UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
   
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20082010
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                   
COMMISSION FILE NUMBER 001-33865
Triple-S Management Corporation
   
Puerto Rico
(STATE OF INCORPORATION)		 66-0555678
(I.R.S. ID)
1441 F.D. Roosevelt Avenue, San Juan, PR 00920
(787) 749-4949
Securities registered pursuant to Section 12(b) of the Act:
   
Title of each className of each exchange on which registered

Class B common stock, $1.00 par value		 Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:Class A common stock, $1.00 par value
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o YESYesþ NONo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o YESYesþ NONo
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 YESYeso NONo
     Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filerþ
Non-accelerated filero
(Do not check if a smaller reporting company)		Smaller reporting companyo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o YESYesþ NONo
     As of February 14, 2011, the registrant had 9,042,809 of its Class A common stock outstanding and 19,736,720 of its Class B common stock outstanding.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (assuming solely for the purposes of this calculation that all Directorsdirectors and executive officers of the registrant are “affiliates”) as of June 30, 20082010 was approximately $263,095,550$373,047,753 for the Class B common stock (the only onestock of the registrant that tradetrades in thea public market) and $15,928,809$9,042,809 for the Class A common stock (value(valued at its par value of $1.00 since it is not a publicly traded stock)traded).
As of February 28, 2009, the registrant had 9,042,809 of its Class A common stock outstanding and 21,069,773 of is Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 26, 200929, 2011 are incorporated by reference into Parts II and III of this Annual Report on Form 10-K.
 
 

 

 

Triple-S Management Corporation
FORM 10-K
For The Fiscal Year Ended December 31, 20082010
INDEXTable of Contents
     
Part I
  3
Item 1. 
Business
3
Item 1A.
Risk Factors
3
Item 1B.
Unresolved Staff Comments
49
Item 2.
Properties
49
Item 3.
Legal Proceedings
50
Item 4.
Submission of Matters to a Vote of Security Holders
52
     
Part IIItem 1. Business
3
Item 1A. Risk Factors
27
Item 1B. Unresolved Staff Comments
44
Item 2. Properties
45
Item 3. Legal Proceedings
45
Item 4. Removed and Reserved
48
   52
Item 5.Part II
 48
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 5248
Item 6.
Selected Financial Data
 5551
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 5652
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 8378
Item 8.
Financial Statements and Supplementary Data
 8781
Item 9.
Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosures.Disclosures
 8781
Item 9A.
Controls and Procedures
 8881
Item 9B.
Other Information
 8982
     
Part III
83
   89
Item 10.
Directors, Executive Officers and Corporate Governance
 8983
Item 11.
Executive Compensation.Compensation
 9083
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 9083
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 9083
Item 14.
Principal AccountingAccountant Fees and Services
 9083
Item 15. Exhibits and Financial Statements Schedules
83
     
Part IV
Item 15.
Exhibits, Financial Statement Schedules
90
SIGNATURES
 9487
 EX-10.8EX-21
 EX-10.17EX-23.1
EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
EX-99.1

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Part I
Item 1. Business.Business
General Description of Business and Recent Developments
Triple-S Management Corporation (“Triple-S”, “TSM”, the “Company”, the “Corporation”, “we”, “us” or “our”) is one of the largestleading managed care companycompanies in Puerto Rico, serving approximately one million789,000 members across all regions, and holds a leading market position covering approximately 30%21.2% of the population. We have the exclusive right to use the Blue Cross and Blue Shield name(“BCBS”) names and markmarks throughout Puerto Rico and the U.S. Virgin Islands and over 50 years of experience in the managed care industry. We offer a broad portfolio of managed care and related products in the commercial and Medicare andmarkets. Until September 30, 2010 we provided managed care services to the Puerto Rico Health ReformInsurance Plan (similar to Medicaid) (the Reform) markets.(“HIP” or “Medicaid”). Our HIP contracts expired by their own terms on September 30, 2010; thus, since October 1st, 2010 we no longer provide services to Medicaid enrollees.
We serve a fullwide range of customer segments — from corporate accounts, federal and local government employees and individuals to Medicare recipients and Reform enrollees,— with a wide range of managed care products. We market our managed care products through both an extensive network of independent agents and brokers located throughout Puerto Rico as well as an internal salaried sales force.
We also offer complementary products and services, including life insurance, accident and disability insurance and property and casualty insurance. We are athe leading provider of life insurance policies in Puerto Rico.
A substantial amount of the     Substantially all premiums generated by our insurance subsidiaries are from customers within Puerto Rico. In addition, all of our long-lived assets, other than financial instruments, including the deferred policy acquisition costs and value of business acquired and the deferred tax assets, are located within Puerto Rico.
On December 4, 2008, weFebruary 7, 2011, TSM announced the signing of a non-binding letter of intent to acquire certain managed care assets of La Cruz Azul de Puerto Rico,that Triple-S Salud, Inc. In addition, we have requested the Blue Cross Blue Shield Association (BCBSA) to transfer to us and(“TSS”), our managed care subsidiary, completed the licensing rightsacquisition of 100% of the outstanding capital stock of Socios Mayores en Salud Holdings, Inc. (“SMSH”), the ultimate parent company of American Health, Inc. (“AHI”), a provider of Medicare Advantage services to over 40,000 dual and non-dual eligible members in Puerto Rico. The cost of this acquisition was approximately $83 million, funded with unrestricted cash. For the twelve months ended December 31, 2010 AHI reported unaudited premium revenue of approximately $380 million. The results of operations and financial condition of the Corporation included in this Annual Report on Form 10-K do not reflect the acquisition or operations of SMSH. The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, as of this date it is not possible to determine the allocation of the purchase price to the Blue Cross brand in Puerto Rico and the Blue Cross Blue Shield brands in the U.S. Virgin Islands. The terms of the proposed acquisition are not yet finalized and are subject to change. The completion of the transaction is subject to a number of customary conditions including final due diligence, approvals from the Insurance Commissioner of Puerto Rico and the BCBSA, and the negotiation of definitive documentation. The Company intends to fund the acquisition with cash and expects to complete the acquisition by the second quarter of 2009.net assets acquired.
On December 8, 2008,September 29, 2010, we announced the conversion of seven million issued and outstanding Class A shares into Class B shares effective immediately, in conjunction with the expiration of the lockup agreements signed by holders of Class A shares at the time of the Company’s initial public offering. We also announced the immediate commencement of our $40a $30.0 million share repurchase program, which will use available cash and wasas authorized by theour Board of Directors in late October 2008. The share repurchaseDirectors. This program will beis being conducted through open-market purchases and privately-negotiated transactions of Class B shares only, in accordance with RuleRules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.1934.
Effective February 16, 2009, Triple-S, Inc. (TSI), a manage care organization and Seguros Triple-S, Inc. (STS) , which is engaged in the underwriting of property and casualty insurance policies, change their name to Triple-S Salud, Inc. and Triple-S Propiedad, Inc., respectively.
In this Annual Report on Form 10-K, references to “shares” or “common stock” refer collectively to our Class A and Class B common stock, unless the context indicates otherwise. All share and per share amounts in this Annual Report on Form 10-K have been restated to reflect the 3,000-for-one common stock split effected by us on May 1, 2007.

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Industry Overview
Managed Care
In response to an increasing focus on health care costs by employers, the government and consumers, there has been a growth in alternatives to traditional indemnity health insurance, such as Health Maintenance Organizations (HMOs)(“HMOs”) and Preferred Provider Organizations (PPOs)(“PPOs”). Through the introduction of these alternatives the managed care industry has attempted to contain the cost of health care by negotiating contracts with hospitals, physicians and other providers to deliver health care to plan members at favorable rates. These products usually feature medical management and other quality and cost optimization measures such as pre-admission review and approval for certain non-emergency services, pre-authorization of certain outpatient surgical procedures, network credentialing to determine that network doctors and hospitals have the required certifications and expertise, and

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various levels of care management programs to help members better understand and navigate the medical system. In addition, providers may have incentives to achieve certain quality measures or may share medical cost risk. Members or their employers generally pay co-payments, coinsurance and deductibles when enrolleesthey receive services. While the distinctions between the various types of plans have lessened over recent years, PPO products generally provide reduced benefits for out-of-network services, while traditional HMO products generally provide little to no reimbursement for non-emergency out-of-network utilization. An HMO plan may also require members to select one of the network primary care physicians to coordinate their care and approve any specialist or other services.
     The federal government of the United States of America (the “U.S. government” or “federal government”) provides hospital and medical insurance benefits to eligible personspeople aged 65 and over as well as to certain other qualified persons through the Medicare program, including the Medicare Advantage program. The federal government also offers prescription drug benefits to Medicare eligibles, both as part of the Medicare Advantage program and on a stand-alone basis, pursuant to Medicare Part D (also referred to as PDP“PDP stand-alone product)product” or “PDP”). In addition, the government of the Commonwealth of Puerto Rico (the government“government of Puerto Rico)Rico”) provides managed care coverage to the medically indigent population of Puerto Rico through the Reform program.Rico.
Recently we have noticed that economic factors and greater consumer awareness have resulted in (a) the increasing popularity of products that offer larger;larger, more extensive networks, more member choice related to coverage, physicians and hospitals;hospitals, greater access to preventive care and wellness programs;programs, and a desire for greater flexibility for customers to assume larger deductibles and co-payments in return for lower premiums and (b) products with lower benefits and a narrower network in exchange for lower premiums. We believe we are well-positionedwell positioned to respond to these market preferences due to the breadth and flexibility of our product offering and size of our provider networks.
     We are licensed by Blue Cross and Blue Shield Association (“BCBSA”) to use the “Blue Cross Blue Shield” name and mark in Puerto Rico and the U.S. Virgin Islands. The BCBSA had 39 independent licensees as of December 31, 2008. We are licensed by BCBSA to use the “Blue Shield” name and mark in Puerto Rico. Most of the BCBSA licensees (known as2010. BCBS plans or Member Plans) have the right to use the “Blue Shield” and “Blue Cross” names and marks in their designated geographic territories. We are not licensed to use the “Blue Cross” name and mark in Puerto Rico. La Cruz Azul de Puerto Rico has the right to use the “Blue Cross” mark in Puerto Rico.However, in December 2008, as part of our pending transaction with La Cruz Azul de Puerto Rico, Inc. we have asked the BCBSA to transfer to us and our managed care subsidiary the license for the “Blue Cross” name and mark in Puerto Rico, as well as the rights to use the “Blue Shield” and “Blue Cross” names and marks in the U.S. Virgin Islands. The number ofmembership stood at 97.6 million members enrolled in Blue Cross Blue Shield (BCBS) plans has been steadily increasing, from 65.2 million in 1994 to 101.9 million at December 31, 2008,September 30, 2010, which represents 33.3%31.4% of the U.S. population. The BCBS plans work cooperatively in a number of ways that create significant market advantages, especially when competing for very large, multi-state employer groups. For example, all BCBS plans participate in the BlueCard program, which effectively creates a national “Blue” network. Each plan is able to take advantage of other BCBS plans’ broad provider networks and negotiated provider reimbursement rates where a member covered by a policy in one state or territory lives or travels outside of thesuch state or territory in which the policy under which he or she is covered is written.territory. The BlueCard program is a source of revenue for providing memberTSS from services provided in Puerto Rico forto individuals who are customers of other BCBS plans and at the same time providealso provides us a significant network in the U.S. BlueCard also providesU.S, creating a significant competitive advantage tofor us because Puerto Ricans frequently travel to the continental United States.

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Life Insurance
Total annual premiums in Puerto Rico in 2007for the nine months ended September 30, 2010 for the life insurance market approximate $925 million.approximated $1.1 billion. The main products in thethis market are ordinary life, cancer and other dreaded diseases, term life, disability and annuities. The main distribution channels are through independent agents. In recent years banks have established general agencies to cross sell many life insurance products, such as term life and credit life.
Property and Casualty Insurance Segment
The total property and casualty market in Puerto Rico in terms of gross premiums written for 2007as of September 30, 2010 was approximately $2.2$1.4 billion. Property and casualty insurance companies compete for the same accounts through aggressive pricing, more favorable policy terms and better quality of services. The main lines of business in Puerto Rico are personal and commercial auto, commercial multi peril, fire and allied lines and other general liabilities. Approximately 64%69% of the market is written by the top six companies in terms of market share, and approximately 82%88% of the market is written by companies incorporated under the laws of, and which operate principally in Puerto Rico.
It is estimated that the     The Puerto Rican property and casualty insurance market has between $80 billion and $90 billion of insured value, while the industry has capital and surplus of approximately $1.5 billion. As a result, the market is highly dependent on reinsurance and some local carriers have diversified their operations outside Puerto Rico.
Puerto Rico’s Economy
     Puerto Rico’s economy experienced a considerable transformation during the past sixty-five years, passing from an agriculture economy to an industrial one. Virtually every sector in the economy participated in this expansion.

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Factors contributing to this expansion include government-sponsored economic developments programs, increases in the level of federal transfer payments, and the relatively low cost of borrowing. In some years, these factors were aided by a significant rise in the construction investment driven by infrastructure projects, private investment, primarily in housing, and relatively low oil prices. Nevertheless, the significant oil price increases during the past five years, the continuous contraction of the manufacturing sector, and budgetary pressures on government finances have triggered a general contraction in the economy. Puerto Rico’s economy is currently in a recession that began in the fourth quarter of fiscal year 2006, during which the real gross national product grew by only 0.5%. For fiscal years 2007 and 2008, the real gross national product contracted by 1.2% and 2.8%, respectively. For fiscal year 2009, the real gross national product also contracted by 3.7%. In March 2010, the Puerto Rico Planning Board (the “Planning Board”) announced that it was projecting a contraction of 3.6% in real gross national product for fiscal year 2010 and an increase of 0.4% in real gross national product for fiscal year 2011. The forecast for fiscal year 2011 took into account the estimated effect of the projected growth of the U.S. economy, tourism activity, personal consumption expenditures, U.S. federal government stimulus package, and the acceleration of investment in construction due to the government of Puerto Rico’s local stimulus package and the establishment of public-private partnerships.
     Personal income, both aggregate and per capita, has increased consistently each fiscal year from 1947 to 2009. In fiscal year 2009, aggregate personal income was $59.0 billion and personal income per capita was $14,905. During the first ten months of fiscal year 2010, total employment averaged 1,106,600, a decline of 5.9% with respect to the same period of the prior year; and the unemployment rate averaged 15.9%.
The economy of Puerto Rico is closely linked to that of the mainlandcontinental United States, as most of the external factors that affect the Puerto Rico economy (other than the price of oil) are determined by the policies and results of the United States.U.S. These external factors include exports, direct investment, the amount of federal transfer payments, the level of interest rates, the rate of inflation, and tourist expenditures. During the fiscal year ended June 30, 2008, approximately 75% of Puerto Rico’s exports went to the United States mainland, which was also the source of approximately 52% of Puerto Rico’s imports. In the past, the economy of Puerto Rico has generally followed economic trends in the overall United States economy. However, in recent years economic growth in Puerto Rico has lagged behind growth in the United States.
The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services. The manufacturing sector has undergone fundamental changes over the years as a result of increased emphasis on higher wage, high technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors, professional and scientific instruments, and certain high technology machinery and equipment. The services sector, includingwhich includes finance, insurance, real estate, wholesale and retail trade, transportation, communications and tourism, alsopublic utilities, and other services, plays a major role in the economy. It ranks second to manufacturing in contribution to the gross domestic product and leads all sectors in providing employment.
Preliminary figures for fiscal year 2008 show that gross national product increased from $58.6 billion (in current dollars) for fiscal 2007 to $60.8 billion (in current dollars) for fiscal 2008. Real gross national product, however, is projected to decline by 3.4% for fiscal year 2009. Personal income, both aggregate and per capita, has increased consistently each fiscal year from 1985 to 2008. In fiscal year 2008, aggregate personal income was $56.2 billion and personal income per capita was $14.2. Average total employment decreased from 1,263,000 in fiscal 2007 to 1,218,000 for fiscal 2008. The average unemployment rate increased from 10.4% in fiscal 2007 to 11.0% in fiscal 2008.
Future growth in the Puerto Rico economy will depend on several factors including the condition of the United States economy, the relative stability in the price of oil imports, the exchange value of the United States dollar, the level of interest rates and changes to existing tax incentive legislation. The major factors affecting the economy at this point are, among others, the high oil prices, the slowdown of economic activity in the U.S., the continuing economic uncertainty generated by the fiscal crisis affecting     On March 12, 2009, the government of Puerto Rico approved various temporary revenue raising measures, including a modification to the alternative minimum tax on corporations that limits deductions for expenses incurred outside Puerto Rico and a 5% surcharge on corporations, including insurance companies. The government of Puerto Rico has developed a comprehensive long-term economic development plan aimed at improving overall competitiveness and business environment and increasing private-sector participation in the economy. As part of this plan, the permitting and licensing process was modernize to provide for a leaner and more efficient process that fosters economic development. Furthermore, the government proposes to (i) strengthen the labor market and encourage greater labor-force participation by bringing out-of-date labor laws and regulations in line with U.S. and international standards, (ii) adopt a new energy policy that seeks to lower energy costs and reduce energy-price volatility by reducing Puerto Rico’s dependence on fuel oil and the effects on economic activitypromotion of diverse, renewable-energy technologies, and (iii) adopt a comprehensive tax reform in two phases. The first phase of the implementationtax reform was enacted in the last quarter of 2010 and was mostly related to reducing the income tax burden to individuals. For 2010 only, corporations received an income tax credit amounting to 7% of the tax determined, defined as the tax liability less certain credits. The second phase of the reform, which was approved on January 31, 2011, provides for the reduction of the maximum corporate income tax rate from 40.95% to approximately 30% including the elimination of the above mentioned 5% surcharge on corporations, as well as adding several tax credits and deductions, among other tax reliefs and changes.
     In addition, to further stimulate economic development the government of Puerto Rico enacted an act establishing a new sales tax that entered into effect on November 14, 2006.clear public policy and legal framework for public-private partnerships to finance and develop infrastructure projects and operate and manage certain public assets. See “Item 1A —1A. Risk Factors—Risks RelatingRelated to Our Business—The geographic concentration of our business in Puerto Rico may subject us to economic downturns in the region”.
On March 12, 2009, the Government of Puerto Rico approved various temporary revenue raising measures, including a modification to the alternative minimum tax on corporations to limit deductions for expenses incurred outside Puerto Rico and a 5% surcharge on corporations, including insurance companies. These modifications and additional taxes will apply for tax years beginning after December 31, 2008 and before January 1, 2012.region.”

