68,681

Equity securities

58,101

9,823

(1,100

)

66,824

125,020

12,087

(1,602

)

135,505

December 31, 2003

Gross

Amortized

unrealized

Estimated fair

cost

gains

losses

value

Securities available for sale:

Fixed maturities

405,547

3,931

(1,948

)

407,530

Equity securities

33,877

22,203

(40

)

56,040

439,424

26,134

(1,988

)

463,570

December 31, 2003

Gross

Amortized

unrealized

Estimated fair

cost

gains

losses

value

Securities held to maturity:

Fixed maturities

4,941

118

)

5,054

Investment in securities at June 30, 2004 are mostly comprised of U.S. Treasury securities and obligations of U.S. government instrumentalities (52.1%), mortgage backed and collateralized mortgage obligations that are U.S. agency-backed (6.8%), obligations of the government of Puerto Rico and its instrumentalities (9.8%) and obligations of states and political subdivisions (0.4%). The remaining 30.9% of the investment portfolio is comprised of corporate debt, equity securities and mutual funds.

The Corporation regularly monitors the difference between the cost and estimated fair value of investments. For investments with a fair value below cost, the process includes evaluating the length of time and the extent to which cost exceeds fair value, the prospects and financial condition of the issuer, and the Corporation’s intent and ability to retain the investment to allow for recovery in fair value, among other factors. This process is not exact and further requires consideration of risks such as credit and interest rate risks. Consequently, if an investment’s cost exceeds its fair value solely due to changes in interest rates, impairment may not be appropriate. If after monitoring and analyzing, the Corporation determines that a decline in the estimated fair value of any available for sale or held to maturity security below cost is other than temporary, the carrying amount of the security is reduced to its fair value. The impairment is charged to operations and a new cost basis for the security is established. No impairments were identified nor recognized by the Corporation during the six-month period ended June 30, 2004.

The unrealized losses on investments were mainly caused by interest rate increases. Because the Corporation has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

(4) Premiums and Other Receivables

Premiums and other receivables as of June 30, 2004 and December 31, 2003 were as follows:


	(Unaudited)
	June 30,		December 31,
	2004		2003
Premiums	$	41,266		37,936
Self-funded group receivables		22,345		15,790
FEHBP		9,058		7,832
Accrued interest		4,958		5,098
Reinsurance recoverable on paid losses		23,673		22,067
Other		13,446		13,783

		114,746		102,506

Less allowance for doubtful receivables:
Premiums		5,369		4,300
Other		4,555		4,715

		9,924		9,015

Total premiums and other receivables	$	104,822		93,491

(5) Claim Liabilities

The activity in the total claim liabilities for the three months ended June 30, 2004 and 2003 is as follows:


	(Unaudited)
	Three months ended June 30,
	2004			2003
Claim liabilities at beginning of period	$	260,922			258,651
Reinsurance recoverable on claim liabilities		(21,463	)		(14,717	)

Net claim liabilities at beginning of period		239,459			243,934

Incurred claims and loss-adjustment expenses:
Current period insured events		278,354			264,153
Prior period insured events		7,892			(4,981	)

Total		286,246			259,172

Payments of losses and loss-adjustment expenses:
Current period insured events		214,788			238,178
Prior period insured events		52,134			33,727

Total		266,922			271,905

Net claim liabilities at end of period		258,783			231,201
Reinsurance recoverable on claim liabilities		21,605			16,896

Claim liabilities at end of period	$	280,388			248,097

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

The activity in the total claim liabilities for the six months ended June 30, 2004 and 2003 is as follows:


	(Unaudited)
	Six months ended June 30,
	2004			2003
Claim liabilities at beginning of period	$	247,920			244,582
Reinsurance recoverable on claim liabilities		(19,357	)		(13,589	)

Net claim liabilities at beginning of period		228,563			230,993

Incurred claims and loss-adjustment expenses:
Current period insured events		559,107			546,333
Prior period insured events		2,887			(16,330	)

Total		561,994			530,003

Payments of losses and loss-adjustment expenses:
Current period insured events		354,857			371,999
Prior period insured events		176,917			157,796

Total		531,774			529,795

Net claim liabilities at end of period		258,783			231,201
Reinsurance recoverable on claim liabilities		21,605			16,896

Claim liabilities at end of period	$	280,388			248,097

As a result of changes in estimates of insured events in prior periods, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred. The amounts in the incurred claims and loss-adjustment expenses for prior period insured events for the three months and six months ended June 30, 2004 are due to an unfavorable development of the claim liabilities attributed to higher than expected cost per service and utilization trends. The credits in the incurred claims and loss-adjustment expenses for prior periods insured events for the three months and six months ended June 30, 2003 are due to a favorable development of the claim liabilities attributed to better than expected utilization trends.

(6) Comprehensive Income

The accumulated balances for each classification of comprehensive income are as follows:

(Unaudited)

Accumulated

Unrealized

Minimum

other

gains on

pension

Cash flow

comprehensive

securities

liability

hedges

income

BALANCE AT JANUARY 1

20,948

(5,822

)

(367

)

14,759

Net current period change

(6,555

)

—

373

(6,182

)

BALANCE AT JUNE 30

14,393

(5,822

)

8,577

(7) Income Taxes

Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns with its subsidiaries. Triple-S, Inc. (TSI), a wholly owned subsidiary of TSM, was exempt through January 1, 2003 from Puerto Rico income taxes under a ruling issued by the Puerto Rico Treasury Department (PRTD).

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

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

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. Quarterly income taxes are estimated based on the income forecasted for the full fiscal year.

Under a resolution passed by the Puerto Rico House of Representatives (House of Representatives), during 2002 and 2003 the Banking and Insurance Committee of the House of Representatives conducted an investigation of TSI’s tax treatment under the PRTD ruling that granted TSI’s tax exempt status. A similar investigation was approved by the Puerto Rico Senate. In addition, the PRTD conducted an audit of TSI’s compliance with the requirements of the tax ruling. All three investigations on the tax exemption were concluded in 2003. The PRTD concluded its investigations with no findings of non-compliance. The House of Representatives and the Puerto Rico Senate concluded their investigations by recommending and providing for the termination of the tax exemption solely on account of TSI’s for-profit status and the fact that no other for-profit health insurer in Puerto Rico enjoys a tax exemption under section 1101(6) of the Puerto Rico Internal Revenue Code of 1994, as amended (the P.R. Code). The Corporation was notified on June 18, 2003 by the PRTD that the ruling recognizing TSI’s tax exemption was terminated effective December 31, 2002. The termination of the ruling was in accordance with a new public policy set by the PRTD pursuant to which tax exemptions under Section 1101(6) of the P.R. Code will not apply to corporations organized as for-profit, which is TSI’s case.

On July 31, 2003, TSM and TSI executed a closing agreement with the PRTD. In general, the terms of the closing agreement established the termination of TSI’s tax exemption effective December 31, 2002. Accordingly, effective January 1, 2003 TSI is subject to Puerto Rico income taxes as an other-than-life insurance entity, as defined in the P.R. Code. As a result, TSI recorded during the second quarter of the year 2003, $11,480 and ($1,719) of current and deferred income tax expense (benefit), respectively, corresponding to the six month period ended June 30, 2003. TSI did not record any income tax expense during the first quarter of the year 2003 since the termination of the income tax ruling was not notified until the second quarter of that year.

The closing agreement also stipulates that TSM will pay taxes on TSI’s accumulated statutory net income, in accordance with the income recognition methodology applied by the Secretary of the Treasury in the closing agreement and the ruling mentioned above. This tax ruling established the following methodology for TSM to determine its tax liability:

• TSI’s accumulated statutory net income while operating under the tax exemption, amounting to $132,763, was deemed distributed to TSM.

• For tax purposes, TSM recognized the exempt accumulated statutory net income as gross income. On this amount, TSM recognized an income tax liability amounting to $51,774, which was determined by applying a tax rate of 39% to the exempt accumulated statutory net income deemed distributed to TSM. During the second quarter of the year 2003, TSM recorded this income tax liability within the current income tax expense presented in the consolidated statements of earnings. Of this tax $37,000 was paid on July 31, 2003, the date of the closing agreement, and $14,774 was paid on April 15, 2004.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

(8) Pension Plan

The components of net periodic benefit cost for the three months ended June 30, 2004 and 2003 were as follows:


	(Unaudited)
	Three months ended June 30,
	2004			2003
Components of net periodic benefit cost:
Service cost	$	1,035			908
Interest cost		929			944
Expected return on assets		(626	)		(623	)
Amortization of prior service cost		12			12
Amortization of actuarial loss		401			392
Settlement loss		—			1,101

Net periodic benefit cost	$	1,751			2,734

The components of net periodic benefit cost for the six months ended June 30, 2004 and 2003 were as follows:


	(Unaudited)
	Six months ended June 30,
	2004			2003
Components of net periodic benefit cost:
Service cost	$	2,070			1,816
Interest cost		1,858			1,888
Expected return on assets		(1,252	)		(1,246	)
Amortization of prior service cost		24			24
Amortization of actuarial loss		802			784
Settlement loss		—			2,202

Net periodic benefit cost	$	3,502			5,468

Employer contributions

The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 2003 that it expected to contribute $5,500 to its pension program in 2004. As of June 30, 2004, no contributions have been made. The Corporation currently anticipates contributing $5,500 to fund its pension program in 2004.