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Products and Services
Managed Care
We     Through our subsidiary TSS, we offer a broad range of managed care products, including HMOs, PPOs, Medicare Supplement, Medicare Advantage and Medicare Part D. Managed care products represented 89.2%, 87.7% and 88.6%approximately 89% of our consolidated premiums earned, net for the years ended December 31, 2008, 20072010, 2009 and 2006.2008. We design our products to meet the needs and objectives of a wide range of customers, including employers, individuals and government entities. Our customers either contract with us to assume underwriting risk or self-fundedthey self-fund underwriting risk and rely on us for provider network access, medical cost management, claim processing, stop-loss insurance and other administrative services. Our products vary with respect to the level of benefits provided, the costs paid by employers and members, including deductibles and co-payments, and the extent to which our members’ access to providers is subject to referral or preauthorization requirements.
Managed care generally refers to a method of integrating the financing and delivery of health care within a system that manages the cost, accessibility and quality of care. Managed care products can be further differentiated by the types of provider networks offered, the ability to use providers outside such networks and the scope of the medical management and quality assurance programs. Our members receive medical care from our networks of providers in exchange for premiums paid by the individuals or their employers, (or a government entity in case of the Medicare Advantage or Reform plan)including governmental entities, and, in some instances, a cost-sharing payment between the employer and the member. We reimburse network providers according to pre-established fee arrangements and other contractual agreements.
We currently offer the following managed care plans:
Health Maintenance Organization (HMO)(“HMO”).We offer HMO plans that provide our Reform and Medicare Advantage members with health care coverage for a fixed monthly premium in addition to applicable member co-payments. Health care services can include emergency care, inpatient hospital and physician care, outpatient medical services and supplemental services such as dental, vision, behavioral and prescription drugs, among others. Members must select a primary care physician within the network to provide and assist in managing care, including referrals to specialists.
Preferred Provider Organization (PPO)(“PPO”).. We offer PPO managed care plans that provide our commercial and Medicare Advantage members and their dependent family members with health care coverage in exchange for a fixed monthly premium from our member or the member’s employer.premium. In addition, we provide our PPO members with access to a larger network of providers than our HMO. In contrast to our HMO product, we do not require our PPO members to select a primary care physician or to obtain a referral to utilize in-network specialists. We also provide coverage for PPO members who access providers outside of the network. Out-of-network benefits are generally subject to a higher deductible and coinsurance. We also offer national in-network coverage to our PPO members through the BlueCard program.
BlueCard.For our members who purchase our PPO and some of our Medicare Advantage products,selected members under ASO arrangements, we offer the BlueCard program. The BlueCard program offers these members in-network benefits through the networks of the other BCBS plans in the United States and certain U.S. territories. In addition, the BlueCard worldwide program provides our PPO members with coverage for medical assistance worldwide. We believe that the national and international coverage provided through this program allows us to compete effectively with large national insurers.
Medicare SupplementSupplement.. We offer Medicare Supplement products, which provide supplemental coverage for many of the medical expenses that the Medicare Parts A and B programs doesdo not cover, such as deductibles, coinsurance and specified losses that exceed the Federalthis program’s maximum benefits.
Prescription Drug Benefit Plans.Every Medicare beneficiary must be given the opportunity to select a prescription drug plan through Medicare Part D, largely funded by the federal government. We are required to offer a Medicare Part D prescription drug plan to our enrollees in every area in which we operate. We offer prescription drug benefits under Medicare Part D in our Medicare Advantage plans as well as on a stand-alone basis. We also offer a Drug Discount Card for local government employees and individuals. The Drug Discount Card program is not insurance, but rather provides access to discounts from contracted pharmacies. As of December 31, 2008,2010, we had enrolled approximately 22,00026,000 members in the Drug

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Discount Card program. We plan to continue extending the program to members in group plans without drug coverage during 2009.2011.

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Government Services.We servd as fiscal intermediary for the Medicare Part B program in Puerto Rico and the U.S. Virgin Islands, for which we received reimbursement of all direct costs and allocated overhead expenses, based on an approved budget by the Centers for Medicare andMedicare Services (CMS) of the U.S. Department of Health and Human Services (HHS), until February 28, 2009. On September 12, 2008, CMS announced that First Coast Service Options (FCSO), a non-affiliated third party organization based in Jacksonville, Florida, was awarded the Medicare Administrative Contract (MAC) for Jurisdiction 9 (Florida, Puerto Rico and the U.S. Virgin Islands). FCSO selected TSI as a subcontractor in MAC Jurisdiction 9 to perform certain provider customer service functions, among others, in Puerto Rico, effective March 1, 2009. See “Regulation — Fiscal Intermediary” included in this Item.
Administrative Services Only.In addition to our fully insured plans, we also offer our PPO products on a self-funded or ASO basis, under which we provide claims processing and other administrative services to employers. Employers choosing to purchase our products on an ASO basis fund their own claims but their employees are able to access our provider network at our negotiated discounted rates. We administer the payment of claims to the providers but we do not bear any insurance risk in connection with claims costs because we are reimbursed in full by the employer.employer, thus we are only subject to credit risk in this business. For certain self-funded plans, we provide stop loss insurance pursuant to which we assume some of the medical risk for a premium. The administrative fee charged to self-funded groups is generally based on the size of the group and the scope of services provided.
Life Insurance
We offer a wide variety of life, accident, disability and health and annuity products to all markets in Puerto Rico through our subsidiary Triple-S Vida, Inc. (TSV)(“TSV”). Among these are group life and individual life insurance products. Life insurance premiums represented 5.5%, 6.0% and 5.7%approximately 6% of our consolidated premiums earned, net for the years ended December 31, 2008, 20072010, 2009 and 2006.2008. TSV markets in-home service life and supplemental health products through a network of company-employed agents. Ordinary life, cancer and dreaded diseases credit(“Cancer” line of business), and pre-need life products are marketed through independent agents. TSV is the leading distributor of life products in Puerto Rico. We are the principal home service company in Puerto Rico that offersand offer guaranteed issue, funeral and cancer policies directly to people in their homes in the lower and middle income market segments.segments directly to people in their homes. We also market our group life coverageand disability coverages through our managed care subsidiary’s network of exclusive agents.
Property and Casualty Insurance
We offer a wide range of property and casualty insurance products through our subsidiary Seguros Triple-S Propiedad, Inc. (STS)(“TSP”). Property and casualty insurance premiums represented 5.5%, 6.5% and 5.9%approximately 5% of our consolidated premiums earned, net for the years ended December 31, 2008, 20072010, 2009 and 2006.2008. Our predominant lines of business are commercial multi-peril, commercial property mono-line, auto physical damage, auto liability and dwelling policies. TheThis segment’s commercial lines target small to medium size accounts. We generate a majority of our dwelling business through our strong relationships with financial institutions. During the year ended December 31, 2008, we generated our premiums in the property and casualty insurance segment primarily from the following lines of business:
Percentage of Total Segment
Revenues for the Year Ended
Line of BusinessDecember 31, 2008
Commercial multi-peril45%
Auto22
Dwelling and commercial property mono-line19
Other14
Due to our geographical location, property and casualty insurance operations in Puerto Rico are subject to natural catastrophic activity, in particular hurricanes and earthquakes. As a result, local insurers, including us,ourselves, rely on the international reinsurance market. The property and casualty insurance market is affected by the cost of reinsurance, which varies with the catastrophic experience. After 2005, the cost of reinsurance reported increases due to the severe catastrophic losses occurred in that year. Because there were fewer

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severe catastrophic events in 2006 and 2007 reinsurance rates were lower in 2008. It is expected that 2009 will have a slight increase in reinsurance rates due to recent catastrophic events and investment losses reported by reinsurers.
We maintain a comprehensive reinsurance program as a means of protecting our surplus in the event of a catastrophe. Our policy is to enter into reinsurance agreements with reinsurers considered to be financially sound. Over 90% ofPractically all our reinsurers have an A.M. Best rating of “A-”''A-’’ or better, or an equivalent rating from other rating agencies. During the year ended December 31, 2008, 42.9%2010, 40.0% of the premiums written in the property and casualty insurance segment were ceded to reinsurers. Although these reinsurance arrangements do not relieve us of our direct obligations to our insureds, we believe that the risk of our reinsurers not paying balances due to us is low.
Marketing and Distribution
Our marketing activities concentrate on promoting our strong brand, quality care, customer service efforts, size and quality of provider networks, flexibility of plan designs, financial strength and breadth of product offerings. We distribute our products through several different channels, including our salaried and commission-based internal sales force, direct mail, independent brokers and agents and telemarketing staff. We also use our website to market our products.
Branding and Marketing
Our branding and marketing efforts include “brand advertising”, which focuses on the Triple-S name and the Blue Cross Blue Shield mark, “acquisition marketing”, which focuses on attracting new customers, and “institutional advertising”, which focuses on our overall corporate image. We believe that the strongest element of our brand identity is the “Triple-S” name. We seek to leverage what we believe to be the high name recognition and comfort level that many existing and potential customers associate with this brand. Acquisition marketing consists of business-to-business marketing efforts which are used to generate leads for brokers and our sales force as well as

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direct-to-consumer marketing efforts which isare used to add new customers to our direct pay businesses. Institutional advertising is used to promote key corporate interests and overall company image. We believe these efforts support and further our competitive brand advantage. We will continue to utilize the Triple-S name and the Blue Cross Blue Shield mark for all managed care products and services in Puerto Rico.Rico and the U.S. Virgin Islands, except for Medicare Advantage products and services offered through our recently acquired subsidiary, AHI, which will continue using its own name and will not carry the BCBS mark.
Sales and Marketing
     We employ a wide variety of sales and marketing activities. Such activities are closely regulated by the Centers for Medicare and Medicaid Services (CMS) of the U.S. Department of Health and Human Services (“HHS”) and other government of Puerto Rico agencies. For example, our sales and marketing materials must be approved in advance by the applicable regulatory authorities, and they often impose other regulatory restrictions on our marketing activities.
Distribution
Managed Care Segment.We rely principally on our internal sales force and a network of independent brokers and agents to market our products. Individual policies and Medicare Advantage products are sold entirely through independent agents who exclusively sell our individual products, and group products are sold through our 7065 person internal sales force as well as our approximately 360168 independent brokers and agents. We believe that each of these marketing methods is optimally suited to address the specific needs of the customer base to which it is assigned. In the Reform sector, those notified by the government of Puerto Rico that they are eligible to participate in the Reform may enroll in the program at our branch offices.
Strong competition exists among managed care companies for brokers and agents with demonstrated ability to secure new business and maintain existing accounts. The basis of competition for the services of such brokers and agents are commission structure, support services, reputation and prior relationships, the ability to retain clients and the quality of products. We pay commissions on a monthly basis based on premiums paid. We believe that we have good relationships with our brokers and agents, and that our products, support services and commission structure are highly competitive in the marketplace.
Life Insurance Segment.In our life insurance segment, we offer our insurance products through our own network of brokersboth company-employed and independent agents, as well as group life and disability insurance coverage through our managed care network of agents. We place a majority of our premiums (57%(56% and 57% during the years ended December 31, 20082010 and 2007)2009, respectively) through direct selling to customers in their homes. TSV employs over 525approximately 600 full-time active agents and managers and utilizedutilizes approximately 600800 independent agents and brokers. WeFor individual policies, we advance first year commissions upon issuance and for group policies, we pay commissions on a monthly basis based on premiums paid.received. In addition, TSV has over 200400 agents that are licensed to sell certain of our managed care products.

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Property and Casualty Insurance Segment.In our property and casualty insurance segment, business is exclusively subscribed through 18approximately 17 general agencies, including our insurance agency, Triple-S Insurance Agency, Inc. (formerly known as Signature Insurance Agency, Inc. (SIA)(“TSIA”), where business is placed by independent insurance agents and brokers. SIA placed approximately 45% of our property and casualty insurance subsidiary, STS, total premium volume during the year ended December 31, 2008. During the each of the years ended December 31, 20072010, 2009 and 2006, SIA2008 TSIA placed approximately 52%49%, 47% and 45% of our subsidiary’sTSP’s total premium volume.volume, respectively. The general agencies contracted by our property and casualty insurance subsidiaryTSP remit premiums net of their respective commission.
Customers
Managed Care
We offer our products in the managed care segment to threetwo distinct market sectors in Puerto Rico. The following table sets forth enrollment information with respect to each sector at December 31, 2008:2010:
                
 Enrollment at Percentage of Enrollment at   
Market Sector December 31, 2008 Total Enrollment December 31, 2010 Percentage of Total Enrollment 
Commercial 592,723  49.6% 725,328  91.9%
Reform 527,447 44.1 
Medicare Advantage 75,280 6.3 
Medicare 63,553 8.1 
          
Total 1,195,450  100.0% 788,881  100.0%
          

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Commercial Sector
The commercial accounts sector includes corporate accounts, U.S. federal government employees, individual accounts, local government employees, and Medicare Supplement.
Corporate Accounts.Corporate accounts consist of small (2 to 50 employees) and large employers (over 50 employees). Employer groups may choose various funding options ranging from fully insuredfully-insured to self-funded financial arrangements or a combination of both. While self-funded clients participate in our managed care networks, the clients bear the claims risk, except to the extent that such self-funded clientsthey maintain stop loss coverage.
U.S. Federal Government Employees.For more than 40 years, we have maintained our leadership in the provision ofproviding managed care services to U.S. federal government employees in Puerto Rico. We provide our services to federalthese employees in Puerto Rico under the Federal Employees Health Benefits Program pursuant to a direct contract with the United States Office of Personnel Management (OPM)(“OPM”). We are one of two companies in Puerto Rico that has such a contract with OPM. Every year, OPM allows other insurance companies to compete for this business, provided such companies comply with the applicable requirements for service providers. This contract is subject to termination in the event of noncompliance not corrected to the satisfaction of OPM.
Individual Accounts.We provide managed care services to individuals and their dependent family members who contract these services directly with us though our network of independent brokers. We provide individual and family contracts. We assume the risk of both medical and administrative costs in return for a monthly premium.
Local Government Employees.We provide managed care services to the local government employees of Puerto Rico through a government-sponsored program whereby the health planTSS assumes the risk of both medical and administrative costs for its members in return for a monthly premium. The government qualifies on an annual basis the managed care companies that participate in this program and sets the coverage, including benefits, co-payments and amount to be contributed by the government. Employees then select from one of the authorized companies and pays for the difference between the premium of the selected carrier and the amount contributed by the government.

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Medicare Supplement.We offer Medicare Supplement products, which provide supplemental coverage for many of the medical expenses that the basic Medicare program doesParts A and B programs do not cover, such as deductibles, coinsurance and specified losses that exceed the Federalfederal program’s maximum benefits.
Reform Sector
In 1994, the government of Puerto Rico privatized the delivery of services to the medically indigent population in Puerto Rico, as defined by the government, by contracting with private managed care companies instead of providing health services directly to such population. The government divided Puerto Rico into geographical areas and by December 31, 2001, the Reform had been fully implemented in each of these areas. Each of the eight geographical areas is awarded to a managed care company doing business in Puerto Rico through a competitive bid process. As of December 31, 2008, the Reform provided healthcare coverage to over 1.5 million people. Mental health and drug abuse benefits are currently offered to Reform beneficiaries by behavioral healthcare companies and are therefore not part of the benefits covered by us.
The Reform program is similar to the Medicaid program, a joint federal and state health insurance program for medically indigent residents of the state. The Medicaid program is structured to provide states the flexibility to establish eligibility requirements, benefits provided, payment rates, and program administration rules, subject to general federal guidelines.
The government of Puerto Rico has adopted several measures to control the increase of Reform expenditures, which represented approximately 5.3% of total government expenditures during its fiscal year ended June 30, 2008, including closer and continuous scrutiny of participants’ (members’) eligibility, decreasing the number of areas in order to take advantage of economies of scale and establishing disease management programs. In addition, the government of Puerto Rico began a pilot project in 2003 within one of the eight geographical areas under which it contracted services on an ASO basis with an Independent Practice Associations (IPA), instead of contracting on a fully insured basis. This project was subsequently extended to the Metro-North region, which was served by us under a fully-insured model until October 31, 2006. This region was awarded to us again on an ASO basis for a one year period beginning November 1, 2008. The two other regions that we currently serve remain with the fully-insured model; however, there can be no assurance that the government will not implement ASO programs in these regions in the future. If a similar ASO plan is adopted in any areas served by us during the contract period, we would not generate premiums in the Reform business but instead we would collect administrative service fees. On the other hand, the government has expressed its intention to evaluate different alternatives of providing health services to Reform beneficiaries.
The government of Puerto Rico has also implemented a plan to allow dual-eligibles enrolled in the Reform to move from the Reform program to a Medicare Advantage plan under which the government, rather than the insured, will assume all of the premiums for additional benefits not included in Medicare Advantage programs, such as the deductibles and co-payments of prescription drug benefits.
We provide managed care services to Reform members in the North and Southwest regions on a fully-insured basis and in the Metro-North region on an ASO basis. We have participated in the Reform program since 1995. The premium rates for each Reform contract are negotiated annually. If the contract renewal process is not completed by a contract’s expiration date, the contract may be extended by the government, upon acceptance by us, for any subsequent period of time if deemed to be in the best interests of the beneficiaries and the government. The terms of a contract, including premiums, can be renegotiated if the term of the contract is extended. Each contract is subject to termination in the event of non-compliance by the insurance company not corrected or cured to the satisfaction of the government entity overseeing the Reform, or in the event that the government determines that there is an insufficiency of funds to finance the Reform. For additional information please see “Item 1A—Risk Factors — We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business”.
Medicare Advantage Sector
Medicare is a federal program administered by CMS that provides a variety of hospital and medical insurance benefits to eligible persons aged 65 and over as well as to certain other qualified persons. Medicare, with the approval of the Medicare Modernization Act, started promoting a managed care

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organizations (MCO)(“MCO”) sponsored Medicare product that offers benefits similar to or better than the traditional Medicare product, but where the risk is assumed by the MCOs. This program is called Medicare Advantage. We entered into the Medicare Advantage market in 2005 and have contracts with CMS to provide extended Medicare coverage to Medicare beneficiaries under ourMedicare Optimo,Medicare SelectoandMedicare Platinopolicies. Under these annual contracts, CMS pays us a set premium rate based on membership that is risk adjusted for demographic factors and health status. In addition,Depending on the total benefits offered, for certain of our Medicare Advantage products the member will also be required to pay an additional premiuma premium.
     OurMedicare SelectoandMedicare Platinopolicies target the sector of the population eligible for both Medicare and Medicaid, or dual-eligible beneficiaries. The government of Puerto Rico has implemented a plan to allow dual-eligibles enrolled in Medicaid to move to a Medicare Advantage plan under which the government, rather than the insured, will assume all of the premiums for additional benefits not included in the Medicare Advantage programs, such as deductibles and co-payments of prescription drug benefits.
Every     Medicare beneficiary must bealso provides a prescription drug program (“Medicare Part D”). Medicare beneficiaries are given the opportunity to select a prescription drug plan through Medicare Part D, largely funded by the federal government. We are required to offer a Medicare Part D prescription drug plan provided by MCOs or other Part D sponsors. Our Medicare Advantage policies offer Medicare Part D coverage to our enrollees in every area in which we operate.members throughout our service area. We also offer a stand-alone Medicare Part D prescription drug benefits under Medicare Part D through our Medicare Advantage plansproduct known as well as on a stand-alone basis. Our stand-alone prescription drug plan, calledFarmaMed, was launched in 2006..

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Life Insurance
Our life and health insurance customers consist primarily of individuals, who hold approximately 370,000465,000 policies, and we insure approximately 1,6001,400 groups.
Property and Casualty Insurance
Our property and casualty insurance segment targets small to medium size accounts with low to average exposures to catastrophic losses. Our dwelling insurance line of business aims for rate stability and seeks accounts with a very low exposure to catastrophic losses. Our auto physical damage and auto liability customer bases consist primarily of commercial accounts.
Underwriting and Pricing
Managed Care
We strive to maintain our market leadership by providingtrying to provide all of our managed care members with the best health care coverage at reasonable cost. DisciplinedWe believe that disciplined underwriting and appropriate pricing are core strengths of our business and we believe are an important competitive advantage.advantages. We continually review our underwriting and pricing guidelines on a product-by-product and customer group-by-group basis in order to maintain competitive rates in terms of both price and scope of benefits. Pricing is based on the overall risk level and the estimated administrative expenses attributable to theeach particular segment.
Our claims database enables us to establish rates based on our owneach renewing group claims experience, andwhich provides us with important insights about the risks in our service areas. We tightly manage the overall rating process and have processes in place to ensure that underwriting decisions are made by properly qualified personnel. In addition, we have developed and implemented a utilization review and fraud and abuse prevention program.
We have been able to maintain relatively high retention rates, which is the percentage of existing business retained in the renewal process, in the corporate accounts sector of our managed care business and since 2003 have maintained our overall market share.share in that sector. The retention rate in our corporate accounts which is the percentage of existing business retained in the renewal process, has been over 90%95% or above in each of the last fourfive years.
In our     Our managed care segment, the rates are set prospectively, meaning that a fixed premium rate is determined at the beginning of each contract year and revised at renewal. We renegotiate the premiums of different groups in the corporate accounts subsector as their existing annual contracts become due. We set rates for individual contracts based on the most recent semi-annual community rating.claims data. We consider the actual claims trend of each group when determining the premium rates for the following contract year. Rates in the Reform and Medicare sectorssector and for federal and local government employees are generally set on an annual basis through negotiations with the U.S. Federalfederal and Puerto Rico governments, as applicable.
Life Insurance
Our individual life insurance business has been priced using mortality, morbidity, lapses and expense assumptions which approximate actual experience for each line of business. We review pricing

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assumptions on a regular basis. Individual insurance applications are reviewed by using common underwriting standards in use in the United States, and only those applications that meet these commonly used underwriting requirements are approved for policy issuance. Our group life insurance business is written on a group-by-group basis. We develop the pricing for our group life business based on mortality and morbidity experience and estimated expenses attributable to each particular line of business.
Property and Casualty Insurance
The property and casualty insurance sector has experiencedis experiencing a soft market conditions in Puerto Rico, in recent periods, principally as a result of the deregulation of commercial property rates since 2001.economic conditions. Lower reinsurance costs in 2006 and 2007 have also contributed to soft market conditions. Notwithstanding these conditions, our property and casualty segment has maintained its leadership position in the property insurance sector by following prudent underwriting and pricing practices.
Our core business is comprised of small and medium-sized accounts. We have attained positive results throughbeen able to maintain a stable volume of business as the result of attentive risk assessment and strict adherence to underwriting guidelines,

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combined with maintenance of competitive rates on above-par risks designed to maintain a relatively high retention ratio. Underwriting strategies and practices are closely monitored by senior management and constantly updated based on market trends, risk assessment results and loss experience. Commercial risks in particular are fully reviewed by our professionals.underwriters.
Quality Initiatives and Medical Management
We utilize a broad range of focused traditional cost containment and advanced care management processes across various product lines. We continue to enhance our management strategies, which seek to control claims costs while striving to fulfill the needs of highly informed and demanding managed care consumers. One of these strategies is the reinforcement of population and case management programs, which empower consumers by educating them and engaging them in actively maintaining or improving their own health. Early identification of patients and inter-program referrals are the focus of these programs, which allow us to provide integrated service to our customers based on their specific conditions. The population management programs include programs whichthat target asthma, congestive heart failure, hypertension, diabetes, and a prenatal program whichthat focuses on preventing prenatal complications and promoting adequate nutrition. AWe developed a medication therapy management program aimed at plan members who are identified as having a potential for high drug usage was also developed.utilization and unrelated diagnostics. We commenced this program in 2010 and expect to fully deploy the program to all our groups during 2011. In addition, we have had a contract with McKesson Health Solutions (McKesson) since 1998(“McKesson”) pursuant to which they provide to usour members a 24-hour telephone-based triage program and health information services for all our sectors.services. McKesson also provides utilization management services for the Reform andour Medicare sectors.sector. We intend to maximize utilization of population and case management programs among our insured populations and expand the medication therapy management program to the Commercial sector the programs not currently offered in that sector. Other strategies include innovative partnerships and business alliances with other entities to provide new products and services such as an employee assistance program and the promotion of evidence-based protocols and patient safety programs among our providers. We also employ registered nurses and social workers to manage individual cases and coordinate healthcare services. We have implemented areviewed our hospital concurrent review program, the goal of which is to monitor the appropriateness of high admission rate diagnoses and unnecessary stays. TheseTo expand the scope of the revision, we established a phone based review for low admissions hospitals, which freed resources to cover the biggest hospitals and allowed the onsite nurses to participate in the patient discharge planning, referral to programs, the quality of the services, and programs include pre-certification and concurrent review hospital dischargeincluding the occurrence of never events. As part of the cost containment measures we have preauthorization services for acute patients, as well as early referralcertain procedures and the mandatory validation of potential candidates for the population and case management programs.
member eligibility prior to accessing services. In addition, we have developed and provide a variety of services and programs for the acute, chronic and complex populations. TheThese services and programs seek to enhance quality by eliminating inappropriate hospitalizations or services.at physicians’ premises, thus reducing emergency care and hospitalizations. We also encouragepromote the usageuse of a formulary andfor accessing medications, encouraging the use of generic drugs instead of non-formulary therapeutic equivalent drugs, through benefit design and member and physician interactions and have implemented ain the three-tier formulary, which offers three co-payment levels: the lowest level for generic drugs, a higher level for brand-name drugs and the highest level for brand-name drugs that are not on the formulary.levels.
     We have also established an exclusive pharmacy network with higher discounted rates.rates than our broader network. In addition, through arrangements with our pharmacy benefitbenefits manager, we are able to obtain discounts and rebates on certain medications based on formulary listing and market share.
We have designed a comprehensive Quality Improvement Program (QIP)(“QIP”). This program is designed with a strong emphasis on continuous improvement of clinical and service indicators, such as Health Employment

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Data Information Set (HEDIS)(“HEDIS”) and Consumer Assessment of Healthcare Providers and Systems (CAHPS)(“CAHPS”) measures. Our QIP also includes a Physician Incentive Program (PIP)(“PIP”) and a Hospital Quality Incentive Program (HQIP)(“HQIP”), which are directed to support corporate quality initiatives, utilizing clinical and benchmark criteria developed by governmental agencies and professional organizations. The PIP encourages the participation of members onin chronic care improvement programs and the achievement of specific clinical outcomes. The HQIP a pilot of which began in 2008, encourages participating hospitals to achieve the national benchmarks regarding fivesrelated to the five core measures of CMS.established by CMS and the Joint Commission.
Information Systems
We have developed and implemented integrated and reliable information technology systems that we believe have been critical to our success. Our systems collect and process information centrally and support our core administrative functions, including premium billing, claims processing, utilization management, reporting, medical cost trending, as well as certain member and provider service functions, including enrollment, member eligibility verification, claims status inquiries, and referrals and authorizations.

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We have substantially completed a system conversion process related to our property and casualty insurance business, which was begun in April 2005, at an estimated cost of $4.0 million.
In addition, we have selected Quality Care Solutions, Inc. (QCSI) to assess and implement a new core business applicationsapplication for our managed care segment. We completed this assessment inQCSI was subsequently acquired by The Trizetto Company. In the fourthsecond quarter of 2007 and plan2010, our Managed Care segment began transitioning to convert our managed care system over time by linethe new electronic data processing system. This transition will continue into the third quarter of business, with2011, when we expect to complete the first line of businessfull migration. Total external costs for the entire project are expected to be converted in the first half of 2010. We expect the managed care conversion process to be completed by 2012 at a total cost ofamount approximately $64.0$55.0 million.
These     This new core business applications areapplication is intended to provide functionality and flexibility to allow us to offer new services and products and facilitate the integration of future acquisitions. They areIt also designed to improve customer service, enhance claims processing and contain operational expenses.
Provider Arrangements
Approximately 99%98% of member services are provided through one of our contracted provider networks and the remaining back-up percentage of member servicesremainder are provided by out-of-network providers. Our relationships with managed care providers, physicians, hospitals, other facilities and ancillary managed care providers are guided by standards established by applicable regulatory authorities for network development, reimbursement and contract methodologies. As of December 31, 2008,2010, we had provider contracts with 4,530approximately 5,400 primary care physicians, 3,1003,700 specialists and 6360 hospitals.
It is generally our philosophy not to delegate full financial responsibility to     We contract with our managed care providers in the form ofdifferent forms, including capitation-based reimbursement. For certain ancillary services, such as behavioral health services and primary care services in the Reform business andourMedicare Optimoproduct, we generally enter into capitation arrangements with entities that offer broad based services through their own contracts with providers. We attempt to provide market-based reimbursement along industry standards. We seek to ensure that providers in our networks are paid in a timely manner, and we provide means and procedures for claims adjustments and dispute resolution. We also provide a dedicated service center for our providers. We seek to maintain broad provider networks to ensure member choice while implementing effective management programs designed to improve the quality of care received by our members.
We promote the use of electronic claims billing toby our providers. Approximately 90%93% of claims are submitted electronically through our fully automated claims processing system, and our “first-pass rate”, or the rate at which a claim is approved for payment after thewhen first time it is processed by our system without human intervention, for physicianprovider claims has averaged 87% for the last two years.86% and 85% in 2010 and 2009, respectively.
In the Reform sector, we have a network of IPAs which provide managed care services to our Reform beneficiaries in exchange for a capitation fee. The IPA assumes the costs of certain primary care services provided and referred by its primary care physicians (PCPs), including procedures and in-patient services not related to risks assumed by us. We retain the risk associated with services provided to beneficiaries

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under this arrangement, such as: neonatal, obstetrical, AIDS, cancer, cardiovascular and dental services, among others.
We believe that physicians and other providers primarily consider member volume, reimbursement rates, timeliness of reimbursement and administrative service capabilities along with the “non-hassle” factor, or reduction of non-value addedadding administrative tasks, when deciding whether to contract with a managed care plan. As a result of our established position in the Puerto Rican market, the strength of the Triple-S name and our association with the BCBA,BCBSA, we believe we have strong relationships with hospital and provider networks leading to a strong competitive position in terms of hospital count, number of providers and number of in-network specialists.
HospitalsHospitals.. We generally contract for hospital services to be paid on an all-inclusive per diem basis, which includes all services necessary during a hospital stay. Negotiated rates vary among hospitals based on the complexity of services provided. We annually evaluate these rates and revise them, if appropriate.
Physicians.Fee-for-service is our predominant reimbursement methodology for physicians except forin our PPO products and services referred by the Reform sector.independent practice associations (“IPAs”) under capitation agreements. Our physician rate schedules applicable to services provided by in-network physicians are pegged to a resource-based relative value system fee schedule and then adjusted for competitive rates in the market. This structure is similar to reimbursement methodologies developed and used by the federal Medicare systemprogram and other major payers. Payments to physicians under the Medicare Advantage program are based on Medicare fees. In the Reform sector, we make payments toFor certain of our providersMedicare products we contract with IPAs in the form of capitation-based reimbursement.reimbursement for certain risks. We have a network of IPAs that provide managed care services to our members in exchange for a capitation fee. The IPAs assume the costs of certain primary care services provided and referred by their primary care physicians (“PCPs”), including procedures and in-patient services not related to risks assumed by us.
Services are provided to our members through our network providers with whom we contract directly. Members seeking medical treatment outside of Puerto Rico are served by providers in these areas through the BlueCard program, which offers access to the provider networks of the other BCBS plans.

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Subcontracting.We subcontract our triage call center, certain utilization management, mental and substance abuse health services, for federal government employees and other large ASO accounts, and pharmacy benefits management services through contracts with third parties.
In addition, we contract with a number of other ancillary service providers, including laboratory service providers, home health agency providers and intermediate and long-term care providers, to provide access to a wide range of services. These providers are normally paid on either a fee schedule or fixed per day or per case basis.
Competition
The insurance industry in Puerto Rico is highly competitive and is comprised of both local and foreignnational entities. The approval of the Gramm-Leach-Bliley Act of 1999, which applies to financial institutions in the United States, including those domiciled in Puerto Rico, has opened the insurance market to new competition by allowing financial institutions such as banks to enter into the insurance business. Several banks in Puerto Rico have established subsidiaries that operate as insurance agencies.agencies, brokers and reinsurers.
Managed Care
The managed care industry is highly competitive, both nationally and in Puerto Rico. Competition continues to be intense due to aggressive marketing, business consolidations, a proliferation of new products and increased quality awareness and price sensitivity among customers. Industry participants compete for customers based on the ability to provide a total value proposition which we believe includes quality of service and flexibility of benefit designs, access to and quality of provider networks, brand recognition and reputation, price and financial stability.
We believe that our competitive strengths, including our leading presence in Puerto Rico, our Blue Cross Blue Shield license, the size and quality of our provider network, the broad range of our product offerings, our strong complementary businesses and our experienced management team, position us well to satisfy these competitive requirements.
Competitors in the managed care segment include national and local managed care plans. We currentlyAt December 31, 2010 we have approximately 1,200,000789,000 members enrolled in our managed care segment, at December 31, 2008,

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representing approximately 30%21.2% of the population of Puerto Rico. Our market share in terms of premiums written in Puerto Rico was estimated at approximately 22%19% for the yearnine-month period ended December 31, 2007.September 30, 2010. We offer a variety of managed care products, and are the leader by market share in almost every sector, as measured by the share of premiums written. Our main competitors are Medical Card Systems Inc., Aveta Inc. (or MMM Healthcare) and Medical Card Systems Inc., and Humana Inc.
Life Insurance
We are one of the leading providers of life insurance products in Puerto Rico. In 2007,the nine-month period ended September 30, 2010, we were the second largest life insurance company in Puerto Rico, as measured by direct premiums, with a market share of approximately 11%8%. In the life insurance segment weWe are the only life insurance company that distributes our products through home service. However, we face competition in each of our product lines. In the life insurance sector, excluding annuities, we were the largest company with a market share of approximately 16%19%, and our main competitors are Cooperativa de Seguros de Vida de Puerto Rico, Massachusetts Mutual,AXA Equitable Life and Axa Equitable Life.National Life Insurance Co.. In the cancer sector, we were the second largest company with a market share of approximately 17%18%, and our main competitors are AFLAC (sector leader), and Trans-Oceanic Life Insurance Company and Universal Life Insurance Company.
Property & Casualty Insurance
The property and casualty insurance market in Puerto Rico is extremely competitive. In addition, soft market conditions have prevailed during last three years in Puerto Rico. In the local market, such conditions mostly affected commercial risks, precluding rate increases and even provoking lower premiums on both renewals and new business. Property and casualty insurance companies tend to compete for the same accounts through more favorable price, and/or policy terms and better quality of services. We compete by reasonably pricing our products and providing efficient services to producers, agents and clients. We believe that our knowledgeable, experienced personnel are also an incentive for our customers to conduct business with us.
In 2007,the nine-month period ended September 30, 2010, we were the fifth largest property and casualty insurance company in Puerto Rico, as measured by direct premiums, with a market share of approximately 8%. Our nearest competitorscompetitor in the property and casualty insurance market in Puerto Rico in 2007 was Chartis Insurance Company of Puerto Rico (formerly American International Insurance Company of Puerto Rico.Rico). The market leaders in the property and