(9) Net Income Available to Stockholders and Net Income per Share

The Corporation presents only basic earnings per share, which amount consists of the net income that could be available to common stockholders divided by the weighted-average number of common shares outstanding for the period.

The Corporation has not declared or distributed dividends on its common stock.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

The following table sets forth the computation of basic net income per share for the three months and six months ended June 30, 2004 and 2003:


	(Unaudited)
	Three months ended June 30,
	2004		2003
Numerator for basic earnings per share:
Net income (loss) available to stockholders	$	1,479		(23,286	)

Denominator for basic earnings per share:
Weighted average of outstanding common shares		8,905		9,264

Basic net income (loss) per share	$	166		(2,514	)


	(Unaudited)
	Six months ended June 30,
	2004		2003
Numerator for basic earnings per share:
Net income (loss) available to stockholders	$	12,635		(9,809	)

Denominator for basic earnings per share:
Weighted average of outstanding common shares		8,954		9,300

Basic net income (loss) per share	$	1,411		(1,055	)

(10) Contingencies

(a) As of June 30, 2004, the Corporation is defendant in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of its legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the consolidated financial position and results of operations of the Corporation.

(b) Drs. Carlyle Benavent and Ibrahim Pérez (the plaintiffs) caused the initiation of an administrative proceeding before the Puerto Rico Insurance Commissioner against TSI and TSM alleging the illegality of the repurchase and subsequent sale of 1,582 shares of TSI’s common stock. The plaintiffs further alleged that the ultimate purchasers of said shares were selected on an improper and selective basis by the Corporation and that they (the plaintiffs) were illegally excluded from participation in the sale of shares, all in violation of the Puerto Rico Insurance Code and that, consequently, the sale of shares should be annulled.

On December 1996, the Commissioner of Insurance issued an order to annul the sale of the 1,582 shares that TSI had repurchased from the estate of deceased stockholders. Consequently, the sale of 1,582 shares was cancelled and the purchase price was returned to each former stockholder. In the year 2000, the Commissioner of Insurance further ordered that all corporate decisions undertaken by TSI through the vote of its stockholders on record, be ratified in a stockholders’ meeting or in a subsequent referendum.

In March 2002, the Commissioner of Insurance stated that the ratification of the corporate reorganization was not required and that TSI had complied with the Commissioner’s order of October 1999 related to the corporate reorganization. Thereafter, the plaintiffs filed a petition for review of the Commissioner’s determination before the Puerto Rico Circuit Court of Appeals.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

On October 2002, the Court of Appeals issued an order requiring the Commissioner of Insurance to order a meeting of stockholders to ratify TSI’s corporate reorganization and the change of name of TSI from “Seguros de Servicio de Salud de Puerto Rico, Inc.” to “Triple-S, Inc.”. TSI and TSM’s filed motions of reconsideration. The Puerto Rico’s Circuit Court of Appeals granted said motions on May 18, 2003. The Circuit Court held that the Commissioner of Insurance had the authority to waive the requirement that a referendum be held to ratify TSI’s reorganization and that therefore the reorganization of TSI was approved by the stockholders, inasmuch as the votes pertaining to the 1,582 shares annulled were not decisive.

On June 26, 2003, the two stockholders presented a writ of certiorari before Puerto Rico’s Supreme Court. The writ was issued by the Supreme Court on August 22, 2003 when it ordered the Circuit Court of Appeals to forward the record of the case. On December 1, 2003, the plaintiffs filed a motion submitting their case on the basis of their original petition. TSI and TSM filed its brief on December 30, 2003, while the Commissioner of Insurance, in turn, filed a separate brief on December 31, 2003. On June 24, 2004 the Supreme Court ordered the plaintiffs to file a brief in support of their allegations. The case is still pending before the Supreme Court.

(c) On September 4, 2003, José Sánchez and others filed a putative class action complaint against the Corporation, some present and former directors of TSM and TSI, and others, in the United States District Court for the District of Puerto Rico, alleging violations under the Racketeer Influenced and Corrupt Organizations Act, better known as the RICO Act. The suit, among other allegations, alleges a scheme to defraud the plaintiffs by acquiring control of TSI through illegally capitalizing TSI and later converting it to a for-profit corporation and depriving the stockholders of their rights. The plaintiffs base their later allegations on the supposed decisions of TSI’s Board of Directors and stockholders, allegedly made in 1979, to operate with certain restrictions in order to turn TSI into a charitable corporation, basically forever. While this case is still in the very early preliminary stages and has not been certified as a class action, a Motion to Dismiss has been filed by the defendants. On March 15, 2004, plaintiffs filed a response to this motion. On April 30, 2004, defendants filed a Reply in Support of Motion to Dismiss.

(d) On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against TSM, TSI and others in the Court of First Instance for San Juan, Superior section, alleging, among other things, violations by the defendants of provisions of the Insurance Code, anti-monopolistic practices, unfair business practices and damages in the amount of $12.0 million. They also requested that TSM sell shares to them. After a preliminary review of the complaint, it appears that many of the allegations brought by the plaintiffs have been resolved in favor of TSM and TSI in previous cases brought by the same plaintiffs in the U.S. District Court for the District of Puerto Rico and by most of the plaintiffs in the local courts. The defendants, including TSM and TSI answered the complaint, filed a counter-claim and filed several motions to dismiss this claim. The case has recently been reassigned to a new judge.

(e) On May 22, 2003 a putative class action suit was filed by Kenneth A. Thomas, M.D. and Michael Kutell, M.D., on behalf of themselves and all other similarly situated and the Connecticut State Medical Society against the Blue Cross and Blue Shield Association (BCBSA) and multiple other insurance companies, including TSI. The case is pending before the U.S. District Court for the Southern District of Florida, Miami District.

The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of plaintiff’s property and a detriment to their business, and for declaratory and

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.

The class action complaint alleges that TSI’s health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.

On June 18, 2004, the Plaintiffs moved to amend the complaint to include the Colegio de Médicos Cirujanos de Puerto Rico (a compulsory association grouping all physicians in Puerto Rico), Marissel Velázquez, MD, and Andrés Meléndez, MD, as plaintiffs against TSI.

TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.

(f) On December 8, 2003 a putative class action was filed by Jeffrey Solomon, MD, and Orlando Armstrong, MD, on behalf of themselves and all other similarly situated and the American Podiatric Medical Association, Florida Chiropractic Association, California Podiatric Medical Association, Florida Podiatric Medical Association, Texas Podiatric Medical Association, and Independent Chiropractic Physicians, against the Blue Cross Blue Shield Association (BCBSA) and multiple other insurance companies, including TSI, all members of the BCBSA. The case is still pending before the United States District Court for the Southern District of Florida, Miami District.

The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of Plaintiff’s property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payment due to the doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.

The class action complaint alleges that TSI’s health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.

On June 25, 2004, the Plaintiff amended the complaint but the allegations against TSI did not vary.

Management believes that TSI was made a party to this litigation for the sole reason that TSI is associated with the BCBSA. Therefore, TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)

(11) Reconciliation of Net Income (Loss) to Net Cash (Used in) Provided by Operating Activities

A reconciliation of net income to net cash provided by operating activities is as follows:


	(Unaudited)
	Six months ended
	June 30,
	2004			2003
Net income (loss)	$	12,635			(9,809	)

Adjustments to reconcile net income to net cash (used in) provided by operating expenses:
Depreciation and amortization		2,761			2,852
Amortization of investments discounts		586			692
Accretion in value of securities		(214	)		(741	)
Increase in provision for doubtful receivables		909			682
Increase (decrease) in net deferred taxes		53			(1,604	)
Gain on sale of securities		(2,748	)		(3,621	)
Unrealized gain (loss) of trading securities		1,433			(9,368	)
Proceeds from trading securities sold:
Fixed maturities		31,611			31,148
Equity securities		15,526			10,512
Acquisition of securities in trading portfolio:
Fixed maturities		(33,686	)		(49,452	)
Equity securities		(27,048	)		(11,217	)
Loss on sale of property and equipment		(6	)		(45	)
(Increase) decrease in assets:
Premiums receivable		(11,111	)		(18,342	)
Accrued interest receivable		140			226
Reinsurance receivable		(1,606	)		(2,477	)
Other receivables		337			(2,816	)
Deferred policy acquisition costs		(790	)		(1,615	)
Prepaid income tax		(3,869	)		—
Other assets		(1,982	)		(1,352	)
Increase (decrease) in liabilities:
Claims processed and incomplete		13,684			(5,552	)
Unreported losses		18,523			8,131
Unpaid loss-adjustment expenses		261			936
Unearned premiums		88			3,567
Individual retirement annuities		470			683
Liability to FEHBP		(3,156	)		9,763
Accounts payable and accrued liabilities		2,978			2,230
Income tax payable		(32,222	)		62,953

Net cash (used in) provided by operating activities	$	(16,443	)		16,364

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

The Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 of Triple-S Management Corporation (TSM) and its subsidiaries (the Corporation) for the three months and six months ended June 30, 2004. Therefore, the following discussion should be read in conjunction with the 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, 2003.

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q and other publicly available documents of the Corporation 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 the financial condition, results of operations and business of the Corporation. These statements are not historical, but instead represent the Corporation’s belief regarding future events, any of which, by their nature, are inherently uncertain and outside of the Corporation’s control. These statements may address, among other things, future financial results, strategy for growth, and market position. It is possible that the Corporation’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial conditions 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. The Corporation is 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.

Structure of the Organization

TSM is incorporated under the laws of the Commonwealth of Puerto Rico. It is the holding company of several entities, through which it offers a wide range of insurance products and services. These insurance products and services are offered through the following TSM wholly-owned subsidiaries:

• TSI, a health insurance company serving two major segments: the Commercial Program and the Commonwealth of Puerto Rico Healthcare Reform Program (the Healthcare Reform) of the Commonwealth of Puerto Rico;

• Seguros Triple-S, Inc. (STS), a property and casualty insurance company; and

• Seguros de Vida Triple-S, Inc. (SVTS), a life and disability insurance and annuity products company.

In addition to the insurance subsidiaries mentioned above, TSM has the following other wholly-owned subsidiaries: Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TCI). ISI provides data processing services to TSM and its subsidiaries. TCI is currently engaged as the third-party administrator in the administration of the Corporation’s Healthcare Reform segment. It also provides healthcare advisory services and other health-related services to TSI and other third parties.

Recent Developments

Healthcare Reform Segment

The premium rates of the Government Healthcare Reform contracts were renegotiated effective July 1, 2004 for a twelve-month period ending on June 30, 2005. As a result of this renegotiation, the premium rates of the Health Insurance – Healthcare Reform segment were increased by approximately 4.4%.

Adoption of Accounting Standard

The Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standard (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. This statement also includes required disclosures for financial instruments within its scope. For the Corporation, this statement was effective for instruments entered in or modified after May 31, 2003 and otherwise was effective January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the statement will be effective for the Corporation on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Corporation currently does not have any financial instruments within the scope of this statement.

General Information

Substantially all of the revenues of the Corporation are generated from premiums earned and investment income. Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. A portion of the claims incurred for each period consists of a management and actuarial estimate of claims incurred but not reported to the segment during the period. Each segment’s results of operations depend largely on their ability to accurately predict and effectively manage these claims. Operating expenses comprise general, selling, commission, depreciation and payroll and payroll related expenses.

The Corporation (on a consolidated basis and for each reportable segment), along with most insurance entities, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. The loss ratio is computed as claims incurred divided by the premiums earned, net and fee revenue. The expense ratio is computed as operating expenses divided by the premiums earned, net and fee revenue. The combined ratio is the sum of the loss ratio and the expense ratio. These ratios are relative measurements that describe, for every $100 of premiums earned, net and fee revenue, the costs of claims and operating expenses. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting loss.

Consolidated Operating Results

The analysis in this section provides an overall view of the consolidated statements of operations and key financial information. 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						Six months ended
	June 30,						June 30,
(dollar amounts in thousands)	2004			2003			2004			2003
Consolidated earned premiums, net and fee revenue	$	326,456			316,779			647,558			634,979

Consolidated claims incurred	$	286,246			259,172			561,994			530,003
Consolidated operating expenses		42,635			39,917			82,473			78,407

Consolidated operating costs	$	328,881			299,089			644,467			608,410

Consolidated loss ratio		87.7	%		81.8	%		86.8	%		83.5	%
Consolidated expense ratio		13.1	%		12.6	%		12.7	%		12.3	%

Consolidated combined ratio		100.7	%		94.4	%		99.5	%		95.8	%

Net investment income	$	6,393			6,286			12,975			12,384
Realized gain on sale of securities		1,365			6,644			2,748			3,621
Unrealized gain (loss) on trading securities		(3,252	)		7,276			(1,433	)		9,368

Total consolidated net investment income	$	4,506			20,206			14,290			25,373

Consolidated income tax expense (benefit)	$	791			61,941			4,600			62,657

Consolidated net income (loss)	$	1,479			(23,286	)		12,635			(9,809	)

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Consolidated earned premiums, net and fee revenue for the three months ended June 30, 2004 increased by $9.7 million or 3.1% when compared to the consolidated earned premiums, net and fee revenue for the same period of last year. This increase is mostly due to the following:

• The earned premiums, net and fee revenue corresponding to the Health Insurance – Commercial segment increased by $11.1 million or 6.5% during this period. An increase in the average enrollment together with increases in premium rates account for the segment’s fluctuation in earned premiums and fee revenue for the period.

• The earned premiums, net of the Property and Casualty Insurance segment increased by $2.0 million or 10.7% during this period. This increase is mostly reflected in the premiums written for the dwelling, commercial multiperil and auto physical damage lines of business. These lines of business together experienced an increase in premiums of $3.1 million, or 14.2%, during this period.

• The earned premiums, net corresponding to the Health Insurance – Healthcare Reform segment decreased by $3.3 million, or 2.6% during this period. This decrease is the net result of a reduction in the average membership of the segment, an adjustment to the return premiums in the 2003 period and an increase in premium rates effective July 1, 2003.

Consolidated claims incurred for the three months ended June 30, 2004 reflect an increase of $27.1 million, or 10.4%, when compared to the claims incurred for the three months ended June 30, 2003. The consolidated loss ratio reflects an increase of 5.9 percentage points during this period. This fluctuation is due to the following:

• During the 2004 period the Health Insurance – Commercial and the Health Insurance – Healthcare Reform segments experienced higher trends, mainly in the cost per service of pharmacy coverage and in the utilization of surgical procedures when compared to the prior year.

• In addition, the Health Insurance – Healthcare Reform and the Health Insurance – Commercial segments had lower increases in premium rates during the 2004 period than during the 2003 period.

• During the 2003 period the claims incurred of the Health Insurance – Commercial and the Healthcare Reform segments were affected by the favorable development of their claim liabilities, which were attributed to better than expected utilization trends.

The consolidated expense ratio for the three months ended June 30, 2004 increased by 0.5 percentage points when compared to the consolidated expense ratio for the same period of the prior year.

The consolidated realized gain on sale of securities is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available for sale securities. The realized gain during the second quarter of the year 2003 is mostly due to the sale of common stocks of Popular, Inc., which generated a gain of approximately $6.1 million.

The consolidated unrealized gain (loss) on trading securities is mostly related to investments held by the insurance segments in corporate bonds and equity securities. The consolidated unrealized loss during the 2004 period is mostly attributed to losses in the portfolios held by these segments in corporate debt securities due to the changes in interest rates.

The consolidated income tax expense for the three months period ended June 30, 2004 decreased by $61.2 million when compared to the same period of the prior year. This decrease is due to the effect of the following:

• On June 18, 2003, the Corporation was notified by the Puerto Rico Treasury Department (PRTD) that TSI’s tax exemption was terminated effective December 31, 2002. As a result, since effective January 1, 2003 TSI is subject to Puerto Rico income taxes, the Health Insurance – Commercial and Healthcare Reform segments together recorded in the second quarter of the year 2003 $9.8 million income tax expense for the entire six months period ended June 30, 2003. In 2004, the income tax expense for these segments includes its corresponding three month period.

• On July 31, 2003, TSM and TSI executed a closing agreement with the PRTD that stipulated that the statutory net income accumulated while TSI operated under the tax ruling was deemed distributed to TSM. As a result, TSM recognized an income tax expense of $51.8 million, which was recorded in the second quarter of the year 2003.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

The consolidated earned premiums, net and fee revenues for the six months ended June 30, 2004 present an increase of $12.6 million, or 2.0%, when compared to the consolidated earned premiums, net and fee revenues for the same period of the prior year. This increase is mostly due to the following:

• The earned premiums, net and fee revenue corresponding to the Health Insurance – Commercial segment increased by $9.9 million or 2.8% during this period. An increase in the average enrollment together with increases in premium rates account for the segment’s fluctuation in earned premiums and fee revenue for the period.

• The earned premiums, net of the Property and Casualty Insurance segment increased by $3.7 million or 9.9% during this period. This increase is mostly reflected in the premiums written for the dwelling, auto physical damage and other liability lines of business. Together, these lines of business experienced an increase in premiums of $5.0 million, or 22.8%, during this period. Also, the amount of premiums ceded increased by $5.5 million mostly as the result of portfolio transfers made during the first quarter of the year 2003.

The amount of consolidated claims incurred for the six months ended June 30, 2004 reflect an increase of $32.0 million, or 6.0%, when compared to the claims incurred for the six months ended June 30, 2003. The

consolidated loss ratio reflects an increase of 3.3 percentage points during this period. This fluctuation is due to the following:

• During the second quarter of the 2004 period the Health Insurance –Commercial and the Health Insurance – Healthcare Reform segments experienced higher trends, mainly in the cost per service of pharmacy coverage and in the utilization of surgical procedures when compared to the prior year.