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casualty insurance market in Puerto Rico in 2006 were Universal Insurance Group, MAPFRE Corporation, and Cooperativa de Seguros Múltiples de Puerto RicoRico.
Blue Cross and MAPFRE Corporation.
Blue Shield License
We have the exclusive right to use the Blue ShieldBCBS name and mark for the sale, marketing and administration of managed care plans and related services in Puerto Rico.Rico and the U.S. Virgin Islands. We believe that the Blue ShieldBCBS name and mark are valuable brands of our products and services in the marketplace. The license agreements, which have a perpetual term (but which are subject to termination under circumstances described below), contain certain requirements and restrictions regarding our operations and our use of the Blue ShieldBCBS name and mark.
Upon the occurrence of any event causing the termination of our license agreements, we would cease to have the right to use the Blue ShieldBCBS name and mark in Puerto Rico.Rico and the U.S. Virgin Islands. We also would no longer have access to the BCBSA networks of providers and BlueCard Program. We would expect to lose a significant portion of our membership if we lose these licenses. Loss of these licenses could significantly harm our ability to compete in our markets and could require payment of a significant fee to the BCBSA. Furthermore, if our licenses were terminated, the BCBSA would be free to issue a new license to use the Blue ShieldBCBS name and marks in Puerto Rico and the U.S. Virgin Islands to another entity, which wouldcould have a material adverse affect on our business, financial condition and results of operations. See “Item 1A—''Item 1A. Risk FactorsFactors—Risks Related to Our Business — The termination or modification of our license agreements to use the Blue ShieldBCBS name and mark could have ana material adverse effect on our business, financial condition and results of operations”.operations.’’
Events which could result in termination of our license agreements include, but are not limited to:

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 Events which could result in termination of our license agreements include, but are not limited to:
• failure to maintain our total adjusted capital at or above 200% of Health Risk-Based Capital Authorized Control Level, as defined by the National Association of Insurance Commissioners (NAIC)(“NAIC”) Risk Based Capital (RBC)(“RBC”) Model Act;
 
• failure to maintain liquidity of greater than one month of underwritten claims and administrative expenses, as defined by the BCBA,BCBSA, for two consecutive quarters;
 
• failure to satisfy state-mandated statutory net worth requirements;
 
• impending financial insolvency; and
 
• a change of control not otherwise approved by the BCBSA or a violation of the BCBSA voting and ownership limitations on our capital stock.
The BCBSA license agreements and membership standards specifically permit a licensee to operate as a for-profit, publicly-traded stock company, subject to certain governance and ownership requirements.
Pursuant to our license agreements with BCBSA, at least 80% of the revenue that we earn from health care plans and related services in Puerto Rico, and at least 66.7% of the revenue that we earn from (or at least 66.7% of the enrollment for) health care plans and related services both in the United States and in Puerto Rico together, must be sold, marketed, administered, or underwritten through use of the Blue Cross Blue Shield name and mark. This may limit the extent to which we will be able to expand our health care operations, whether through acquisitions of existing managed care providers or otherwise, in areas where a holder of an exclusive right to the Blue Cross Blue Shield name and mark is already present. Currently, the Blue Cross and Blue Shield name and mark is licensed to other entities in all markets in the continental United States, Hawaii, and Alaska.
     As required by our BCBS license agreements, our articles of incorporation prohibit any institutional investor from owning 10% or more of our voting power, any person that is not an institutional investor from owning 5% or more of our voting power, and any person from beneficially owning shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest in us. To the extent that a person, including an institutional investor, acquires shares in excess of these limits, our articles provide that we will have the power to take certain actions, including refusing to give effect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the articles.
Pursuant to the rules and license standards of the BCBSA, we guarantee our subsidiaries’ contractual and financial obligations to their respective customers. In addition, pursuant to the rules and license standards of the BCBSA, we have agreed to indemnify the BCBSA against any claims asserted against it resulting from our contractual and financial obligations.

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Each license requires an annual fee to be paid to the BCBSA. The fee is determined based on a per-contract charge from products using the Blue ShieldBCBS name and mark. The annual BCBSA fee for the year 20092011 is $1,340,489.$1,764,143. During the years ended December 31, 20082010 and 2007,2009, we paid fees to the BCBSA in the amount of $1,079,172$1,717,677 and $921,636,$1,345,489, respectively. The BCBSA is a national trade association of 39 Member Plans, the primary function of which is to promote and preserve the integrity of the BCBS names and marks, as well as to provide certain coordination among the Member Plans. Each Member Plan is an independent legal organization and is not responsible for obligations of other Blue Cross Blue Shield AssociationBCBSA Member Plans. With a few limited exceptions, we have no right to market products and services using the Blue ShieldBCBS names and marks outside our Blue ShieldBCBS licensed territory.
We do not have the authority to use the Blue Cross name and mark in Puerto Rico. However, in December 2008, as part of our pending transaction with La Cruz Azul de Puerto Rico, Inc. we have asked the BCBSA to transfer to the Company and our managed care subsidiary the license for the Blue Cross name and mark in Puerto Rico, as well as the rights to use the Blue Shield and Blue Cross names and marks in the U.S. Virgin Islands.
BlueCard.Under the rules and license standards of the BCBSA, other Member Plans must make available their provider networks to members of the BlueCard Program in a manner and scope as consistent as possible to what such member would be entitled to in his or her home region. Specifically, the Host Plan (located where the member receives the service) must pass on discounts to BlueCard members from other Member Plans that are at least as great as the discounts that the providers give to the Host Plan’s local members. The BCBSA requires us to pay fees to any Host Plan whose providers submit claims for health care services rendered to our members who receive care in their service area. Similarly, we are paid fees for submitting claims and providing other services to members of other Member Plans who receive care in our service area.
Claim Liabilities
We are required to estimate the ultimate amount of claims which have not been reported, or which have been received but not yet adjudicated, during any accounting period. These estimates, referred to as claim liabilities, are recorded as liabilities on our balance sheet. We estimate claim reserves in accordance with

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Actuarial Standards of Practice promulgated by the Actuarial Standards Board, the committee of the American Academy of Actuaries that establishes the professional guidelines and standards for actuaries to follow. A significant degree of judgment is involved in estimating reserves. We make assumptions regarding the propriety of using existing claims data as the basis for projecting future payments. For additional information regarding the calculation of claim liabilities, see “Item 7—7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates—Estimates ¯ Claim Liabilities”.Liabilities.”
Investments
Our investment philosophy is to maintain a largely investment-grade fixed income portfolio, provide adequate liquidity for expected liability durations and other requirements, and maximize total return through active investment management.
We evaluate the interest rate risk of our assets and liabilities regularly, as well as the appropriateness of investments relative to our internal investment guidelines. We operate within these guidelines by maintaining a diversified portfolio, both across and within asset classes.
Investment decisions are centrally managed by investment professionals based on the guidelines established by management and approved by our Investment and financing Committee.Financing Committee of the Board of Directors (the “Investment and Financing Committee”). Our internal investment group is comprised of the CFO,Chief Financial Officer, a Vice President and Treasurer, an investment officer,analyst, and a treasury operations officer.analyst. The internal investment group uses an external investment consultant and manages our short-term investments, fixed income portfolio and equity securities of Puerto Rican corporations that are classified as available for sale. In addition, we use GE Asset Managementsecurities.
     The Investment and State Street Global Advisor as portfolio managers for our trading securities.
The board of directorsFinancing Committee monitors and approves investment policies and procedures. The investment portfolio is managed following those policies and procedures, and any exception must be reported to our board of directors.the Investment and Financing Committee.
For additional information on our investments, see “Item 7A—7A. Quantitative and Qualitative Disclosures About Market Risk—Market Risk Exposure”.Risk.”
Trademarks
We consider our trademarks of “Triple-S” and “SSS” to be very important and material to all segments in which we are engaged. In addition to these, other trademarks used by our subsidiaries that are considered important have been duly registered with the Department of State of Puerto Rico and the United States Patent and Trademark

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Office. It is our policy to register all our important and material trademarks in order to protect our rights under applicable corporate and intellectual property laws. In addition, we have the exclusive right to use the “Blue Cross and Blue Shield” name and mark in Puerto Rico.Rico and the U.S. Virgin Islands. See “—Blue Cross and Blue Shield License”.
Regulation
The operations of our managed care business are subject to comprehensive and detailed regulation in Puerto Rico, as well as U.S. Federalfederal regulation. Supervisory agencies include the Office of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner“Commissioner of Insurance)Insurance”), the Division of Banking and Insurance of the Office of the Lieutenant Governor of the U.S. Virgin Islands, the Health Department of the Commonwealth of Puerto Rico and the Administration for Health Insurance of the Commonwealthgovernment of Puerto Rico (ASES,(“ASES”, for its Spanish acronym), which administers the Reform Program for the Commonwealthgovernment of Puerto Rico.Rico Health Insurance Plan including the dual-eligible beneficiaries program. Federal regulatory agencies that oversee our operations include CMS, the Office of the Inspector General (OIG)(“OIG”) of HHS, the Office of Civil Rights of HHS, the U.S. Department of Justice, the U.S. Department of Labor, and the Office of Personnel Management (OPM).OPM. These government agencies have the right to:
•
grant, suspend and revoke licenses to transact business;
•regulate many aspects of the products and services we offer;
•assess fines, penalties and/or sanctions;
•monitor our solvency and adequacy of our financial reserves; and

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regulate many aspects of the products and services we offer;
assess fines, penalties and/or sanctions;
monitor our solvency and adequacy of our financial reserves; and
regulate our investment activities on the basis of quality, diversification and other quantitative criteria, within the parameters of a list of permitted investments set forth in applicable insurance laws and regulations.
Our operations and accounts are subject to examination and audits at regular intervals by a number of these agencies. In addition, the U.S Federalfederal and local governments continue to consider and enact many legislative and regulatory proposals that have impacted, or wouldcould materially impact, various aspects of the health care system. Some of the more significant current issues that may affect our managed care business include:
•
initiatives to provide greater access to coverage for uninsured and under-insured populations;
•initiatives to increase healthcare regulation, including enhanced efforts to expand the tort liability improve quality of health plans care;
•Reform and Medicare reform legislation;
•local government plans and initiatives;
•Reform and Medicare reform legislation; and
•increased government concerns regarding fraud and abuse.; and
•initiatives to increase health care regulation, including efforts to expand the tort liability of health plans.
On February 26, 2009, President Obama announced his proposed budget for fiscal year 2010, which supports his comprehensive health care reform agenda. The Obama health care reform plan is expected to address increasing access to coverage for uninsured and under-insured populations without adequate funding to health care coverage, reducing the cost of care, and improving the quality of care rendered. The health care reform plan is expectedplans or to be financed in large part by reduced expenditures for the Medicare program. The proposed budget projects a minimum savingsfunded through taxes or other negative financial levy on health care expendituresplans;
payments to health plans that are tied to achievement of $316 billion by the Federal government over the next decade incertain quality performance measures;
other efforts or specific legislative changes to the Medicare program, including $176 billonchanges in the bidding process or other means of whichmaterially reducing premiums;
local government regulatory changes;
increased government enforcement, or changes in interpretation or application of fraud and abuse laws; and
regulations that increase the operational burden on health plans or laws that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health care plans;
     On March 23, 2010, President Obama signed into law federal health reform legislation, known as the Patient Protection and Affordable Care Act. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, signed into law on March 30, 2010 (collectively, Pub. L. No. 111-148, and referred to herein as “PPACA”), includes certain mandates that took effect in 2010, as well as other requirements that are to be implemented over the next several years. Many aspects of the PPACA will be realizedfurther articulated and clarified through reducedregulation and guidance. The PPACA effects all aspects of the health care delivery and reimbursement system in the United States, including health insurers, managed care organizations, health care providers, employers, and U.S. states and territories.
     The implementation of PPACA could have a material adverse effect on the profitability or marketability of our business, financial condition and results of operations. Various federal agencies, including, but not limited to, HHS, the U.S. Department of Labor, and the U.S. Department of the Treasury are issuing regulations in several phases implementing specific PPACA provisions. While CMS recently issued a Final Rule that implements certain PPACA provisions that effect provider and supplier participation and enrollment in federal and state health payor programs, this Final Rule is not expected to have a material impact on our business. Additionally, federal agencies have issued Requests for Information and Interim Final Regulations implementing certain other PPACA provisions

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that could affect our business. Final regulations and guidance are anticipated in the near future and we will continue to assess PPACA’s impact on us as final regulations and guidance are issued.
     Some of the more significant PPACA issues that may affect our managed care business (including our Commercial and Medicare sectors) include:
Provisions requiring greater access to coverage for certain uninsured and under-insured populations and the elimination of certain underwriting practices without adequate funding to health plans or with negative financial levies on health plans such as restrictions in the ability to charge additional premium for additional risk. These include, among others, (i) extending dependent coverage for unmarried individuals until age 26 under their parents’ health coverage, (ii) limiting a health plan’s ability to rescind coverage and restrict the plan’s ability to establish annual and lifetime financial caps, and (iii) limiting a health plan’s ability to deny or limit coverage on grounds of a person’s pre-existing medical condition;
Provisions restricting medical loss ratios and imposing significant penalties for non-compliance beginning in 2011;
Provisions requiring health plans to report to their members and HHS certain quality performance measures and their wellness promotion activities;
Provisions that freeze premium payments to Medicare Advantage health plans asbeginning in 2011 and that tie such premium to the local Medicare fee for service costs. The adjustment will be phased in over between 3 and 7 years depending on the amount of the eventual adjustment;
Provisions that tie Medicare Advantage premiums to achievement of certain quality performance measures;
Provisions requiring non-exempt individuals to maintain minimum essential coverage (i.e. the “individual mandate”), whether through a result ofgovernment-sponsored program, an employer-sponsored program, or an individual market health plan, or pay a penalty. In connection with the ‘individual mandate” provisions, insurers and employers will have reporting obligations to various federal agencies.
Other efforts or specific legislative changes to the Medicare and Medicaid programs, including changes in the competitive bidding process, authority of CMS to deny bids, or other means of materially reducing premiums such as through further adjustments to the risk adjustment methodology;
Increased federal funding to the Puerto Rico Medicaid program available for years 2014 — 2019;
Funding provided to the government of Puerto Rico to either establish health insurance exchanges or fund the Puerto Rico Medicaid program at the discretion of the Governor;
Increased government funding to enforcement agencies and/or changes in interpretation or application of fraud and abuse laws;
Expanded scope of authority and/or funding to audit Medicare Advantage contracts. In addition, President Obama’s proposed budget callshealth plans and recoup premiums or other funds by the government or its representatives; and
The increase in persons eligible for premium increases for certain high-income Medicare beneficiaries. The U.S. Congress is continuing to develop legislative efforts directed toward patient protection, including proposed laws that could expose insurance companies to economic damages, andcoverage under the Medicaid program in Puerto Rico, which may result in some cases punitive damages,persons currently insured by us in our Commercial programs becoming eligible for, making a determination denying benefits or for delaying members’ receipt of benefits as well as for other coverage determinations. Similar legislation has been proposed in Puerto Rico. Givenand thus moving to, the political process, it is not possible to determine whether anyMedicaid program.
     The federal and/or local legislation or regulation will be enacted in 2009 or what form any such legislation might take. Other legislative or regulatory changes that may affect us are described below. While certain of these measures could adversely affect us, at this time we cannot predict the extent of this impact.
The Federal government and the government of Puerto Rico, including the Commissioner of Insurance, have adopted laws and regulations that govern our business activities in various ways. These laws and regulations may restrict how we conduct our business and may result in additional burdens and costs to us. Areas of governmental regulation include:
   
•    licensure;
 licensure;
•
transactions resulting in a change of control;
•
policy forms, including plan design and disclosures; 
•
member rights and responsibilities;
•
premium rates and rating methodologies;•fraud and abuse;
•
 
•    fraud and abuse;
•underwriting rules and procedures;
 
•
sales and marketing activities;
•    benefit mandates;
 benefit mandates;
•
quality assurance procedures;
•    eligibility requirements;
 eligibility requirements;
•
privacy of medical and other information and permitted disclosures;
•
security of electronically transmitted individually identifiable health information;•rates of payment to providers of care;
•
geographic service areas;•surcharges on payments to providers;
•
market conduct;•provider contract forms;
•delegation of financial risk and other financial

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•    security of electronically transmitted individually identifiable health information;
 utilization review;
•    rates of payment to providers of care;
•    geographic service areas;
 
•    surcharges on payments to providers;
•    market conduct;
 
•    provider contract forms;
•    utilization review;
•    delegation of financial risk and other financial arrangements in rates paid to providers of care;
•
payment of claims, including timeliness and accuracy of payment;•agent licensing;
•
 
•    agent licensing;
•special rules in contracts to administer government programs;
 
•
financial condition (including reserves);
•
transactions with affiliated entities;•reinsurance;
•
 
•    reinsurance;
•limitations on the ability to pay dividends;
 
•
issuance of new shares of capital stock;
•
rates of payment to providers of care; 
•
corporate governance; and
  
•
permissible investments.
These laws and regulations are subject to amendments and changing interpretations in each jurisdiction. Failure to comply with existing or future laws and regulations could materially and adversely affect our operations, financial condition and prospects.
Puerto Rico Insurance Laws
Our insurance subsidiaries are subject to the regulations and supervision of the Commissioner of Insurance. The regulations and supervision of the Commissioner of Insurance consist primarily of the approval of certain policy forms, the standards of solvency that must be met and maintained by insurers and their agents, and the nature of and limitations on investments, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations and the form and content of reports of financial condition required to be filed, among others. In general, such regulations are for the protection of policyholders rather than security holders.
Puerto Rico insurance laws prohibit any person from offering to purchase or sell voting stock of an insurance company with capital contributed by stockholders (a stock insurer) whichthat constitutes 10% or more of the total issued and outstanding stock of such company or of the total issued and outstanding stock of a company that controls an insurance company, without the prior approval of the Commissioner of Insurance. The proposed purchaser or seller must disclose any changes proposed to be made to the administration of the insurance company and provide the Commissioner of Insurance with any information reasonably requested. The Commissioner of Insurance must make a determination within 30 days of the later of receipt of the petition or of additional information requested. The determination of the Commissioner of Insurance will be based on its evaluation of the transaction’s effect on the public, having regard to the experience and moral and financial responsibility of the proposed purchaser, whether such responsibility of the proposed purchaser will affect the effectiveness of the insurance company’s operations and whether the change of control could jeopardize the interests of insureds, claimants or the company’s other stockholders. Our articles prohibit any institutional investor from owning 10% or more of our voting power, any person that is not an institutional investor from owning 5% or more of our voting power, and any person from beneficially owning shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest in us. To the extent that a person, including an institutional investor, acquires shares in excess of these limits, our articles provide that we will have the power to take certain actions, including refusing to give effect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the articles.
Puerto Rico insurance laws also require that stock insurers obtain the Commissioner of Insurance’s approval prior to any merger or consolidation. The Commissioner of Insurance cannot approve any such transaction unless it determines that such transaction is just, equitable, and consistent with the law, and that no reasonable objection exists. The merger or consolidation must then be authorized by a duly approved resolution of the board of directors and ratified by the affirmative vote of two-thirds of all issued and outstanding shares of capital stock with the right to vote thereon. The reinsurance of all or substantially all of the insurance of an insurance company by another insurance company is also deemed to be a merger or consolidation.
Puerto Rico insurance laws further prohibit insurance companies and insurance holding companies, among other entities, from soliciting or receiving funds in exchange for any new issuance of its securities, other than through a stock dividend, unless the Commissioner of Insurance has granted a solicitation permit in respect of such transaction. The Commissioner of Insurance will issue the permit unless it finds that the

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funds proposed to be secured are excessive for the purpose intended, the proposed securities and their distribution would be inequitable, or the issuance of the securities would jeopardize the interests of policyholders or securityholders.security-holders.