• In addition, the Health Insurance – Healthcare Reform and the Health Insurance – Commercial segments had lower increases in premium rates during the 2004 period.

• During the 2003 period the claims incurred of the Insurance – Health Insurance – Commercial and the Healthcare Reform segments were affected by the favorable development of their claim liabilities, which were attributed to better than expected utilization trends in that particular period.

The consolidated expense ratio for the six months ended June 30, 2004 increased by 0.4 percentage points when compared to the consolidated expense ratio for the same period of the prior year.

The consolidated realized gain on sale of securities is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available for sale securities. The realized gain during the 2003 period is mostly due to the sale of common stocks of Popular, Inc., which generated a gain of approximately $6.1 million.

The consolidated income tax expense for the six months period ended June 30, 2004 decreased by $58.1 million when compared to the same period of the prior year. This decrease is due to the effect of the following:

• The taxable income decreased during the 2004 period thus, reducing the consolidated income tax expense.

Health Insurance – Commercial Program Operating Results


	Three months ended						Six months ended
	June 30,						June 30,
(dollar amounts in thousands)	2004			2003			2004			2003
Average enrollment:
Corporate accounts		301,786			300,649			302,845			307,103
Self-funded employers		139,994			129,538			136,376			128,352
Individual accounts		84,779			84,416			84,707			84,010
Federal employees		52,440			54,158			52,828			54,239
Local government employees		42,811			43,447			42,882			43,503

Total enrollment		621,810			612,208			619,638			617,207

Earned premiums	$	179,820			169,010			355,011			345,076
Amounts attributable to self-funded arrangements		46,319			40,200			89,575			80,337
Less: Amounts attributable to claims under self-funded arrangements		(42,485	)		(37,191	)		(83,067	)		(74,550	)

Earned premiums and fee revenue	$	183,654			172,019			361,519			350,863

Claims incurred	$	162,616			138,164			315,856			292,721
Operating expenses		22,619			21,861			44,613			43,020

Total underwriting costs	$	185,235			160,025			360,469			335,741

Underwriting income	$	(1,581	)		11,994			1,050			15,122

Loss ratio		88.5	%		80.3	%		87.4	%		83.4	%
Expense ratio		12.3	%		12.7	%		12.3	%		12.3	%

Combined ratio		100.9	%		93.0	%		99.7	%		95.7	%

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Earned premiums and fee revenue for the three months ended June 30, 2004 reflects an increase of $11.6 million, or 6.8%, when compared to the earned premiums and fee revenue for the three months ended June 30, 2003. This increase is the result of the following:

• Average enrollment as of June 30, 2004 increased by 9,602 members, or 1.6%, when compared to the enrollment as of the same period of 2003. The increase in average enrollment is mostly reflected in Self-funded employers and Corporate Accounts businesses, which membership increased by 10,456 members, or 8.1%, and 1,137, or 0.4%, respectively, during this period. The average enrollment of Federal employees reflects a decrease in membership by 1,718, or 3.2% during this period.

• The segment monitors premium rates, particularly in the rated Corporate Accounts business, ensuring adequate premium rates that cover actual claims trends. Increases in premium rates combined with an increase in Self funded employers have contributed to the increase experienced in the earned premiums and fee revenue for the period.

Claims incurred during the three months ended June 30, 2004 increased by $24.4 million, or 17.7%, when compared to the same period in 2003. In addition, the segment’s loss ratio for the three months ended June 30, 2004 increased by 8.2 percentage points when compared to the loss ratio for the three months ended June 30, 2003. These fluctuations are attributed to an increase in trends during the latter part of the 2004 quarter, particularly in the cost per service of pharmacy coverage and in the utilization of surgical procedures when compared to the same period of the prior year. For this segment, cost containment initiatives have been put in place to maintain cost and utilization trends at levels consistent with pricing and margin objectives. In addition, during the 2003 period the claims incurred were affected by the favorable development of its claim liabilities, which were attributed to better than expected utilization trends in that particular period.

The operating expenses for the three months ended June 30, 2004 reflect an increase of $758 thousand, or 3.5%, when compared to the three months ended June 30, 2003. This increase is due to the normal inflationary effect in operating costs in addition to increases in the following line items: commissions, access services, data processing and provision for bad debt. The expense ratio for the three months ended June 30, 2004 experienced a decrease of 0.4 percentage points compared to the three months ended June 30, 2003.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Earned premiums and fee revenue for the six months ended June 30, 2004 reflects an increase of $10.7 million, or 3.0%, when compared to the earned premiums and fee revenue for the six months ended June 30, 2003. This increase is the result of the following:

• Average enrollment as of June 30, 2004 increased by 2,431 members, or 0.4%, when compared to the enrollment as for the same period of 2003. The increase in average enrollment is mostly reflected in the Self-funded employers business, which membership increased by 8,024 members, or 6.3%, during this period. The average enrollment of the Corporate Accounts and Federal employees businesses reflects a decrease in membership of 4,258, or 1.4%, and 1,411, or 2.6%, during this period, respectively.

• The segment monitors premium rates, particularly in the rated Corporate Accounts business, ensuring adequate premium rates that cover actual claims trends. Increases in premium rates combined with an increase in the average membership of the self funded employers business, have mitigated the effect of the decrease in average membership of other lines of business in the earned premiums and fee revenue for the period.

Claims incurred during the six months ended June 30, 2004 increased by $23.1 million, or 7.9%, when compared to the same period in 2003. In addition, the segment’s loss ratio for the six months ended June 30, 2004 increased by 4.0 percentage points when compared to the loss ratio for the six months ended June 30, 2003. This increase is attributed to an increase in utilization trends during the latter part of the second quarter of the year 2004, particularly in the cost per service of pharmacy coverage and in the utilization of surgical procedures when compared to the prior year. For this segment, cost containment initiatives have been put in place in order to maintain cost and utilization trends at levels consistent with pricing and margin objectives. In addition, during the 2003 period the claims incurred of the segment were affected by the favorable development of its claim liabilities, which were attributed to better than expected utilization trends in that particular period.

The operating expenses for the six months ended June 30, 2004 reflect an increase of $1,593, or 3.7%, when compared to the operating expenses for the six months ended June 30, 2003. This increase is due to the normal inflationary effect in operating costs in addition to increases in the following line items: commissions, access services, data processing and legal services. The expense ratio for the six months ended June 30, 2004 did not change when compared to the ratio for the six months ended June 30, 2003.

Health Insurance – Healthcare Reform Program Operating Results


	Three months ended						Six months ended
	June 30,						June 30,
(dollar amounts in thousands)	2004			2003			2004			2003
Average enrollment:
North area		234,238			238,137			233,789			239,510
Metro-north area		218,401			225,727			218,701			227,083
Southwest area		165,603			169,460			165,725			170,207

		618,242			633,324			618,215			636,800

Earned premiums	$	119,601			122,852			238,999			238,647

Claims incurred	$	109,605			108,786			218,820			212,953
Operating expenses		9,050			8,428			17,802			16,74

Total underwriting costs	$	118,655			117,214			236,622			229,699

Underwriting income	$	946			5,638			2,377			8,948

Loss ratio		91.6	%		88.6	%		91.6	%		89.2	%
Expense ratio		7.6	%		6.9	%		7.4	%		7.0	%

Combined ratio		99.2	%		95.4	%		99.0	%		96.3	%

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Earned premiums of the Healthcare Reform segment for the three months ended June 30, 2004 decreased by $3.3 million, or 2.6%, when compared to the same period of last year. This decrease is the result of the net effect of the following:

• The earned premiums for the three months ended June 30, 2003 include an adjustment increasing premiums by approximately $5.8 million. This represents an adjustment to premiums to be returned to the Administración de Seguros de Salud de Puerto Rico (ASES, by its Spanish acronym), which is the government agency that administers the Healthcare Reform. As mentioned in previous filings with the United States Securities and Exchange Commission, the Healthcare Reform contracts include a provision where if the net income for any given contract year exceeds 2.5% of earned premiums, the insurance companies have to return 75.0% of this excess to ASES.

• The average monthly enrollment for this segment decreased by 15,082 insureds, or 2.4%, when comparing the average enrollment for the three months ended June 30, 2004 with the average enrollment for the three months ended June 30, 2003. This decrease is attributed to the continuous review and screening performed by the Government of Puerto Rico over the persons eligible to participate in the Healthcare Reform.

• Premium rates were increased by approximately 4.2% during the Healthcare Reform contract renegotiation process for the twelve-month period ended on June 30, 2004.

Claims incurred during the three months ended June 30, 2004 reflect an increase of $819 thousand, or 0.8%, when compared to the three months ended June 30, 2003. The loss ratio increased by 3.0 percentage points when comparing the 2004 period with the 2003 period. This fluctuation results mostly from higher utilization trends experienced during the three months ended June 30, 2004. In addition, during the 2003 period the claims incurred of the segment were affected by the favorable development of its claim liabilities, which were attributed to better than expected utilization trends in that particular period.

Operating expenses for the three months ended June 30, 2004 increased by $622 thousand, or 7.4%, when compared to the operating expenses for the three months ended June 30, 2003. The expense ratio increased by 0.7 percentage points during the same period. This increase is due to the normal inflationary effect in operational costs.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Earned premiums for the six months ended June 30, 2004 present an increase of $352 thousand, or 0.1%, when compared to the earned premiums for the six months ended June 30, 2003. This increase is due to the net effect of the following:

• Premium rates were increased by approximately 4.2% during the Healthcare Reform contract renegotiation process for the twelve-month period ended on June 30, 2004.

• In the six months ended June 30, 2003 the segment increased premiums by approximately $5.8 million when adjusting the amount recorded as return premiums to ASES.

• The average monthly enrollment for this segment decreased by 18,585 insureds, or 2.9%, when comparing the average enrollment for the six months ended June 30, 2004 with the average enrollment for the six months ended June 30, 2003. This decrease is attributed to the continuous review and screening performed by the Government of Puerto Rico over the persons eligible to participate in the Healthcare Reform.

Claims incurred during the six months ended June 30, 2004 increased by $5.9 million, or 2.8%, when compared to the claims incurred for the same period of 2003. The loss ratio increased by 2.4 percentage points when comparing the 2004 period with the 2003 period. This fluctuation results mostly from higher utilization trends experienced during the six months ended June 30, 2004. In addition, during the 2003 period the claims incurred of the segment were affected by the favorable development of its claim liabilities, which were attributed to better than expected utilization trends in that particular period.

Operating expenses for the six months ended June 30, 2004 increased by $1.1 million, or 6.3%, when compared to the operating expenses for the six months ended June 30, 2003. The expense ratio increased by 0.4 percentage points during the same period. This increase is due to the normal inflationary effect in operational costs.

Property and Casualty Insurance Operating Results


	Three months ended						Six months ended
	June 30,						June 30,
(dollar amounts in thousands)	2004			2003			2004			2003
Premiums written:
Commercial multiperil	$	12,641			11,590			25,521			25,633
Dwelling		7,837			6,752			13,536			11,505
Auto physical damage		4,479			3,499			8,891			6,993
Commercial auto liability		3,125			2,879			6,683			5,924
Other liability		2,473			2,132			4,482			3,406
Medical malpractice		1,529			1,331			2,517			2,333
All other		2,540			2,692			4,246			4,456

Total premiums written		34,624			30,875			65,876			60,250

Premiums ceded		(12,977	)		(13,750	)		(25,730	)		(20,185	)
Change in unearned premiums		(1,438	)		1,129			846			(2,758	)

Net premiums earned	$	20,209			18,254			40,992			37,307

Claims incurred	$	10,501			10,645			21,128			20,455
Operating expenses		10,719			8,966			19,428			17,485

Total underwriting costs	$	21,220			19,611			40,556			37,940

Underwriting income	$	(1,011	)		(1,357	)		436			(633	)

Loss ratio		52.0	%		58.3	%		51.5	%		54.8	%
Expense ratio		53.0	%		49.1	%		47.4	%		46.9	%

Combined ratio		105.0	%		107.4	%		98.9	%		101.7	%

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Total premiums written for the three months ended June 30, 2004 increased by $3.7 million, or 12.1%, when compared to the three months ended June 30, 2003. This fluctuation is mostly due to an increase in

the volume of the premiums written in the dwelling, commercial multi-peril and auto physical damage lines of business, which experienced an increase in premiums of $1.1 million, or 16.1%, $1.1 million, or 9.1%, and $980 thousand, or 28.0%, during this period, respectively. The current market is characterized by strong and aggressive competition with premium rates at levels similar or below those of prior year. Nonetheless, focusing on business retention and relationships with our general agents has provided favorable results for premium writings in the commercial multi-peril business, the segment’s major line business. The strengthening of business partnerships with institutions has contributed to the increase in the writings of the dwelling business. Also, the commercial auto, including auto physical damage coverage, and general liability have been targeted for growth in new business.

Premiums ceded to reinsurers during the three months ended June 30, 2004 decreased by $773 thousand, or 5.6 %, when compared to the same period for the prior year. The ratio of premiums ceded to premiums written reflects a decrease of 7.0 percentage points, from 44.5% for the three months ended June 30, 2003 to 37.5% for the three months ended June 30, 2004. This fluctuation is mainly due the fact that during the second quarter of 2003 the segment recorded an outgoing portfolio transfer covering the builder’s risk treaty which had the effect of increasing premiums ceded for the period.

The decrease in the change in unearned premiums of $2.6 million is primarily due to the effect of the previously described outgoing reinsurance portfolio transfer that was done during the second quarter of the year 2003 and a change in the mix of the business subscribed. The portfolio transfer had the effect of decreasing ceded unearned premiums during the 2003 period by approximately $1.0 million.

Claims incurred reflect a reduction of $144 thousand, or 1.4% when compared to the three months ended June 30, 2003. The loss ratio experienced a decrease of 6.3 percentage points during the three months period ended June 30, 2004 as compared to the same period of the prior year. Emphasis on quality underwriting has resulted in better loss experience, particularly in the segment’s auto liability and casualty lines of business.

The operating expenses for the three months ended June 30, 2004 increased by $1.8 million, or 19.6%, when compared to the operating expenses for the three months ended June 30, 2003. The expense ratio increased by 3.9 percentage points during this period. The fluctuation in the total operating expenses and the expense ratio during this period is mainly due to the following:

• During the second quarter of 2004, the segment recorded a guaranty fund assessment to cover liabilities of insolvent companies. This assessment, which amounted to $871 thousand, was charged to operations during this period.

• During the second quarter of the 2003 period, the segment recorded an experience refund that was received from the Compulsory Vehicle Liability Insurance Joint Underwriting Association. This refund, amounting to $638 thousand, was recorded as a decrease to the operating expenses for the period. No experience refund from the Compulsory Vehicle Liability Insurance Joint Underwriting Association has been received in the 2004 period.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Total premiums written for the six months ended June 30, 2004 increased by $5.6 million, or 9.3%, when compared to the six months period ended June 30, 2003. This fluctuation is mostly due to an increase in the volume of the premiums written for the dwelling, auto physical damage and other liability lines of business, which experienced an increase in premiums of $2.0 million, or 17.7%, $1.9 million, or 27.1%, and $1.1 million, or 31.6%, during this period, respectively. The strengthening of business relationships with financial institutions has resulted in additional growth in the dwelling line of business. Commercial auto, including auto physical damage coverage, as well as the other liability lines of business have been targeted for growth in new business.

Premiums ceded to reinsurers during the six months ended June 30, 2004 increased by $5.5 million, or 27.5%, when compared to the same period for the prior year. The ratio of premiums ceded to premiums

written reflects an increase of 5.6 percentage points, from 33.5% as of June 30, 2003 to 39.1% as of June 30, 2004. The increase in the premiums ceded to premiums written ratio is due to the following:

• The amount of premiums ceded for the six months ended June 30, 2003 was reduced as a result of the cancellation of the property surplus treaty. This cancellation resulted in a reinsurance portfolio transfer resulting in a net incoming business and a reduction in the amount of premiums ceded.

• During the 2003 period the segment increased its retention in the personal lines quota share treaty from 70% to 95%. In addition, as a result of the increased retention, the segment received an incoming reinsurance portfolio transfer causing a reduction in the premiums ceded for the six months ended June 30, 2003.

• Increased catastrophe reinsurance costs during 2004.

Claims incurred increased by $673 thousand, or 3.3%, when comparing the claims incurred for the six months ended June 30, 2004 to the claims incurred for the same period in 2003. This increase is basically due to the segment’s increased volume of business. The decrease experienced in the loss ratio of 3.3 percentage points during this period is mainly attributed to the segment’s focus on quality underwriting in order to improve loss experience. These efforts have resulted in improved loss ratios particularly in the auto liability and casualty lines of business.

The operating expenses for the six months ended June 30, 2004 increased by $1.9 million, or 11.1%, when compared to the operating expenses for the six months ended June 30, 2003. The expense ratio increased by 0.5 percentage point during this period. The fluctuation in the total operating expenses and the expense ratio during this period is mainly due to the following:

Liquidity and Capital Resources

Cash Flows

The Corporation maintains good liquidity measures due to the quality of its assets, the predictability of its liabilities, and the duration of its contracts. The liquidity of the Corporation is primarily derived from the operating cash flows of its insurance subsidiaries.

As of June 30, 2004 and December 31, 2003, the Corporation’s cash and cash equivalents amounted to $56.8 million and $48.3 million, respectively. The sources of funds available to meet the requirements of the Corporation’s operations include: cash provided from operations, maturities and sales of securities classified within the trading and available-for-sale portfolios, securities sold under repurchase agreements, and issuance of long and short-term debt.

Management believes that the Corporation’s net cash flows from operations are expected to sustain the operations for the next year and thereafter, as long as the operations continue showing positive results. In addition, the Corporation monitors its premium rates and its claims incurred to maintain proper cash flows and has the ability to increase premium rates throughout the year in the monthly renewal process.