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     In addition, Puerto Rico insurance laws also limit insurance companies’ ability to reinsure risk. Insurance companies can only accept reinsurance in respect of the types of insurance which they are authorized to transact directly. Also, except for life and disability insurance, insurance companies cannot accept any reinsurance in respect of any risk resident, located, or to be performed in Puerto Rico which was insured as direct insurance by an insurance company not then authorized to transact such insurance in Puerto Rico. As a result, insurance companies can only reinsure their risks with insurance companies in Puerto Rico authorized to transact the same type of insurance or with a foreign insurance company that has been approved by the Commissioner of Insurance. Insurance companies cannot reinsure 75% or more of their direct risk with respect to any type of insurance without first obtaining the approval of the Commissioner of Insurance.
Privacy of Financial and Health Information
Puerto Rico law requires that managed care providers maintain the confidentiality of financial and health information. The Commissioner of Insurance has promulgated regulations relating to the privacy of financial information and individually identifiable health information. Managed care providers must periodically inform their clients of their privacy policies and allow such clients to opt-out if they do not want their financial information to be shared. However, the regulations related to the privacy of health information do not apply to managed care providers, such as us, who comply with the provisions of HIPAA.HIPAA (defined below). Also, Puerto Rico law requires that managed care providers provide patients with access to their health information within a specified time and that they not charge more than a predetermined amount for such access. The law imposes various sanctions on managed care providers that fail to comply with these provisions.
Managed Care Provider Services
Puerto Rico law requires that     Participating managed care providers cover andof the dual-eligible sector of the population, ministered by the Puerto Rico Health Insurance Administration (“PRHIA”), are required to provide specific services to their subscribers. Such services include access to a provider network that guarantees emergency and specialized services. In addition, the Office of the Solicitor for the Beneficiaries of the ReformMedicaid is authorized to review and supervise the operations of entities contracted by the Commonwealthgovernment of Puerto Rico to provide services underto the Reform.dual-eligible sector of the population. The Solicitor may investigate and adjudicate claims filed by Medicaid beneficiaries of the Reform against the various service providers contracted by the Commonwealthgovernment of Puerto Rico. See “Business—Customers—“Business — Customers-Medicare Supplement and Medicare Supplement—ReformAdvantage Sector” sections included in this Item for more information.
Capital and Reserve Requirements
In addition     Since 2009, local insurers and health organizations are required by the Insurance Code to submit to the capital and reserve requirements set forth below, thePuerto Rico Commissioner of Insurance requires our managed care subsidiary to maintain minimum capital of $1.0 million, our life insurance subsidiary to maintain minimum capital of $2.5 million and our property and casualty insurance subsidiary to maintain minimum capital of $3.0 million. During 2008,RBC reports following the Commissioner of Insurance approved the requirement to use the National Association of Insurance Commissioners’ (NAIC)NAIC’s RBC Model Act (theand accordingly are subject to certain regulatory actions if their capital levels do not meet minimum specific risk based capital requirements. In February 2010, Insurance Regulation No. 92, which establishes the guidelines to implement RBC Model Act) by all local insurers in determining minimum capital level. This requirement goesrequirements went into effect in 2009.effect. Rule 92 provides for gradual compliance over a period of five years.
     In addition, our managed care subsidiary is subject to the capital and surplus licensure requirements of the BCBSA.
The capital and surplus requirements of the BCBSA are based on the RBC Model Act. These capital and surplus requirements are intended to assess capital adequacy taking into account the risk characteristics of an insurer’s investments and products. The RBC Model Act set forth the formula for calculating the risk-based capital requirements, which are designed to take into account various risks, including insurance risks, interest rate risks and other relevant risks, with respect to an individual insurance company’s business.
The RBC Model Act requires increasing degrees of regulatory oversight and intervention as an insurance company’s risk-based capital declines. The level of regulatory oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary insurance commissioner of a

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comprehensive financial plan for increasing its risk-based capital to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control, in rehabilitation or liquidation proceeding. The RBC Model Act provides for four different levels of regulatory attention depending on the ratio of the company’s total adjusted capital (defined as the total of its statutory capital, surplus, asset valuation reserve and dividend liability) to its risk-based capital. The “company action level” is triggered if a company’s total adjusted capital is less than 200% but greater than or equal to 150% of its risk-based capital. At the company action level, a company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. A company whose total adjusted capital is between 250% and 200% of its risk-based capital is subject to a trend test. The trend test

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calculates the greater of any decrease in the margin (i.e., the amount in dollars by which a company’s adjusted capital exceeds it risk-based capital) between the current year and the prior year and between the current year and the average of the past three years, and assumes that the decrease could occur again in the coming year. If a similar decrease in margin in the coming year would result in a risk-based capital ratio of less than 190%, then company action level regulatory action will occur.
The “regulatory action level” is triggered if a company’s total adjusted capital is less than 150% but greater than or equal to 100% of its risk-based capital. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The “authorized control level” is triggered if a company’s total adjusted capital is less than 100% but greater than or equal to 70% of its risk-based capital, at which level the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. The “mandatory control level” is triggered if a company’s total adjusted capital is less than 70% of its risk-based capital, at which level the regulatory authority must place the company under its control.
We and our insurance subsidiaries currently meet and exceed the minimum capital requirements of the Commissioner of Insurance and the BCBSA, as applicable. Regulation of financial reserves for insurance companies and their holding companies is a frequent topic of legislative and regulatory scrutiny and proposals for change. It is possible that the method of measuring the adequacy of our financial reserves could change and that could affect our financial condition.
In addition to its catastrophic reinsurance coverage, STSTSP is required by local regulatory authorities to establish and maintain a reserve supported by a trust fund (the Trust)“Trust”) to protect policyholders against their dual exposure to hurricanes and earthquakes. The funds in the Trust are solely to be used to pay catastrophecatastrophic losses whenever qualifying catastrophic losses exceed 5% of catastrophe premiums or when authorized by the Commissioner of Insurance. Contributions to the Trust, and accordingly additions to the reserve, are determined by a rate (1% in 20082010, 2009 and 2007)2008), imposed by the Commissioner of Insurance on the catastrophe premiums written in that year. As of December 31, 20082010 and 2007,2009, we had $31.3$35.9 million and $29.1$33.7 million, respectively, invested in securities deposited in the Trust. The income generated by investment securities deposited in the Trust becomes part of the Trust fund balance and are therefore considered an addition to the reserve. For additional details see note 1719 of the audited consolidated financial statements.
Dividend Restrictions
Puerto Rico insurance laws also restrict insurance companies’ ability to pay dividends, as they provide that such companies can only pay cash dividends from their available surplus funds derived from realized net profits and cannot pay dividends with funds derived from loans. Any violation of these provisions would subject us to a penalty under these laws.
Puerto Rico insurance laws are not directly applicable to us, as a holding company, since we are not an insurance company. However, we, together with our insurance subsidiaries,     We are subject to the provisions of the General Corporation Law of Puerto Rico (PRGCL)(“PRGCL”), which contains certain restrictions on the declaration and payment of dividends by corporations organized pursuant to the laws of Puerto Rico. These provisions provide that Puerto Rico corporations may only declare dividends charged to their surplus or, in the absence of such surplus, net profits of the fiscal year in which the dividend is declared and/or the preceding fiscal year. The PRGCL also contains provisions regarding the declaration and payment of dividends and directors’ liability for illegal payments.

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     Our ability to pay dividends is dependent on cash dividends from our subsidiaries. Our subsidiaries are subject to regulatory surplus requirements and additional regulatory requirements, which may restrict their ability to declare and pay dividends or distributions to us. In addition, our secured term loan restricts our ability to pay dividends if a default thereunder has occurred and is continuing. Please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Restrictions on Certain Payments by the Corporation’s Subsidiaries”.

Guaranty Fund Assessments
We are required by Puerto Rico law and by the BCBSA guidelines to participate in certain guarantee associations. See “Item 7—7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Contingencies—Guarantee Association”Associations” for additional information.
Federal Regulation
     Our business is subject to extensive federal law and regulation. New laws, regulations or guidance or changes to existing laws, regulations or guidance or their enforcement, may materially impact our business financial condition and results of operations.

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The Medicare Advantage and Medicare Part D Programs
Medicare is the health insurance program for retired United States citizens aged 65 and older, qualifying disabled persons, and persons suffering from end-stage renal disease. Medicare is funded by the federal government and administered by CMS.
The original Medicare program, created in 1965, known as Medicare fee-for-service, offers both hospital insurance, known as Medicare Part A, and medical insurance, known as Medicare Part B. In general, Medicare Part A covers hospital care and some nursing home, hospice and home care. Although there is no monthly premium for Medicare Part A, beneficiaries are responsible for significant deductibles and co-payments. All United States citizens eligible for Medicare are automatically enrolled in Medicare Part A when they turn 65. Enrollment in Medicare Part B is voluntary. In general, Medicare Part B covers outpatient hospital care, physician services, laboratory services, durable medical equipment, and some other preventive tests and services. Beneficiaries that enroll in Medicare Part B pay a monthly premium that is usually withheld from their Social Security checks. Medicare Part B generally pays 80% of the cost of services and beneficiaries pay the remaining 20% after the beneficiary has satisfied a $135an annual $162 deductible. To fill the gaps in traditional fee-for-service Medicare coverage, individuals often purchase Medicare supplement products, commonly known as “Medigap”, which is regulated but not funded by CMS, to cover deductibles, co-payments, and coinsurance.
Initially, Medicare was offered only on a fee-for-service basis. Under the Medicare fee-for-service payment system, a Medicare beneficiary can choose any licensed physician and use the services of any hospital, healthcare provider, or facility that has signed a participation agreement and meets applicable certification requirements with Medicare. CMS reimburses providers if Medicare covers the service and the service is “medically necessary” and meets other applicable coverage criteria. There is currently no fee-for-service coverage for certain preventive services, including annual physicals and well visits, eyeglasses, hearing aids, dentures and most dental services.
As an alternative to the traditional fee-for-service Medicare program, in geographic areas where a managed care plansince the 1980’s, Medicare has contracted with CMS pursuant to the Medicare Advantage (MA) program, Medicare beneficiaries may choose to receive Medicare Parts A and B benefits from a managed care plan. The currentalso offered Medicare managed care program was established in 1997 when Congress created a Medicare Part C, formerly known as Medicare+Choice and now known as Medicare Advantage. Pursuant to Medicare Part C, Medicare Advantage plans contract with CMS to provide benefits at least comparable to those offered under the traditional fee-for-service Medicare program in exchange for a fixed monthly payment per member from CMS. The monthly payment amounts from CMS to each MA plan are based on the plan’s enrolled beneficiaries’ demographics, including each member’s county of residence, as adjusted for each member’sprovided though contracted private health risk characteristics.Individuals who elect to participate in the Medicare Advantage program often receive greater benefits than traditional fee-for-service Medicare beneficiaries, such as additional preventive services, and dental and vision benefits, which are included in some of our Medicare Advantage plans. Medicare Advantage plans typically have lower deductibles and co-payments than traditional fee-for-service Medicare, and plan members do not need to purchase supplemental Medigap policies. In exchange for these enhanced benefits, members are generally required to use only the services and provider network provided by the Medicare Advantage plan. Many Medicare Advantage plans have no additional premiums. In some geographic areas, however, and for plans with open access to providers, members may be required to pay a monthly premium.
Prior to 1997, CMS reimbursed health plans participating in the Medicare program primarily on the basis of the demographic data of the plans’ members. Under the Balanced Budget Act ofBeginning in 1997, (BBA), as amended by SCHIP Benefits Improvement Act of 2000 (BIPA), CMS gradually phased in a risk adjustment payment methodology that based the CMS monthly premium payments to plans on various clinical and demographic factors. CMS required allBeginning in 2003, Congress introduced a new Medicare managed care companies to capture, collect and submit the necessary diagnosis code

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information to CMS twice a year for reconciliation with CMS’s internal database. Payments to Medicare Advantage plans are also supplemented by a budget neutrality factor, which are scheduled to be phase out by 2011.approach.
As of January 1, 2006 CMS uses a new rate calculation system for Medicare Advantage plans for Parts A and B services. The new system is based on a competitive bidding process that allows the federal government to share in any cost savings achieved by Medicare Advantage plans. In general, the statutory payment rate for each county, which is primarily based on the county level payment rates for MA plans prior to 2006, which were at least as high as CMS’s historic per capita fee-for-service payments, was relabeled as the “benchmark” amount, or bidding target. Local Medicare Advantage plans annually submit bids that reflect the costs they expect to incur in providing the base Medicare Part A and Part B benefits in their applicable service areas. If the standard bid is less than the benchmark for that year, Medicare will pay the plan its bid amount, risk adjusted based on its risk scores, plus a rebate equal to 75% of the actual amount by which the benchmark exceeds the bid, resulting in an annual adjustment in reimbursement rates. Plans are required to use the rebate to provide beneficiaries with extra benefits, reduced cost sharing, or reduced premiums, including premiums for MA-PD and other supplemental benefits. CMS will have the right to audit the use of these proceeds. The remaining 25% of the excess amount will be retained in the statutory Medicare trust fund. If a Medicare Advantage plan’s bid is greater than the benchmark, the plan receives the benchmark as payment from Medicare and charges a premium to enrollees equal to the difference between the bid amount and the benchmark, which is expected to make such plans less competitive. CMS generally updates benchmarks each year. Medicare payments are also based on certain patient demographics and health risk characteristics. Regional MA plans are paid in a manner similar to local plans, described above, but take into account the weighted average of the average county rate and average plan bid. Currently TSI bids are below the CMS benchmark for all of our products.
The 2003 Medicare Modernization Act
In December 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act, which is known as the Medicare Modernization Act (MMA)(“MMA”). The MMA transformed Medicare’s managed care program—known as Medicare Part C or Medicare Advantage—and also introduced a prescription drug program known as Medicare Part D.
     Under Medicare Part C, Medicare Advantage plans contract with CMS and in exchange for a monthly payment per member from CMS, agree to provide a minimum benefits package that is equivalent to the benefits provided by Medicare under the traditional fee-for-service Medicare program and to provide additional benefits to the extent a Medicare Advantage plan is able to do so.
As partof January 1, 2006, such contracts are awarded and premiums are set based upon a prescribed bidding. Local Medicare Advantage plans annually submit bids based upon their expected costs to provide the minimum Medicare Part A and Part B benefits in their applicable service areas. The bids are then compared to a county level “benchmark” amount that is based upon the historic cost of providing Medicare fee for service benefits adjusted by CMS over time.
     If the bid is less than the benchmark, CMS will pay the plan its bid amount, risk adjusted based on its risk scores, plus a rebate equal to 75% of the MMA,actual amount by which the benchmark exceeds the bid, resulting in an annual adjustment in reimbursement rates. Plans are required to use the rebate to provide beneficiaries with supplemental benefits, reductions in cost sharing, or reductions in premiums for Part D benefits or other supplemental benefits. It is common for Medicare Advantage plans to provide additional benefits to enrollees such as lower deductibles and co-payments than those required by traditional fee-for-service Medicare, and plan members do not need to purchase supplemental Medigap policies because those types of benefits are covered under the Medicare Advantage benefits package. Because Medicare Advantage plans frequently employ a managed care