Cash Flows from Operations

Most of the cash flows from operating activities are generated from the insurance subsidiaries. The basic components of the cash flows from operations are premium collections, claims payments, payment of

operating and acquisition expenses and proceeds from sales and maturities of investments in the trading portfolio.

Net cash flows (used in) provided by operating activities amounted to $(16.4) million and $16.4 million for the six months ended June 30, 2004 and 2003, respectively, a decrease of $32.8 million. This decrease in cash flows from operating activities is mainly attributed to the net effect of the following:

• The amount of income taxes paid increased by $39.3 million when comparing payments made in the 2004 and 2003 periods. The 2004 period includes the payment of the last installment of the $51.8 million income tax liability of the closing agreement with the Puerto Rico Treasury Department upon the termination of TSI’s tax exemption. The first installment of $37.0 million was made on July 31, 2003 and the second and final installment, amounting to $14.8 million, was made on April 15, 2004. In addition, on April 15, 2004 TSI made a payment of $22.1 million corresponding to its income tax liability for the year 2003 and the first installment of the estimated tax corresponding to the year 2004.

• Premiums collected increased by $17.3 million when comparing collections during the six months ended June 30, 2004 with collections for the six months ended June 30, 2003. This increase is mostly related to the increased volume of business and increases in premium rates of the operating segments.

• The amount of claims, losses and benefits paid for the six months ended June 30, 2004 reflect an increase of $3.0 million when compared with the six months ended June 30, 2003. The increase in the amount of claims, losses and benefits paid is mostly the result of the segments’ increased volume of business as well as to increased utilization trends in both Health Insurance segments.

• The net acquisition of investments in the trading portfolio decreased by $5.4 million for the six months ended June 30, 2004, when compared to the six months ended June 30, 2003.

• During the six months ended June 30, 2003 the Corporation collected approximately $13.0 million from the contingency reserve funds of the Federal Employee Health Benefit Plan. The contingency reserve funds payment corresponding to the year 2004 had not been received as of June 30, 2004.

Any excess liquidity is available, among other things, to invest in high quality and diversified fixed income securities and, to a lesser degree, to invest in marketable equity securities.

Cash Flows from Investing Activities

The basic components of the cash flows from investing activities are derived from acquisitions and proceeds from sales and maturities of investments in the available for sale and held to maturity portfolios and capital expenditures. The Corporation monitors the duration of its investment portfolio and executes the purchases and sales of these investments with the objective of having adequate funds available to satisfy its maturing liabilities.

Net cash flows provided by (used in) investing activities amounted to $11.4 million and $(23.3) million for the six months ended June 30, 2004 and 2003, respectively. The increase in the cash flows from investing activities during this period is attributed to a reduction in the amount of investment proceeds that was reinvested. In the six months ended June 30, 2004 the proceeds from investments sold or matured exceeded acquisition of investments by $13.1 million. In the six months ended June 30, 2003 total acquisition of investments exceeded the proceeds from investments sold or matured by $20.8 million.

Cash Flows from Financing Activities

Net cash flows provided by financing activities amounted to $13.5 million and $4.6 million for the six months ended June 30, 2004 and 2003, respectively. The increase of $8.9 million when compared to the same period of the prior year is mainly due to the combined effect of the following:

• The change in outstanding checks in excess of bank balances reflects an increase of $8.8 million during the six months ended June 30, 2004 compared to the six months ended June 30, 2003. The amount of checks in excess of bank balances represents a timing difference between the issuance of checks and the cash balance in the bank account at one point in time.

• The net proceeds from individual retirement annuities were $1.1 million higher during the six months ended June 30, 2004 than during the six months ended June 30, 2003. This fluctuation is basically due to an increase in the proceeds received in the fixed deferred annuity product.

• The payments of long-term debt increased by $1.0 million for the six months period ended June 30, 2004 when compared to the payments made in the 2003 period. This increase is due to a scheduled payment of $1.0 million that was done on one of the credit agreements. Payments for this credit agreement are made annually on or before August 1^st.

Financing and Financing Capacity

The Corporation has significant short-term liquidity supporting its businesses. It also has available short-term borrowings from time to time to address timing differences between cash receipts and disbursements. These short-term borrowings are mostly in the form of securities sold under repurchase agreements. As of June 30, 2004, the Corporation had $227.5 million in available credit on these agreements. Outstanding short-term borrowings as of June 30, 2004 amount to $38.7 million. The amount due under outstanding short-term borrowings is expected to be paid out of the operating and investing cash flows of the Corporation.

In addition, the Corporation has two credit agreements with a commercial bank, FirstBank Puerto Rico. These credit agreements bear interest rates based on the London Interbank Offered Rate (LIBOR) plus a margin specified by the commercial bank at the time of the agreement. As of June 30, 2004, the two credit agreements have an outstanding balance of $31.7 million and $15.0 million. These credit agreements contain several restrictive covenants, including, but not limited to, restrictions to incur additional indebtedness and the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of June 30, 2004, management believes the Corporation is in compliance with these covenants. Further details regarding these credit agreements are incorporated by reference to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Corporation’s December 31, 2003 of the Corporation’s Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Corporation is exposed to certain market risks that are inherent in the Corporation’s financial instruments, which arise from transactions entered into in the normal course of business. The Corporation has exposure to market risk mostly in its investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in the Corporation’s exposure to financial market risks since December 31, 2003. A discussion of the Corporation’s market risk as of December 31, 2003 is incorporated by reference to Item 7a of the Corporation’s Annual Report on Form 10-K.

Item 4. Controls and Procedures

The Corporation’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures as of June 30, 2004. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2004. There were no significant changes in the Corporation’s disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed the evaluation referred to above.

Part II – Other Information

Item 1. Legal Proceedings

(a) As of June 30, 2004, the Corporation is a defendant in various lawsuits arising out of the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the Corporation’s consolidated financial position or results of operations.

(b) Drs. Carlyle Benavent and Ibrahim Pérez (the plaintiffs) caused the initiation of an administrative proceeding before the Puerto Rico Insurance Commissioner against TSI and TSM alleging the illegality of the repurchase and subsequent sale of 1,582 shares of TSI’s common stock. The plaintiffs further alleged that the ultimate purchasers of said shares were selected on an improper and selective basis by the Corporation and that they (the plaintiffs) were illegally excluded from participation in the sale of shares, all in violation of the Puerto Rico Insurance Code and that, consequently, the sale of shares should be annulled.

On December 1996, the Commissioner of Insurance issued an order to annul the sale of the 1,582 shares that TSI had repurchased from the estate of deceased stockholders. Consequently, the sale of 1,582 shares was cancelled and the purchase price was returned to each former stockholder. In the year 2000, the Commissioner of Insurance further ordered that all corporate decisions undertaken by TSI through the vote of its stockholders on record, be ratified in a stockholders’ meeting or in a subsequent referendum.

In March 2002, the Commissioner of Insurance stated that the ratification of the corporate reorganization was not required and that TSI had complied with the Commissioner’s order of October 1999 related to the corporate reorganization. Thereafter, the plaintiffs filed a petition for review of the Commissioner’s determination before the Puerto Rico Circuit Court of Appeals.

On October 2002, the Court of Appeals issued an order requiring the Commissioner of Insurance to order a meeting of stockholders to ratify TSI’s corporate reorganization and the change of name of TSI from “Seguros de Servicio de Salud de Puerto Rico, Inc.” to “Triple-S, Inc.”. TSI and TSM’s filed motions of reconsideration. The Puerto Rico’s Circuit Court of Appeals granted said motions on May 18, 2003. The Circuit Court held that the Commissioner of Insurance had the authority to waive the requirement that a referendum be held to ratify TSI’s reorganization and that therefore the reorganization of TSI was approved by the stockholders, inasmuch as the votes pertaining to the 1,582 shares annulled were not decisive.

On June 26, 2003, the two stockholders presented a writ of certiorari before Puerto Rico’s Supreme Court. The writ was issued by the Supreme Court on August 22, 2003 when it ordered the Circuit Court of Appeals to forward the record of the case. On December 1, 2003, the plaintiffs filed a motion submitting their case on the basis of their original petition. TSI and TSM filed its brief on December 30, 2003, while the Commissioner of Insurance, in turn, filed a separate brief on December 31, 2003. On June 24, 2004 the Supreme Court ordered the plaintiffs to file a brief in support of their allegations. The case is still pending before the Supreme Court.

(c) On September 4, 2003, José Sánchez and others filed a putative class action complaint against the Corporation, some present and former directors of TSM and TSI, and others, in the United States District Court for the District of Puerto Rico, alleging violations under the Racketeer Influenced and Corrupt Organizations Act, better known as the RICO Act. The suit, among other allegations, alleges a scheme to defraud the plaintiffs by acquiring control of TSI through illegally capitalizing TSI and later converting it to a for-profit corporation and depriving the stockholders of their rights. The plaintiffs base their later allegations on the supposed decisions of TSI’s Board of Directors and stockholders, allegedly made in 1979, to operate with certain restrictions in order to turn TSI into a charitable corporation, basically forever. While this case is still in the very early preliminary stages and has not been certified as a class action, a Motion to Dismiss has been filed by the defendants. On

March 15, 2004, plaintiffs filed a response to this motion. On April 30, 2004, defendants filed a Reply in Support of Motion to Dismiss.

(d) On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against TSM, TSI and others in the Court of First Instance for San Juan, Superior section, alleging, among other things, violations by the defendants of provisions of the Insurance Code, anti-monopolistic practices, unfair business practices and damages in the amount of $12.0 million. They also requested that TSM sell shares to them. After a preliminary review of the complaint, it appears that many of the allegations brought by the plaintiffs have been resolved in favor of TSM and TSI in previous cases brought by the same plaintiffs in the U.S. District Court for the District of Puerto Rico and by most of the plaintiffs in the local courts. The defendants, including TSM and TSI answered the complaint, filed a counter-claim and filed several motions to dismiss this claim. The case has recently been reassigned to a new judge.

(e) On May 22, 2003 a putative class action suit was filed by Kenneth A. Thomas, M.D. and Michael Kutell, M.D., on behalf of themselves and all other similarly situated and the Connecticut State Medical Society against the Blue Cross and Blue Shield Association (BCBSA) and multiple other insurance companies, including TSI. The case is pending before the U.S. District Court for the Southern District of Florida, Miami District.

The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of plaintiff’s property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.

The class action complaint alleges that TSI’s health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.

On June 18, 2004, the Plaintiffs moved to amend the complaint to include the Colegio de Médicos Cirujanos de Puerto Rico (a compulsory association grouping all physicians in Puerto Rico), Marissel Velázquez, MD, and Andrés Meléndez, MD, as plaintiffs against TSI.

TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.

(f) On December 8, 2003 a putative class action was filed by Jeffrey Solomon, MD, and Orlando Armstrong, MD, on behalf of themselves and all other similarly situated and the American Podiatric Medical Association, Florida Chiropractic Association, California Podiatric Medical Association, Florida Podiatric Medical Association, Texas Podiatric Medical Association, and Independent Chiropractic Physicians, against the Blue Cross Blue Shield Association (BCBSA) and multiple other insurance companies, including TSI, all members of the BCBSA. The case is still pending before the United States District Court for the Southern District of Florida, Miami District.

The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of Plaintiff’s property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payment due to the doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.

The class action complaint alleges that TSI’s health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.

On June 25, 2004, the Plaintiff amended the complaint but the allegations against TSI did not vary.

Management believes that TSI was made a party to this litigation for the sole reason that TSI is associated with the BCBSA. Therefore, TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submissions of Matters to a Vote of Security Holders

Annual Meeting

The Corporation held its 2004 Annual Meeting on April 25, 2004. The shareholders considered and voted upon the election of eight directors and five resolutions. Summaries of said proposals and voting results were as follows:

Election of Directors:

At the Annual Meeting, shareholders elected by ballot eight (8) directors to serve as members of the Board of Directors for a term of three (3) years. The directors had to be elected by a majority of the affirmative votes of the issued and outstanding shares with the right to vote in the elections for directors that are present or represented by proxy at the Annual Meeting, pursuant to Section A of Article 7-1 of the By-laws of TSM and Article 7.06(C) of the General Corporations Law of 1995, as amended. At the moment of voting, 4,245 shares were present or represented.

All candidates nominated by the Board of Directors were elected. Seven directors were required to be representatives of the community: (1) Ramón Ruiz-Comas, CPA received 3,930 votes in favor, (2) Mr. Mario S Belaval-Ferrer received 3,911 votes in favor, (3) José Davison-Lampón, Esq. received 3,930 votes in favor, (4) Manuel Suárez-Méndez, PE received 3,884 votes in favor, (5) Carmen Ana Culpeper-Ramírez received 3,864 votes in favor, (6) Manuel Figueroa-Collazo, PhD. received 3,937 votes in favor, and (7) Miguel Nazario-Franco received 3,890 votes in favor. One director was required to be a physician or dentist: (1) Fernando J. Ysern Borrás, MD received 3,924 votes in favor.

Proposals of the Board of Directors:

Resolution Number 1: This resolution was presented by the Board of Directors of TSM to amend Article Eighth of the Articles of Incorporation and Article 4-2 of the By-laws of TSM to allow a shareholder to transfer, without consideration, all or part of his/her shares to any other physician or dentist, regardless of the person being a descendant of the Shareholder, and subsequently register said shares in the books of TSM, provided said physician or dentist complies with the twenty-one (21) shares limit requirement.

In order for this Resolution to be approved, it had to receive the affirmative vote of no less than two-thirds (2/3) of the shares issued and outstanding with the right to vote since it is an amendment to the Articles of Incorporation pursuant to Section A of Article Thirteenth of the Articles of Incorporation. At the moment of voting, 4,249 shares were present or represented. This Resolution was not approved, since, of the 8,943 voting shares issued and outstanding, it received 39.8% (3,556) votes in favor, 6.3% (567)

votes against and 1.1% (94) abstentions.

Resolution Number 2: This resolution was presented by the Board of Directors of TSM to amend Articles 8-1, 8-5, and 8-11 of the Bylaws of TSM to change the time when the Board of Directors shall meet and to modify certain duties of the Chairperson of the Board of Directors, substitute the Executive Committee of the Board of Directors for a Corporate Governance Committee, assign duties and members to the Corporate Governance Committee, and to establish and modify the duties of the other Committees of the Board of Directors.

In order for this Resolution to be approved, it had to receive the affirmative vote of a majority of a majority of the shares issued and outstanding with the right to vote that were present or represented at the Annual Meeting. Of the 4,249 shares present or represented at the moment of voting, this Resolution received 90.3% (3,837) votes in favor, 4.1% (173) votes against and 3.3% (142) abstentions. Therefore, this Resolution received the required votes in favor and was approved.

Proposals of the Shareholders:

Resolution Number 3: This resolution was presented by Leslie H. López-Vélez, DDS, shareholder of TSM, to amend Articles Sixth and Thirteenth, Section A of the Articles of Incorporation, and Articles 4-1 and 9-1 of the By-laws of TSM to reduce the required shares needed in order to approve certain amendments to Article Sixth of the Articles of Incorporation and Article 4-1 of the By-laws from three-fourths (3/4) of the shares issued and outstanding to two-thirds (2/3) of the shares issued and outstanding.

In order for this Resolution to be approved, it had to receive the affirmative vote of no less than three-fourths (3/4) of the shares issued and outstanding with the right to vote since it is an amendment to the Articles of Incorporation and an amendment to the By-laws, pursuant to Section A of Article Thirteenth of the Articles of Incorporation and Section A of Article Nine of the By-laws. At the moment of voting, 4,249 shares were present or represented. This Resolution was not approved, since, of the 8,943 voting shares issued and outstanding, it received 39.8% (3,561) votes in favor, 5.0% (447) votes against and 1.6% (145) abstentions.

Resolution Number 4: This resolution was presented by Guillermo J. Fernández-Marti, MD, shareholder of TSM, to recommend to the Board of Directors of TSM to obtain the National Committee of Quality Assurance’s (NCQA) accreditation within a time frame of no more than six (6) months in compliance with the petition of the Shareholders made at the Annual Meeting of Shareholders held on April 29, 2001.

In order for this Resolution to be approved, it had to receive the affirmative vote of a majority of the shares issued and outstanding with the right to vote that are present and represented at the Annual Meeting. This Resolution was not approved, since, of the 4,249 voting shares present and represented at the moment of voting, it received 32.0% (1,361) votes in favor, 57.8% (2,454) votes against and 5.2% (220) abstentions.

Proposal Presented at the Annual Meeting of Shareholders:

Resolution Number 5: This resolution was presented by Bernardo Puebla-Melón, MD, shareholder of TSM, in order to state that the shareholders of TSM have never requested, accepted, nor feel represented by the people claiming to be their representatives in the Sánchez Case or any other, and that, if procedurally feasible, this resolution be notified to the Court.

In order for this resolution to be approved, it had to receive the affirmative vote of the majority of the shares issued and outstanding with the right to vote present or represented at the Annual Meeting. Of the 4,249 shares present and represented at the moment of voting, this Resolution received 93.7% (3,983) votes in favor, 1.8% (78) votes against and 1.8% (76) abstentions. Therefore, this Resolution received the required votes in favor and it was approved.

Item 5. Other Information

On April 26, 2004, the Board of Directors of TSM held a special meeting where it appointed the officers of TSM, which appointment was effective immediately. Said appointments are as follows:


Name:		Office:
Fernando J. Ysern-Borrás, MD		Chairman of the Board of Directors
Wilmer Rodríguez-Silva, MD		Vice-Chairman of the Board of Directors
Jesús R. Sánchez-Colón, DMD		Secretary of the Board of Directors
Arturo R. Córdova-López, MD		Assistant Secretary of the Board of Directors
Vicente J. León-Irizarry, CPA		Treasurer of the Board of Directors
Adamina Soto Martínez, CPA		Assistant Treasurer of the Board of Directors
Ramón Ruiz-Comas, CPA		President and Chief Executive Officer

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


Exhibit 3(ii)		By-Laws of Triple-S Management Corporation, as amended (English translation).