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model, members are often required to use only the service and provider network contracted by the Medicare Advantage plan for non-emergency care. In some geographic areas, however, and for plans employing an open access model, members may be required to pay a monthly premium. For our products such additional benefits include increased preventive services, and dental and vision benefits.
     If a Medicare Advantage plan’s bid is greater than the benchmark, the plan receives the benchmark as payment from Medicare and is required to charge a premium to enrollees equal to the difference between the bid amount and the benchmark. Currently some of the bids that TSS has submitted each year for its products have been below the CMS benchmark, meaning TSS has not been required to charge its members a premium in those particular products.
     The Medicare Advantage premium amount is risk adjusted by enrollee depending on the documented health characteristics of each enrollee. The monthly payment amounts from CMS to each Medicare Advantage plan are based on a fixed premium amount per member per month that is set each year by CMS. That fixed amount is then risk adjusted by member based upon each member’s documented health characteristics. In order to facilitate the risk adjustment system, CMS requires all Medicare Advantage plans to collect and submit diagnosis code information to CMS twice a year for reconciliation with CMS’s internal database. Between 2003 and 2010, payments were further adjusted by a budget neutrality factor, which has now been phased out.
     Under Medicare Part D, every Medicare beneficiary is able to select a voluntaryMedicare prescription drug plan provided through Medicare Part D.private Medicare Part D plans are private companies like ours that have contracted with the federal government to offer and run a Medicare Part D benefit plan under terms and conditions dictated by CMS in 34 geographic regions. Medicare Part D alsohas replaced thestate level Medicaid Prescription Drug Coverageprescription drug coverage for dual-eligibles (e.g., beneficiaries eligible for participation under both the Medicare and Medicaid programs, or dual-eligibles.programs). The Medicare Part D prescription drug benefit payments to plans are determined through a competitive bidding process, and enrollee premiums also are tied tobased upon plan bids. The bids reflect theare based upon a plan’s expected costs for a Medicare beneficiary of average health; CMS adjusts payments to plans based on enrollees’ health and other factors. The programis largely subsidizedfunded by the federal government and is additionally supported bywith some risk-sharing between Medicare Part D plans and the federal government through risk corridors designed to limit the profits or losses of the drug plans and reinsurance for catastrophic drug costs, as described below. The government payment amount to plans is based on the national weighted average monthly bid for basic Part D coverage, adjusted for member demographics and risk factor payments. The beneficiary will be responsible for the difference between the government subsidy and his or her plan’s bid, together with the amount of his or her plan’s supplemental premium (before rebate allocations), subject to the co-pays, deductibles and late enrollment penalties, if applicable, described below. Additional subsidies are provided for dual-eligible beneficiaries and specified low-income beneficiaries. Medicare also subsidizes 80% of drug spending above an enrollee’s catastrophic threshold.
The Medicare Part D benefits are available to Medicare Advantage plan enrollees as well as Medicare fee-for-service enrollees. Medicare Advantage plan enrollees who elect to participate may pay a monthly premium for this Medicare Part D prescription drug benefit (MA-PD)(“MA-PD”) while fee-for-service beneficiaries will be able to purchase a stand-alone prescription drug plan (PDP)(“PDP”) from a list of CMS-approved PDPs available in their area. Any Medicare Advantage Membermember enrolling in a stand-alone PDP, however, will automatically be disenrolled from the Medicare Advantage plan altogether, thereby resuming traditional fee-for-service Medicare for Medicare Parts A and B coverage. Under the standard Part D drug coverage for 2009,2011, Medicare beneficiaries enrolled in a stand-alone PDP will pay a $295$310 deductible, co-insurance payments equal to 25% of the drug costs between $295$310 and the initial annual coverage limit of $2,700$2,840 and all drug

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costs between $2,700the annual coverage limit and $6,153,$4,550 in out-of-pocket drug expenses, which is commonly referred to as the Part D “doughnut hole” or “coverage gap”. However, in 2011 Medicare beneficiaries are entitled to a fifty percent (50%) discount on brand name formulary drugs and a seven percent (7%) discount on generics purchased during the doughnut hole period. After the Medicare beneficiary has incurred $4,350$4,550 in out-of-pocket drug expenses, the MMA provides catastrophic stop loss coverage that will cover approximately 95% of the beneficiaries’ remaining out-of-pocket drug costs for that year. MA-PDs are not required to match these limits, but are required to provide, at a minimum, coverage that is actuarially equivalent to this standard drug coverage benefit design. Medicare Part D plans also may offer supplemental drug coverage for additional benefits not subsidized by Medicare programs payments. The deductible, co-pay and coverage amounts are adjusted by CMS on an annual basis. We are required as a Medicare Advantage coordinated care plan to offer qualified Part D prescription drug coverage of our MA plan service areas. We currently offer prescription drug benefits through our Medicare Advantage plans and also offer a stand-alone PDP. Among the options in Medicare Advantage we offer fourthree MA-PD plans, with no initial deductible, one of which hashave generic coverage with a $5 co-payment during the “doughnut

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hole” period. On the PDP side, we currently offer threetwo plans, twoone of which havehas no initial deductible and one of which has generic coverage with a $5 co-payment during the “doughnut hole” period.
Dual-Eligible Beneficiaries.A “dual-eligible” beneficiary is a person who is eligible for both Medicare and Medicaid, because of age or other qualifying status, and Reform,Medicaid, because of economic status. The government of Puerto Rico established a model that wraps-around benefits included in Medicaid that were not included in MA benefits. Dual-eligible beneficiaries in Puerto Rico have the option to participate in this model calledPlatino. Health plans that serve dual-eligible beneficiariesofferPlatinoproducts receive premiumpremiums from CMS and the government of Puerto Rico for dual-eligible members. The government of Puerto Rico has implemented aRico. In this plan to allow dual-eligibles enrolled in the Reform to move from the Reform program to a Medicare Advantage plan under which the government, rather than the insured, will assume all of the premiums for additional benefits not included in traditional Medicare programs, such as prescription drug benefits. All qualified Reform participants were eligible to move to the government-sponsored plan beginning in January 2006, and as of December 31, 2006 approximately 61,000 such participants from areas served by us did so. During the years ended December 31, 2007 and 2008, mostly those members newly-qualified for Medicare benefits moved to the government sponsored plan. By managing utilization and implementing disease management programs, many Medicare Advantage plans can profitably care for dual-eligible members. The MMA provides subsidies and reduced or eliminated deductibles for certain low-income beneficiaries, including dual-eligible individuals. Pursuant to the MMA, as of January 1, 2006 dual-eligible individuals receive their drug coverage from the Medicare program rather than the ReformMedicaid program. Companies offering stand-alone PDPs with bids at or below the regional weighted average bid resulting from the annual bidding process received a pro-rata allocation and auto-enrollment of the dual-eligible beneficiaries within the applicable region.
Sales and Marketing.TheOur sales and marketing and sales activities of our insurance and managed care subsidiaries are closely regulated by CMS, and ASES. For example, our sales and marketing materials must be approved in advance by the applicable regulatory authorities, and they often impose other regulatory restrictions on our marketing activities.
Annual Enrollment and Lock-inIn order for an MA organization to accept an enrollment request, a valid request must be made during an election period. There are four types of election periods during which individuals may make enrollment requests: Annual, Initial Coverage, SpecialASES and the Open Enrollment Period. During the Annual Enrollment Period, MA eligible individuals may enroll in or disenroll from an MA plan. It occurs November 15 through December 31 of every year. The Initial Coverage Enrollment Period is the period during which an individual newly eligible for MA may make an initial enrollment request to enroll in an MA plan. The initial enrollment period begins 3 months before the individual’s entitlement to both Medicare Part A and Part B and ends on the laterOffice of the last daySolicitor for the Beneficiaries of the month preceding entitlement to both Medicare Part A and Part B or the last day of the individual’s Part B initial enrollment period. The initial enrollment period for Part B is the seven (7) month period that begins 3 months before the month an individual meets the eligibility requirements for Part B, and ends 3 months after the month of eligibility. In addition, MA eligible individuals may make one open enrollment period election from January 1st through March 31st. During the Open Enrollment Period the change enrollment requests must be made to enrollMedicaid. CMS Regulations in the same type of plan. An individual who is enrolled in an MA-PD plan may elect another MA-PD plan or disenroll from the MA-PD by enrolling in a PDP. To effectuate this enrollment request, the individual must elect an MA-PD plan or enroll in a PDP. An individual enrolled in a PDP may elect an MA-PD. An individual who is enrolled in an MA plan and who does not have Part D coverage may elect another MA plan that does not include Part D coverage or may elect to disenroll from the MA plan.

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An individual enrolled in Original Medicare but not in a PDP may elect an MA plan that does not provide Part D coverage but, may not elect an MA-PD plan during this period. After these defined enrollment periods end, generally only Medicare beneficiaries who permanently relocate to another service area leave the service area for six months, dual-eligible beneficiaries, institutionalized beneficiaries and employer MA plan retirees will be permitted to enroll in or change health plans during that plan year pursuant to special election period rules. Eligible beneficiaries who fail to timely enroll in a Part D plan will be subject to the penalties described above if they later decide to enroll in a Part D plan.preempt local law.
Fiscal Intermediary.As set forth in the MMA, the Federal government, through CMS, replaced the current Title 18 fiscal intermediary (Fl) and carrier contracts with competitively procured contracts that conform to the Federal Acquisition Regulation under the new Medicare Administrative Contractor (MAC) contracting authority. CMS has six years, between 2006 and 2011, to complete the transition of Medicare fee-for-service claims processing activities from the FI’s and carriers to the MAC’s. On September 12, 2008, CMS announced that First Coast Service Options (FCSO), a non-affiliated third party organization based in Jacksonville, Florida, was awarded the Medicare Administrative Contract (MAC) for Jurisdiction 9 (Florida, Puerto Rico and the U.S. Virgin Islands). FCSO selected our subsidiary, TSI as a subcontractor in MAC Jurisdiction 9 to perform certain provider customer service functions, among others, in Puerto Rico, effective March 1, 2009.
Fraud and Abuse Laws.Entities, such as TSS, that receive federal funds from government health care programs, such as Medicare and Medicaid, are subject to a wide variety of federal fraud and abuse laws and enforcement activities. Such laws include the federal anti-kickback laws and the False Claims Act.
Anti-kickback Laws.The federal anti-kickback provisions of the Social Security Act and its regulationslaws prohibit the payment, solicitation, offering or receipt of any form of remuneration (including kickbacks, bribes, and rebates) in exchange for the referral of federal healthcare program patients or any item or service that is reimbursed by any federal health care program. In addition, the federal regulations include certain safe harbors that describe relationships that have been determined by CMS not to violate the federal anti-kickback laws. Relationships that do not fall within one of the enumerated safe harbors are not a per se violation of the law, but will be subject to enhanced scrutiny by regulatory authorities. Failure to comply with the anti-kickback provisions may result in civil damages and penalties, criminal sanctions, and administrative remedies, such as exclusion from the applicable federal health care program.
Federal False Claims Act.Federal regulations also strictly prohibit the presentation of false claims or the submission of false information to the federal government. Under the federal False Claims Act, any person or entity that has knowingly presented or caused to be presented a false or fraudulent request for payment from the federal government or who has made a false statement or used a false record in the submission of a claim may be subject to treble damages and penalties of up to $11,000 per claim. The federal government has taken the position that claims presented in relationships that violate the anti-kickback statute may also be considered to be violations of the federal False Claims Act. Furthermore, the federal False Claims Act permits private citizen “whistleblowers” to bring actions on behalf of the federal government for violations of the Act and to share in the settlement or judgment that may result from the lawsuit. In 2010, recoveries from civil health care matters brought under the False Claims Act exceeded $2.5 million.
HIPAA and Gramm-Leach-Bliley Act
     Health care entities, such as TSS, are subject to laws, including HIPAA and the Gramm-Leach-Bliley Act, that require the protection of certain health and other information. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)(“HIPAA”) authorizes HHS to issue standards for administrative simplification, as well as privacy and security of medical records and other individually identifiable health information. The regulations under the HIPAA Administrative Simplification section impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors. HIPAA Administrative Simplification section requirements apply to self-funded group plans, health insurers and HMOs, health care clearinghouses and health care providers who transmit health information electronically (covered entities)(“covered entities”). Regulations adoptedpromulgated pursuant to implement HIPAA Administrative Simplificationthe Stimulus (as defined below) also require that business associates acting for or on behalf of HIPAA-covered entities be contractually obligated to meetcomply with many of the HIPAA standards.standards regarding the privacy and security of individually identifiable health

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information. The regulations of the Administrative Simplification section of HIPAA establish significant criminal penalties and civil sanctions for noncompliance.
HHS has released rules mandating the use of new standard formats with respect to certain health care transactions (e.g. health care claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules requiring the use of standardized code sets and

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unique identifiers by employers and providers. Our managed care subsidiary believes that it is in material compliance with all relevant requirements.
HHS also sets standards relating to the privacy of individually identifiable health information. In general, these regulations restrict the use and disclosure of medical records and other individually identifiable health information held by health plans and other affected entities in any form, whether communicated electronically, on paper or orally, subject only to limited exceptions. In addition, the regulations provide patients new rights to understand and control how their health information is used. HHS has also published security regulations designed to protect member health information from unauthorized use or disclosure. Our managed care subsidiary is currently in material compliance with these security regulations.
     We have recently learned of a breach and other unauthorized access to a specific internet database managed by TCI. We have completed our investigation and determined that the intrusions were the result of the unauthorized use of one of more active user IDs and passwords and not the result of a breach to our security system. See “Item 3. Legal Proceedings — Intrusions into Triple-C, Inc. Internet IPA Database”.
The American Recovery and Reinvestment Act of 2009 (H.R. 1, S. 1) (the Stimulus)(“the Stimulus”), signed by President Obama on February 17, 2009, contains several provisions that expand the scope and enforcement of HIPAA. MostMany of thethose Stimulus provisions that affect and expand HIPAA will not becomebecame effective untilon February 17, 2010 or thereafter,2010. The Secretary of HHS has promulgated regulations clarifying certain aspects of the Stimulus pertaining to HIPAA and it is expected that the Secretary of HHS is requiredwill issue additional regulations pertaining to promulgate regulations interpretingHIPAA in the near future. We have updated our internal policies and clarifying the aspects ofoperations to comply with the Stimulus pertaining to HIPAA. We will monitor the further implementation of the Stimulus and the regulations promulgated thereunder, and we will modify our policies and operations as necessary to comply with these future amendments. In the fall of 2010 CMS notified all Medicare Advantage plans, including TSS, that it intends to devote greater attention to HIPAA enforcement under its legal mandate to protect Medicare beneficiaries and ensure that CMS contractors comply with the law. See “Item 1—‘Item 1. Business — Regulation — Legislative and Regulatory Initiatives” for additional information.
Other     HHS has released rules mandating the use of standard formats in electronic health care transactions (for example, health care claims submission and payment, plan eligibility, precertification, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules requiring the use of standardized code sets and unique identifiers for employers and providers. By 2013, the federal legislation includesgovernment will require that healthcare organizations, including health insurers, upgrade to updated and expanded standardized code sets used for describing health conditions. The Regulation requires a conversion from the ICD-9 diagnosis and procedure code set to the ICD-10 diagnosis and procedure code set. Our managed care subsidiary has initiated a project to comply with the ICD-10 capabilities by the October 1, 2013 (effective date), that will require a substantial investment.
     The Gramm-Leach-Bliley Act which applies to financial institutions in the United States, including those domiciled in Puerto Rico. The Gramm-Leach-Bliley Act generally placed restrictions on the disclosure of non-public information to non-affiliated third parties, and required financial institutions including insurers, to provide customers with notice regarding how their non-public personal information is used, including an opportunity to “opt out” of certain disclosures. The Gramm-Leach-Bliley Act also gives banks and other financial institutions the ability to affiliate with insurance companies, which has led to new competitors in the insurance and health benefits fields in Puerto Rico.
Employee Retirement Income Security Act of 1974
The provision of services to certain employee welfare benefit plans is subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA)(“ERISA”) a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor (DOL)(“DOL”). ERISA regulates certain aspects of the relationships between us, the employers who maintain employee welfare benefit plans subject to

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ERISA and participants in such plans. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, certain states require licensure or registration of companies providing third-party claims administration services for benefit plans. We provide a variety of products and services to employee welfare benefit plans that are covered by ERISA. Plans subject to ERISA can also be subject to state laws and the question of whether ERISA preempts a state law has been, and will continue to be, interpreted by many courts.
Other Government Programs
We participateparticipated in the Health Reform ofInsurance Plan provided by the government of Puerto Rico (the Reform)(similar to Medicaid) (“Medicaid”) to provide health coverage to medically indigent citizens in Puerto Rico. See “Business—Customers—Reform“Item 1. Business — Customers — Medicaid Sector”. On August 31, 2010, the Puerto Rico Health Insurance Administration notified our managed care subsidiary, TSS, that the proposal submitted by TSS to continue to provide services to the Medicaid population was not selected. Thus, its contracts expired by their own terms on September 30, 2010. Medicaid enrollment as of September 30, 2010 was 544,448 members. Medicaid premiums earned, net during 2010, 2009 and 2008 amounted to $287.5 million, $348.1 million and $340.1 million, respectively. The operating income for the Medicaid business during 2010, 2009 and 2008 amounted to $19.0 million, $12.4 million and $10.5 million, respectively.
Legislative and Regulatory Initiatives
Puerto Rico Initiatives
The Commissioner of Insurance is currently evaluating the adoption ofadopted on December 2010 Rule No. 83, titled “Norms“Rules and Procedures to Regulate Insurancethe Systems of the Holding Companies of Insurers and Organizations of Health Maintenance Holding Company SystemsServices and the Criteria to Evaluate thefor Evaluating Change of Control”. The most recent draft of Rule No. 83 contains certain reporting requirements as well as restrictions on transactions between an insurer or HMO and its affiliates. Rule No. 83 would generally requirerequires insurance companies and HMOshealth services organizations domiciled in the Commonwealth of Puerto Rico and that are within an insurance holding company system to register with the Commissioner of Insurance if they are domiciled in the Commonwealth and to file with the Commissioner of Insurance certain reports describing capital structure, ownership, financial condition, certain intercompany transactions, and general business operations. In addition, Rule No. 83 would requirerequires prior notice, reporting and regulatory approval of certain material transactionsmergers and intercompany transfersacquisitions of an insurer or health services organization, distributions of extraordinary dividends and other distributions to stockholders.
     The Commissioner of Insurance, along with the Puerto Rico Legislature, is currently evaluating the adoption of a Health Insurance Code through the Puerto Rico Senate Bill Number 1856. This new Code will replace the current Insurance Code for the topics related to health insurance. The Commissioner has publicly expressed his intention to implement this Code in phases during 2011. The main objective of the proposed Code will be to update the regulatory framework for this activity and harmonize local provisions with recently approved federal legislation. The most recent draft of this Code contains the general dispositions, handling of prescription medicines, availability of health insurance for small and medium companies, prohibition of discretionary clauses, complaint procedures of health organizations, among others.
     Also, the Puerto Rico Senate is working on Bill S. 746, which would allow healthcare service providers to form cooperatives in order to collectively negotiate the terms and conditions of their contracts with insurers, health maintenance organizations and pharmacy benefit managers. The Bill would exempt these cooperatives from the provisions of antimonopoly statutes and empower the Corporación Pública para la Supervisión y Seguro de Cooperativas de Puerto Rico to authorize and monitor the negotiation process. This new Bill would not repeal Law number 203 of August 8, 2008, which also granted providers collective bargaining rights; instead the new bill would provide alternate means to attain the same objective.
Federal Initiatives
     The constitutionality of the PPACA is being challenged by at least 26 states, including Florida, Michigan and Virginia. Currently there is a division in the federal courts as it relates to the constitutionality of PPACA. On October 7, 2010, Judge George C. Steech, of the United States District Court for the Eastern District of Michigan upheld the United States Congress’ power under the United States Constitution’s interstate commerce clause to impose the penalty under PPACA for violation of the individual mandate provision in the law. On November 30, 2010, Judge Norman K. Moon of the United States District Court for the Western District of Virginia found that the United States Congress was within its authority in passing PPACA and dismissed claims challenging the law. On December13, 2010, Judge Henry E. Hudson of the United States Disctrict Court for the Eastern District of Virginia granted the state attorney general’s motion for summary judgment in the case filed against the legality of the individual mandate provision of PPACA, stating that the United States Congress exceeded its authority to regulate economic activity under the United States Constitution’s interstate commerce clause by including the individual mandate provision in PPACA. On January 31, 2011, Judge Roger Vinson of the United States Disctrict Court for the Northern District of Florida declared PPACA is unconstitutional and inseverable from the remainder of PPACA. In February 2011, Judge Gladys Kessler of the United States District court in Washington, D.C. ruled that Congress was authorized under the Commerce clause to enact PPACA’s individual mandate and that the individual mandate