Exhibit 11		Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three months ended March 31, 2004 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.

Exhibit 12		Statements re computation of ratios; an exhibit describing the computation of the loss ratio, expense ratio and combined ratio for the three months ended March 31, 2003 has been omitted as the detail necessary to determine the computation of the loss ratio, expense ratio and combined ratio can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.

Exhibit 31.1		Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).

Exhibit 31.2		Certification of the Vice President of Finance and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).

Exhibit 32.1		Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350.

Exhibit 32.2		Certification of the Vice President of Finance and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.

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

(b) Reports on Form 8-K:

The Corporation did not file with the Securities and Exchange Commission any Current Reports on Form 8-K during the second quarter of the year 2004.


	Triple-S Management Corporation Registrant

Date: August 12, 2004	By:	/s/ Ramón M. Ruiz-Comas

		Ramón M. Ruiz-Comas, CPA
		President and
		Chief Executive Officer

Date: August 12, 2004	By:	/s/ Juan J. Román

		Juan J. Román, CPA
		Vice President of Finance
		and Chief Financial Officer


		PAGE
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		3
	Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003		4
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the six months ended June 30, 2004 and 2003		5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		36
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		38
Item 3.	Defaults Upon Senior Securities		38
Item 4.	Submissions of Matters to a Vote of Security Holders		38
Item 5.	Other Information		40
Item 6.	Exhibits and Reports on Form 8-K		41
SIGNATURES			42
EX-3(ii) BY-LAWS OF TRIPLE-S MANAGEMENT CORPORATION, AS AMENDED (ENGLISH TRANSLATION)
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

	•		TSI’s accumulated statutory net income while operating under the tax exemption, amounting to $132,763, was deemed distributed to TSM.

	•		For tax purposes, TSM recognized the exempt accumulated statutory net income as gross income. On this amount, TSM recognized an income tax liability amounting to $51,774, which was determined by applying a tax rate of 39% to the exempt accumulated statutory net income deemed distributed to TSM. During the second quarter of the year 2003, TSM recorded this income tax liability within the current income tax expense presented in the consolidated statements of earnings. Of this tax $37,000 was paid on July 31, 2003, the date of the closing agreement, and $14,774 was paid on April 15, 2004.

	(a)		As of June 30, 2004, the Corporation is defendant in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of its legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the consolidated financial position and results of operations of the Corporation.

	(b)		Drs. Carlyle Benavent and Ibrahim Pérez (the plaintiffs) caused the initiation of an administrative proceeding before the Puerto Rico Insurance Commissioner against TSI and TSM alleging the illegality of the repurchase and subsequent sale of 1,582 shares of TSI’s common stock. The plaintiffs further alleged that the ultimate purchasers of said shares were selected on an improper and selective basis by the Corporation and that they (the plaintiffs) were illegally excluded from participation in the sale of shares, all in violation of the Puerto Rico Insurance Code and that, consequently, the sale of shares should be annulled.

			On December 1996, the Commissioner of Insurance issued an order to annul the sale of the 1,582 shares that TSI had repurchased from the estate of deceased stockholders. Consequently, the sale of 1,582 shares was cancelled and the purchase price was returned to each former stockholder. In the year 2000, the Commissioner of Insurance further ordered that all corporate decisions undertaken by TSI through the vote of its stockholders on record, be ratified in a stockholders’ meeting or in a subsequent referendum.

			In March 2002, the Commissioner of Insurance stated that the ratification of the corporate reorganization was not required and that TSI had complied with the Commissioner’s order of October 1999 related to the corporate reorganization. Thereafter, the plaintiffs filed a petition for review of the Commissioner’s determination before the Puerto Rico Circuit Court of Appeals.

			On October 2002, the Court of Appeals issued an order requiring the Commissioner of Insurance to order a meeting of stockholders to ratify TSI’s corporate reorganization and the change of name of TSI from “Seguros de Servicio de Salud de Puerto Rico, Inc.” to “Triple-S, Inc.”. TSI and TSM’s filed motions of reconsideration. The Puerto Rico’s Circuit Court of Appeals granted said motions on May 18, 2003. The Circuit Court held that the Commissioner of Insurance had the authority to waive the requirement that a referendum be held to ratify TSI’s reorganization and that therefore the reorganization of TSI was approved by the stockholders, inasmuch as the votes pertaining to the 1,582 shares annulled were not decisive.

			On June 26, 2003, the two stockholders presented a writ of certiorari before Puerto Rico’s Supreme Court. The writ was issued by the Supreme Court on August 22, 2003 when it ordered the Circuit Court of Appeals to forward the record of the case. On December 1, 2003, the plaintiffs filed a motion submitting their case on the basis of their original petition. TSI and TSM filed its brief on December 30, 2003, while the Commissioner of Insurance, in turn, filed a separate brief on December 31, 2003. On June 24, 2004 the Supreme Court ordered the plaintiffs to file a brief in support of their allegations. The case is still pending before the Supreme Court.

	(c)		On September 4, 2003, José Sánchez and others filed a putative class action complaint against the Corporation, some present and former directors of TSM and TSI, and others, in the United States District Court for the District of Puerto Rico, alleging violations under the Racketeer Influenced and Corrupt Organizations Act, better known as the RICO Act. The suit, among other allegations, alleges a scheme to defraud the plaintiffs by acquiring control of TSI through illegally capitalizing TSI and later converting it to a for-profit corporation and depriving the stockholders of their rights. The plaintiffs base their later allegations on the supposed decisions of TSI’s Board of Directors and stockholders, allegedly made in 1979, to operate with certain restrictions in order to turn TSI into a charitable corporation, basically forever. While this case is still in the very early preliminary stages and has not been certified as a class action, a Motion to Dismiss has been filed by the defendants. On March 15, 2004, plaintiffs filed a response to this motion. On April 30, 2004, defendants filed a Reply in Support of Motion to Dismiss.

	(d)		On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against TSM, TSI and others in the Court of First Instance for San Juan, Superior section, alleging, among other things, violations by the defendants of provisions of the Insurance Code, anti-monopolistic practices, unfair business practices and damages in the amount of $12.0 million. They also requested that TSM sell shares to them. After a preliminary review of the complaint, it appears that many of the allegations brought by the plaintiffs have been resolved in favor of TSM and TSI in previous cases brought by the same plaintiffs in the U.S. District Court for the District of Puerto Rico and by most of the plaintiffs in the local courts. The defendants, including TSM and TSI answered the complaint, filed a counter-claim and filed several motions to dismiss this claim. The case has recently been reassigned to a new judge.

	(e)		On May 22, 2003 a putative class action suit was filed by Kenneth A. Thomas, M.D. and Michael Kutell, M.D., on behalf of themselves and all other similarly situated and the Connecticut State Medical Society against the Blue Cross and Blue Shield Association (BCBSA) and multiple other insurance companies, including TSI. The case is pending before the U.S. District Court for the Southern District of Florida, Miami District.

			The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of plaintiff’s property and a detriment to their business, and for declaratory and

			injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.

			The class action complaint alleges that TSI’s health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.

			On June 18, 2004, the Plaintiffs moved to amend the complaint to include the Colegio de Médicos Cirujanos de Puerto Rico (a compulsory association grouping all physicians in Puerto Rico), Marissel Velázquez, MD, and Andrés Meléndez, MD, as plaintiffs against TSI.

			TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.

	(f)		On December 8, 2003 a putative class action was filed by Jeffrey Solomon, MD, and Orlando Armstrong, MD, on behalf of themselves and all other similarly situated and the American Podiatric Medical Association, Florida Chiropractic Association, California Podiatric Medical Association, Florida Podiatric Medical Association, Texas Podiatric Medical Association, and Independent Chiropractic Physicians, against the Blue Cross Blue Shield Association (BCBSA) and multiple other insurance companies, including TSI, all members of the BCBSA. The case is still pending before the United States District Court for the Southern District of Florida, Miami District.

			The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which are alleged to have resulted in a loss of Plaintiff’s property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payment due to the doctors so that they are not paid in a timely manner for the covered, medically necessary services they render.

			The class action complaint alleges that TSI’s health care plans are the agents of BCBSA licensed entities, and as such have committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants.

			On June 25, 2004, the Plaintiff amended the complaint but the allegations against TSI did not vary.

			Management believes that TSI was made a party to this litigation for the sole reason that TSI is associated with the BCBSA. Therefore, TSI, pursuant to the advice of legal counsel, will move for the dismissal of the complaint against TSI.

	•		TSI, a health insurance company serving two major segments: the Commercial Program and the Commonwealth of Puerto Rico Healthcare Reform Program (the Healthcare Reform) of the Commonwealth of Puerto Rico;

	•		Seguros Triple-S, Inc. (STS), a property and casualty insurance company; and

	•		Seguros de Vida Triple-S, Inc. (SVTS), a life and disability insurance and annuity products company.