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was necessary to making PPACA work. We will continue to assess the impact of assetsthese state challenges on PPACA as well as certain transactions between insurance companies, HMOs, their parent holding companies and affiliates. Among other restrictions, Rule No. 83 would restrictthey develop.
     In addition to the ability of our regulated subsidiariesconstitutional challenges to pay dividends.
Additionally, Rule No. 83 would restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. According to Rule No. 83, no person may make an offer to acquire or to sell the issued and outstanding voting stock of an insurance company, which constitutes 10% or morePPACA, members of the issued and outstanding stockUnited States Congress continue to introduce legislation in an attempt to repeal or defund PPACA. To date, none of an insurance company, orthese measures have passed both chambers of the total stock issued and outstanding of a holding company of an insurance company, without (i) filing the appropriate documentation with the Commissioner of Insurance and (ii) obtaining the prior approval of the Commissioner of Insurance. This requirement is similar to that contained in the Insurance Code and referred to under “Regulation—Puerto Rico Insurance Laws”.United States Congress.
Federal Initiatives
On February 26, 2009, President Obama announced his proposed budget for fiscal year 2010, which supports his comprehensive health care reform agenda. The Obama health care reform plan is expected to address increasing access to health care coverage, reducing the cost of care, and improving the quality of care rendered. The health care reform plan is expected to be financed in large part by reduced expenditures for the Medicare program. The proposed budget projects a minimum savings on health care expenditures of $316 billion by the Federal government over the next decade in the Medicare program, including $176 billon of which will be realized through reduced payments to Medicare Advantage plans as a result of changes in the competitive bidding process for Medicare Advantage contracts. In addition, President Obama’s proposed budget calls for premium increases for certain high-income Medicare beneficiaries.
Consistent with President Obama’s plan, Congress has previously supported financing health care reform by reducing Medicare Advantage subsidies. On August 1, 2007, the U.S. House of Representatives passed the Children’s Health and Medicare Protection Act of 2007 (H.R. 3162), which, among other things, would amend the Social Security Act to improve the federal government’s children’s health insurance program and make other changes under the Medicare and Medicaid programs. H.R. 3162 includes provisions that would gradually reduce Medicare Advantage payments over a four-year period to equalize payments for services made through Medicare Advantage plans and the traditional fee-for-service Medicare program by 2011, consistent with the recommendations contained in MedPac’s 2007 annual report to Congress on Medicare payment policy H.R. 3162 was referred to the Senate on September 4, 2007 for consideration; however, Congress did not enact H.R. 3162. Instead, Congress enacted the Medicare, Medicaid, and SCHIP Extension Act of 2007 in order to protect physician payment reductions through June 30, 2008. This legislation did not include any payment reductions to Medicare Advantage plans, but it included several provisions affecting Medicare Advantage plans, including: (i) extended the statutory authority to allow existing special needs plans (SNPs) to continue to operate through December 31, 2009; (ii) placed a moratorium on approval of new SNPs; and (iii) removed $1.5 billion from the stabilization fund for regional preferred provider organizations in 2012, which would have no impact on plans in Puerto Rico. In its 2009 annual report to Congress, MedPac projected Medicare Advantage payments are likely to exceed payments for comparable Medicare fee-for-service spending in 2009 by 14%, and restated its support financial neutrality between payment rates for traditional Medicare fee-for-service and Medicare Advantage programs, as contained in H.R. 3162. As of the date of this Annual Report on Form 10-K, the U.S. Congress has not enacted H.R. 3162, or any other legislation that includes the MedPac recommendations for gradual reductions in Medicare Advantage payments. We cannot provide assurances if, when or to what degree Congress may enact H.R. 3162 or similar legislation, including the MedPac recommendations, but any reduction in Medicare Advantage rates could have a material adverse effect on our revenue, financial position, results of operations or cash flow.
The Stimulus contains several provisions that expand the scope and enforcement of HIPAA. In general, the Stimulus makes the following additions to and expansions of HIPAA: (i) business associates will be directly subject to certain provisions of HIPAA; (ii) covered entities and business associates must report breaches of unencrypted protected health information to the affected individuals and the Secretary of HHS; (iii) covered entities will have greater responsibilities with respect to the accounting of disclosures of protected health information; (iv) individuals will have greater access to their protected health information and increased ability to request restrictions on the disclosure of their protected health information; (v) there

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will be additional restrictions and prohibitions on the ability of covered entities and business associates to sell protected health information for marketing purposes; (vi) the civil and criminal penalties for violations of HIPAA will be increased; and (vii) State Attorneys General have the authority to file suit in federal district court for alleged violations of HIPAA. The authority granted to State Attorneys General to prosecute HIPAA violations took effect as of February 17, 2009. However, the remaining Stimulus provisions that affect and expand HIPAA will not become effective until February 17, 2010 or thereafter. The Stimulus requires the Secretary of HHS to promulgate regulations interpreting and clarifying the aspects of the Stimulus pertaining to HIPAA. We are a “covered entity” under HIPAA, and therefore, we will monitor the implementation of the Stimulus and the regulations promulgated thereunder, and modify our policies and operations to remain HIPAA compliant.
President Obama and the U.S. Congress are considering a number of proposals to decrease the number of Americans who are uninsured or under-insured for health care, to decrease the costs of health care, and to improve the quality of care.We cannot provide assurances if, when or to what degree Congress may act on any of the proposals and do not know whether any proposal which may be enacted into law will change the way health insurance benefits are structured, sold or administered in the future.
Financial Information About Segments
Operating revenues (with intersegment premiums/service revenues shown separately), operating income and total assets attributable to the reportable segments are set forth in note 2729 to the audited consolidated financial statements for the years ended December 31, 2008, 20072010, 2009 and 2006.2008.
Employees
As of February 28, 2009,December 31, 2010, we had 2,269approximately 2,200 full-time employees and 301330 temporary employees. Our managed care subsidiary has a collective bargaining agreement with the Unión General de Trabajadores, which represents approximately 45%41% of our managed care subsidiary’s 725878 regular employees. The collective bargaining agreement expires on July 31, 2012. The Corporation considers its relations with employees to be good.
Available Information
We are an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) and are required, pursuant to Item 101 of Regulation S-K, to provide certain information regarding itsour website and the availability of certain documents filed with or furnished to the United States Securities and Exchange Commission (the SEC)“SEC”). Our Internet website is www.triplesmanagement.com. We make available free of charge, or through our Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. We also include on our Internet website our Corporate Governance Guidelines, our StandardsCode of Ethical Business Conduct and Ethics and the charter of each standing committee of our Board of Directors. In addition, we intend to disclose on our Internet website any amendments to, or waivers from, our StandardsCode of Ethical Business Conduct and Ethics that are required to be publicly disclosed pursuant to rules of the SEC and the New York Stock Exchange (NYSE)(“NYSE”). The SEC maintains an internet site (www.sec.gov)(www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The website addresses listed above are provided for the information of the reader and are not intended to be an active link. We will provide free of charge copies of our filings to any shareholder that requests them at the following address: Triple-S Management Corporation; Office of the Secretary of the Board;Secretary; PO Box 363628; San Juan, P.R. 00936-3628.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include

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information about possible or assumed future sales, results of operations, developments, regulatory approvals or other circumstances and may be found in the Items of this Annual Report on Form 10-K entitled “Item 1—1. Business”, “Item 1A—1A. Risk Factors”, “Item 7—7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K. Statements that use the terms “believe”, “expect”, “plan”, “intend”, “estimate”, “anticipate”, “project”, “may”, “will”, “shall”, “should” and similar expressions, whether in the positive or negative, are intended to identify forward-looking statements.
All forward-looking statements in this Annual Report on Form 10-K reflect our current views about future events and are based on assumptions and subject to risks and uncertainties. Consequently, actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Item 1A—1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
In addition, we operate in a highly competitive, constantly changing environment that is significantly influenced by very large organizations that have resulted from business combinations, aggressive marketing and pricing practices of competitors and regulatory oversight. The following is a summary of factors, the results of which, either individually or in combination, if markedly different from our planning assumptions, could cause our results

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to differ materially from those expressed in any forward-looking statements contained in this Annual Report on Form 10-K:
•trends in health care costs and utilization rates;
•ability to secure sufficient premium rate increases;
•competitor pricing below market trends of increasing costs;
•re-estimates of our policy and contract liabilities;
•changes in government regulation of managed care, life insurance or property and casualty insurance;
•significant acquisitions or divestitures by major competitors;
•introduction and use of new prescription drugs and technologies;
•a downgrade in our financial strength ratings;
•litigation or legislation targeted at managed care, life insurance or property and casualty insurance companies;
•ability to contract with providers consistent with past practice;
•ability to successfully implement our disease management and utilization management programs;
•volatility in the securities markets and investment losses and defaults;
•general economic downturns, major disasters and epidemics.
trends in health care costs and utilization rates;
ability to secure sufficient premium rate increases;
competitor pricing below market trends of increasing costs;
re-estimates of our policy and contract liabilities;
changes in government regulation of managed care, life insurance or property and casualty insurance;
significant acquisitions or divestitures by major competitors;
introduction and use of new prescription drugs and technologies;
a downgrade in our financial strength ratings;
litigation or legislation targeted at managed care, life insurance or property and casualty insurance companies;
ability to contract with providers and government agencies consistent with past practice;
ability to successfully implement our disease management and utilization management programs;
volatility in the securities markets and investment losses and defaults;
general economic downturns, major disasters and epidemics.
The foregoing list should not be construed to be exhaustive. We believe the forward-looking statements in this Annual Report on Form 10-K are reasonable; however, there is no assurance that the actions, events or results anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition. In view of these uncertainties, you should not place undue reliance on any forward-looking statements, which are based on our current expectations. Further, forward-looking statements speak only as of the date they are made, and, other than as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any of them in light of new information or future events.
Item 1A. Risk Factors
We must deal with several risk factors during the normal course of business. You should carefully consider the following risks and all other information set forth onin this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business operations. The occurrence of any of the following risks could materially affect our business, financial condition, operating results, and cash flows.

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Risks Relating to our Capital Stock
Certain of our current and former providers may bring materially dilutive claims against us.
Beginning with our founding in 1959 and until 1994, we encouraged, and at times required, the doctors and dentists that comprised our provider network to acquire our shares. Between approximately 1985 and 1994, our predecessor managed care subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (“SSS”) generally entered into an agreement with each new physician or dentist who joined our provider network to sell the provider shares of SSS at a future date (each agreement, a share“share acquisition agreement)agreement”). These share acquisition agreements were necessary because there were not enough authorized shares of SSS available during this period and afterwards for issuance to all new providers. Each share acquisition agreement committed SSS to sell, and each new provider to purchase, five $40-par-value shares of SSS at $40 per share after SSS had increased its authorized share capital in compliance with the Puerto Rico Insurance Code and was in a position to issue new shares. Despite repeated efforts in the 1990s, SSS was not successful in obtaining shareholder approval to increase its share capital, other than in connection with the Corporation’s reorganization in 1999, when SSS was merged into a newly-formed entity having authorized capital of 25,000 $40-par-value shares, or twice the number of authorized shares of SSS. SSS’s shareholders did not, however, authorize the issuance of the newly formed entity’s shares to providers or any other third party. In addition, subsequent to the reorganization, our shareholders did not approve attempts to increase our share capital in 2002 and 2003.
Notwithstanding the fact that TSITSS and its predecessor, SSS, were never in a position to issue new shares to providers as contemplated by the share acquisition agreements because shareholder approval for such issuance was

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never obtained, and the fact that SSS on several occasions in the 1990s offered providers the opportunity to purchase shares of its treasury stock and such offers were accepted by very few providers, providers who entered into share acquisition agreements may claim that the share acquisition agreements entitled them to acquire our or TSI’sTSS’s shares at a subscription price equivalent to that provided for in the share acquisition agreements. SSS entered into share acquisition agreements with approximately 3,000 providers, the substantial majority of whom never came to own shares of SSS. Such share acquisition agreements provide for the purchase and sale of approximately 15,000 shares of SSS. If we or TSITSS were required to issue a significant number of shares in respect of these agreements, the interest of our existing shareholders would be substantially diluted. As of the date of this Annual Report on Form 10-K, only one judicial claim to enforce any of these agreements has been commenced. See “Item 3. Legal Proceedings — Hau et al Litigation (formerly known as Jordan et al)”. Additionally, we have received inquiries with respect to less than 700 shares under share acquisition agreements. The share numbers set forth in this paragraph reflect the number of SSS shares provided for in the share acquisition agreements. Those agreements do not include anti-dilution protections and we do not believe that the amounts of any claims under the agreements with SSS should be multiplied to reflect our 3,000-for-one stock split. We cannot provide assurances, however, that claimants will not successfully seek to increase the size of their claims by reference to the stock split.
We have been advised by our counsel that, on the basis of a reasoned analysis, while the matter is not free from doubt and there are no applicable controlling precedents, we should prevail in any litigation of these claims because, among other defenses, the condition precedent to SSS’s obligations under the share acquisition agreements never occurred, and any obligation it may, or we may be deemed to, have had under the share acquisition agreements should be understood to have expired prior to our corporate reorganization, which took effect in 1999, although the share acquisition agreements do not expressly provide for any expiration.
We believe that we should prevail in any litigation with respect to these matters; however, we cannot predict the outcome of any such litigation, including with respect to the magnitude of any claims that may be asserted by any plaintiff, and the interests of our shareholders could be materially diluted to the extent that claims under the share acquisition agreements are successful.
Heirs of certain of our former shareholders may bring materially dilutive claims against us.
For much of our history, we and our predecessor entity have restricted the ownership or transferability of our shares, including by reserving to us or our predecessor a right of first refusal with respect to share transfers and by limiting ownership of such shares to physicians and dentists. In addition, we and our

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predecessor, consistent with the requirements of our and our predecessor’s bylaws, have sought to repurchase shares of deceased shareholders at the amount originally paid for such shares by those shareholders. Nonetheless, former shareholders’ heirs who were not eligible to own or be transferred shares because they were not physicians or dentists at the time of their purported inheritance (“non-medical heirs”), may claim an entitlement to our shares or to damages with respect to the repurchased shares notwithstanding applicable transfer and ownership restrictions. Our records indicate that there may be as many as approximately 450 former shareholders whose non-medical heirs may claim to have inherited up to 10,500,000 shares after giving effect to the 3,000-for-one stock split. As of the date of this Annual Report on Form 10-K, fourwe are defending five judicial claim seeking the return of or compensation for 81 shares (prior to giving effect to the 3,000-for-one stock split) had been broughtclaims by non-medical heirs of former shareholders whose shares were repurchased upon their death. These heirs purportdeath seeking the return of or compensation for a total of 71 shares (prior to represent as a class all non-medical heirsgiving effect to the 3,000-for-one stock split). See “Item 3. Legal Proceedings — Claims by Heirs of deceased shareholders whose shares we repurchased.Former Shareholders”. In addition, we have received inquiries from non-medical heirs with respect to less than 700 shares (or 2,100,000 shares after giving effect to the 3,000-for-one stock split).
We believe that we should prevail in litigation with respect to these matters; however, we cannot predict the outcome of any such litigation regarding these non-medical heirs. The interests of our existing shareholders could be materially diluted to the extent that any such claims are successful.
The dual class structure may not successfully protect against significant dilution of your shares of Class B common stock.
We designed our dual class structure of capital stock to offset the potential impact on the value of our Class B common stock attributable to any issuance of shares of common stock for less than market value in respect of a successful claim against us under any share acquisition agreement or by a non-medical heir. We believe that this mechanism will effectively protect investors in our shares of Class B common stock against any potential dilution

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attributable to the issuance of any shares in respect of such claims at below market prices. We cannot, however, provide any assurances that this mechanism will be effective under all circumstances.
While we expect to prevail against any such claims brought against us and, to the extent that we do not prevail, would expect to issue Class A common stock in respect of any such claim, there can be no assurance that the claimants in any such lawsuit will not seek to acquire Class B common stock. The issuance of a significant number of shares of Class B common stock, if followed by a material further issuance of shares of common stock to separate claimants, could impair the effectiveness of the anti-dilution protections of the Class B common stock. In addition, we cannot provide any assurances that the anti-dilution protections afforded our Class B common stock will not be challenged by share acquisition providers and/or non-medical heir claimants to the extent that these protections limit the percentage ownership of us that may be acquired by such claimants. We believe that such a challenge should not prevail, but cannot provide any assurances of the outcome.
In the event that claimants acquire shares of our managed care subsidiary, TSI,TSS, at less than fair value, we will not be able to prevent dilution of the value of the Class B shareholders’ ownership interest in us to the extent that the net value received by such claimants exceeds the value of our outstanding shares of Class A common stock. Finally, the anti-dilution protection afforded by the dual class structure may cease to be of further effect five years following the completion of our initial public offering, at which time all remaining shares of Class A common stock may, at the sole discretion of our board of directors and after considering relevant factors, including market conditions at the time, be converted into shares of Class B common stock even if we have not resolved all claims against us by such time.
Future sales of our Class B common stock, or the perception that such future sales may occur, may have an adverse impact on its market price.
Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could occur, could cause the market price of our Class B common stock to decline. Either of these limits our future ability to raise capital through an offering of equity securities. There are 22,104,989were 19,772,614 shares of Class B common stock and 9,042,809 shares of Class A common stock outstanding as of December 31, 2008.2010. Our Class A common stock is no longer subject to contractual lockup; thus, such shares are freely tradable without restriction or further registration under the Securities Act by persons

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other than our “affiliates” within the meaning of Rule 144 under the Securities Act, although such shares will continue not to be listed on the New York Stock Exchange (NYSE)NYSE and will not be fungible with our listed shares of Class B common stock. In addition, at any time following the fifth anniversary of our initial public offering, or such earlier date after the first anniversary of the initial public offering as all claims with respect to which anti-dilution protections are afforded to shares of Class B common stock have been resolved, all or any portion of our shares of Class A common stock may at the sole discretion of our board of directors and after considering relevant factors, including market conditions at the time, be converted to shares of Class B common stock.
Risks Related to Our Business
Our inability to contain managed care costs may adversely affect our business and profitability.
Substantially all of our managed care revenue is generated by premiums consisting of monthly payments per member that are established by contracts with our commercial customers the government of Puerto Rico (for the Reform program) or the CMS (for our Medicare Advantage and PDP plans), all of which are typically renewable on an annual basis. If our medical expenses exceed our estimates, except in very limited circumstances or as a result of risk score adjustments for member acuity in the case of the Medicare Advantage products, we will be unable to increase the premiums we receive under these contracts during the then-current terms. As a result, our profitability in any year depends, to a significant degree, on our ability to adequately predict and effectively manage our medical expenses related to the provision of managed care services through underwriting criteria, medical management, product design and negotiation of favorable provider contracts with hospitals, physicians and other health care providers. The aging of the population and other demographic characteristics and advances in medical technology continue to contribute to rising health care costs. Government-imposed limitations on Medicare and Reform reimbursement have also caused the private sector to bear a greater share of increasing health care costs. Also, we have in the past and may in the future enter into new lines of business in which it may be difficult to estimate anticipated costs. Numerous factors affecting the cost of managed care, including changes in health care practices, inflation, new technologies such as genetic laboratory screening for diseases including breast cancer, electronic recordkeeping, the cost of prescription drugs, clusters of high cost cases,

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changes in the regulatory environment including the implementation of HIPAA amendments under the Stimulus, as well as others, such as implementation of President Obama’s health care reform plan,PPACA, may adversely affect our ability to predict and manage managed care costs, as well as our business, financial condition and results of operations.
Our inability to implement increases in premium rates on a timely basis may adversely affect our business and profitability.
In addition to the challenge of managing managed care costs, we face pressure to contain premium rates. Our customers may move to a competitor at policy renewal to obtain more favorable premiums. Future Medicare and Reform premium rate levels may be affected by continuing government efforts to contain medical expense or other federal budgetary constraints. In particular, the government of Puerto Rico has adopted several measures to control Reform expenditures, such as closer and continuous scrutiny of participants’ eligibility, redesign of benefits, co-payments, deductibles, and requiring the establishment of disease management programs. Changes in the Medicare and Reform programs,Advantage program, including with respect to funding, may lead to reductions in the amount of reimbursement, elimination of coverage for certain benefits, or reductions in the number of persons enrolled in or eligible for Medicare and the Reform.Medicare. A limitation on our ability to increase or maintain our premium levels could adversely affect our business, financial condition and results of operations.
     The property and casualty insurance industry is under soft market conditions for commercial lines and consequently is highly competitive, and we believe that it will remain highly competitive for the foreseeable future. Competitors may offer products at prices and on terms that are not consistent with economic standards in an effort to maintain or increase their business. The property and casualty insurance industry has historically been cyclical, with periods characterized by intense price competition and less restrictive underwriting standards followed by periods of higher premium rates and more selective underwriting standards. The competitive environment in which we operate is also impacted by current general economic conditions, which could reduce the volume of business available to us, as well as to our competitors.
Our profitability may be adversely affected if we are unable to maintain our current provider agreements and to enter into other appropriate agreements.
Our profitability is dependent upon our ability to contract on favorable terms with hospitals, physicians and other managed care providers. We face heavy competition from other managed care plans to enter into contracts with hospitals, physicians and other providers in our provider networks. Consolidation in our industry, both on the provider side and on the managed care side, only exacerbates this competition.

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Currently certain providers are pressing for legislation that would allow them to collectively negotiate service fees by group.through cooperatives. The failure to maintain or to secure new cost-effective managed care provider contracts may result in a loss in membership or higher medical costs. In addition, our inability to contract with providers could adversely affect our business.
A reduction in the enrollment in our managed care programs could have an adverse effect on our business and profitability.
A reduction in the number of enrollees in our managed care programs could adversely affect our business, financial condition and results of operations. Factors that could contribute to a reduction in enrollment include: failure to obtain new customers or retain existing customers; premium increases and benefit changes; our exit from a specific market; reductions in workforce by existing customers; negative publicity and news coverage; failure to maintain the Blue Cross Blue Shield license; and any general economic downturn that results in business failures.
We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.
Our managed care business participates in government contracts that generate a significant amount of our consolidated premiums earned, net, as follows:
 • Reform:We participate in the government of Puerto Rico Health Reform Program to provide health coverage to medically indigent citizens in Puerto Rico. Our results of operations have depended to a significant extent on our participation in the Reform program. During each of the years ended December 31, 2008, 2007 and 2006, the Reform program has accounted for 20.1%, 22.1% and 30.2%, respectively , of our consolidated premiums earned, net. During the 2008 period, we were the sole Reform provider in two of the eight Reform regions in Puerto Rico on a fully insured basis. One region was awarded to us on an ASO basis for a one year period beginning November 1, 2008. Since we obtained our first Reform contract in 1995, we have been the sole provider for two to three regions each year. The contract for each geographical area is subject to termination in the event of any non-compliance by the insurance company which is not corrected or cured to the satisfaction of the government entity overseeing the Reform, or on 90 days’ prior written notice in the event that the government determines that there is an insufficiency of funds to finance the Reform. These contracts have one-year terms and expire on June 30 of each year, except for the Metro-North region contract. Upon the expiration of the contract for a geographical area, the government of the Commonwealth of Puerto Rico usually commences an open bidding process for such area. During the year ended December 31, 2006, this region accounted for 10.7% of our consolidated premiums earned, net and 7.4% of our consolidated operating income. We intend to continue to participate in the Reform program, but we may not be able to retain the right to service a particular geographical area in which we currently operate after the expiration of our current or any future contracts.
•Medicare:We provide services through our Medicare Advantage health plansproducts pursuant to a limited number of contracts with CMS. These contracts generally have terms of one year and must be renewed each year. Each of our contracts with CMS is terminable for cause if we breach a material provision of the contract or violate relevant laws or regulations. If we are unable to renew, or to successfully re-bid or compete for any of these contracts, or if the process for bidding materially changes or if any of these contracts are terminated, our business wouldcould be materially impaired. During each of the years ended December 31, 2008, 20072010, 2009 and 2006,2008, contracts with CMS represented 25.9%24.6%, 17.2%27.4% and 11.3%25.9% of our consolidated premiums earned, net, respectively, and 12.4%45.2%, 34.6%33.9% and 46.0%12.4% of our consolidated operating income, respectively. The Medicare business may in the future represent a greater percentage of our results.

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 • Commercial:Our managed care subsidiary is a qualified contractor to provide managed care coverage to federal government employees within Puerto Rico. Such coverage is provided pursuant to a contract with the OPM that is subject to termination in the event of noncompliance not corrected to the satisfaction of the OPM. During each of the years ended December 31, 2008, 20072010, 2009 and 20062008 premiums generated under this contract represented 7.3%6.9%, 8.2%6.7% and 7.5%7.3% of our consolidated premiums earned, net, respectively. The operating income generated under this contract represented 1.0%, 1.2% and 1.1% of our consolidated operating income during each of the years ended December 31, 2010, 2009 and 2008, 2007 and 2006.respectively.

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If any of these contracts is terminated for any reason, including by reason of any noncompliance by us, or not renewed or replaced by a comparable contract, our consolidated premiums earned would be materially adversely affected. The further loss or non-renewal
     We participated in the government of eitherPuerto Rico Health Insurance Plan (similar to Medicaid) to provide health coverage to medically indigent citizens in Puerto Rico until September 30, 2010, when our contracts with the government of Puerto Rico expired by their own terms. Thus since October 1, 2010 we no longer provide services to these members. Our results of operations have depended to a significant extent on our participation in this sector. During each of the years ended December 31, 2010, 2009 and 2008, Medicaid premiums have accounted for 15.0%, 18.6% and 20.1%, respectively, of our fully insured Reform contracts could have a material adverse effect on our operating results and could result in the downsizing of certain personnel, the cancellation of lease agreements of certain premises and of certain contracts, and severance payments, among others.consolidated premiums earned, net.
A change in our managed care product mix may impact our profitability.
Our managed care products that involve greater potential risk, such as fully insured arrangements, generally tend to be more profitable than ASO products and those managed care products where employer groups retain the risk, such as self-funded financial arrangements. There has been a trend in recent years among our Commercial customers of moving from fully-insured plans to ASO, or self-funded arrangements. In addition, the government of Puerto Rico began a pilot project in 2003 in one of the eight geographical areas under which it contracted for Reform services on an ASO basis for certain members instead of contracting on a fully insured basis. This project was subsequently extended to the Metro-North region. This region was awarded to us again on an ASO basis for a one year period beginning November 1, 2008. There can be no assurance that the government will not implement such a program in areas served by us. As of December 31, 2008, and as a result of us being awarded the Metro-North region contract on an ASO basis, 69.5%2010, 69.4% of our managed care customers had fully insured arrangements and 30.5%30.6% had ASO arrangements, as compared to approximately 83.5%66.1% and 16.5%33.9%, respectively, as of December 31, 2007.2009. Unfavorable changes in the relative profitability or customer participation among our various products could have a material adverse effect on our business, financial condition, and results of operations.
Our failure to accurately estimate incurred but not reported claims would affect our reported financial results.
A portion of the claim liabilities recorded by our insurance segments represents an estimate of amounts needed to pay and adjust anticipated claims with respect to insured events that have occurred, including events that have not yet been reported to us. These amounts are based on estimates of the ultimate expected cost of claims and on actuarial estimation techniques. Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under each segment’s current facts and circumstances. Accordingly, the ultimate liability may be in excess of or less than the amount provided. We regularly compare prior period liabilities to re-estimatedre-estimate claim liabilities based on subsequent claims development; any difference between these amounts is adjusted in the operations of the period determined. Additional information on how each reportable segment determines its claim liabilities, and the variables considered in the development of this amount, is included elsewhere in this Annual Report on Form 10-K under “Item 7 —7. Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations — Critical Accounting Policies”Estimates”. Actual experience will likely differ from assumed experience, and to the extent the actual claims experience is less favorable than estimated based on our underlying assumptions, our incurred losses would increase and future earnings could be adversely affected.
The termination or modification of our license agreements to use the Blue ShieldBCBS name and mark could have a material adverse effect on our business, financial condition and results of operations.
We are a party to a license agreementagreements with the BCBSA whichthat entitle us to the exclusive use of the Blue ShieldBCBS name and mark in Puerto Rico.Rico and the U.S. Virgin Islands. We believe that the Blue Cross and Blue Shield name and mark are valuable identifiers of our products and services in the marketplace. The termination of thisthese license agreementagreements or changes in thetheir terms and conditions of a license agreement could adversely affect our business, financial condition and results of operations.

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Our license agreementagreements with the BCBSA containscontain certain requirements and restrictions regarding our operations and our use of the Blue ShieldBCBS name and mark. Failure to comply with any of these requirements and restrictions could result in athe termination of a license agreement. The standards under a license agreement may be modified in certain instances by the BCBSA. From time to time there have been proposals considered by the BCBSA to modify the terms of a license agreement to restrict various potential business activities of licensees. To the extent that such amendments to thea license agreement are adopted

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in the future, they could have a material adverse effect on our future expansion plans or results of operations.
Upon any event causing termination of the license agreements, we would no longer have the right to use the Blue ShieldBCBS name and mark in Puerto Rico.Rico and the U.S. Virgin Islands. Furthermore, the BCBSA would be free to issue a license to use the Blue ShieldBCBS name and mark in Puerto Rico and the U.S. Virgin Islands to another entity. Events that could cause the termination of a license agreement with the BCBSA include failure to comply with minimum capital requirements imposed by the BCBSA, a change of control or violation of the BCBSA ownership limitations on our capital stock, impending financial insolvency and the appointment of a trustee or receiver or the commencement of any action against a licensee seeking its dissolution. Accordingly, termination of a license agreement could have a material adverse effect on our business, financial condition and results of operations.
In addition, the BCBSA requires us to comply with certain specified levels of risk based capital (RBC)(“RBC”). RBC is designed to identify weakly capitalized companies by comparing each company’s adjusted surplus to its required surplus (the RBC ratio)“RBC ratio”). Although we are currently in compliance with these requirements, we may be unable to continue to comply in the future. Failure to comply with these requirements could result in the revocation or loss of our BCBS license.licenses.
Upon termination of a license agreement, the BCBSA would impose a “Re-establishment Fee” upon us, which would allow the BCBSA to “re-establish” a Blue Cross Blue Shield presence in the vacated service area with another managed care company. The fee is currently $89.02$98.33 per licensed enrollee. If the re-establishment fee were applied to our total Blue Cross Blue Shield enrollees as of December 31, 2008,2010, we would be assessed approximately $106.4$77.6 million by the BCBSA.
See “Item 11. Business — Business —Blue Cross and Blue Shield License” for more information.
Our ability to manage our exposure to underwriting risks in our life insurance and property and casualty insurance businesses depends on the availability and cost of reinsurance coverage.
Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. In the year ended December 31, 2008, 42.9%2010, 40.0%, or $72.1$63.7 million, of the premiums written in the property and casualty insurance segment and 7.6%5.0%, or $7.6$5.6 million, of the premiums written in the life insurance segment were ceded to reinsurers. In the year ended December 31, 2007, 40.4%2009, 41.3%, or $69.1$67.5 million, of the premiums written in the property and casualty insurance segment and 9.0%5.7%, or $8.8$6.1 million, of the premiums written in the life insurance segment were ceded to reinsurers. The premiums ceded and the availability and cost of reinsurance is subject to changing market conditions and may vary significantly over time. Any decrease in the amount of our reinsurance coverage will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.
It is also possible that the losses we experience on insured risks for which we have obtained reinsurance will exceed the coverage limits of the reinsurance. See “— Large scale“Risks Related to Our Business — Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operation”.operations.” If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.
If our reinsurers do not pay our claims or do not pay them in a timely manner, we may incur losses.
We are subject to loss and credit risk with respect to the reinsurers with whom we deal. In accordance with general industry practices, our property and casualty and life insurance subsidiaries annually purchase reinsurance to lessen the impact of large unforeseen losses and mitigate sudden and unpredictable changes in our net income and shareholdersshareholders’ equity. Reinsurance contracts do not relieve us from our obligations to policyholders. In the event

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that all or any of the reinsurance companies are unable to meet their obligations under existing reinsurance agreements or pay on a timely basis, we will continue to be liable to our policyholders notwithstanding such defaults or delays. If our reinsurers are not capable of fulfilling their

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financial obligations to us, our insurance losses would increase, which would negatively affect our financial condition and results of operations.
A downgrade in our A.M. Best rating or our inability to increase our A.M. Best rating could affect our ability to write new business or renew our existing business in our property and casualty segment.
Ratings assigned by A.M. Best are an important factor influencing the competitive position of the property and casualty insurance companies in Puerto Rico. In 2008,2010, A.M. Best maintained our property and casualty insurance subsidiary’s rating of “A-” (the fourth highest of A.M. Best’s 16 financial strength ratings) and changed the outlook to stable.with a stable outlook. A.M. Best ratings represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Financial strength ratings are used by brokers and customers as a means of assessing the financial strength and quality of insurers. A.M. Best reviews its ratings periodically and we may not be able to maintain our current ratings in the future. A downgrade of our property and casualty subsidiary’s rating could severely limit or prevent us from writing desirable property business or from renewing our existing business. The lines of business that property and casualty subsidiary writes and the market in which it operates are particularly sensitive to changes in A.M. Best financial strength ratings.
Significant competition could negatively affect our ability to maintain or increase our profitability.
Managed Care
The managed care industry in Puerto Rico is very competitive. If we are unable to compete effectively while appropriately pricing the business subscribed, our business and financial condition could be materially affected. Competition in the insurance industry is based on many factors, including premiums charged, services provided, speed of claim payments and reputation. This competitive environment has produced and will likely continue to produce significant pressures on the profitability of our managed care companies.company. In addition, the managed care market in Puerto Rico other than the Medicare Advantage market, is mature. According to the U.S. Census Bureau, Puerto Rico’s population grewdecreased by 0.3%6.1% between April 1, 2010 and July 2007 and 2008, less than half2009, however the national population rate growth of 0.9%grew 0.5% during the same period. According to the US Census Bureau, between 2010 and 2050, the United States is projected to experience rapid growth in its population over 65 years. This population is projected to more than double from 2010 to 2050. A similar trend is expected for the Puerto Rico population. As a result, in order to increase our profitability we must increase our membership in the new Medicare Advantage program, increase market share in the commercial sector, improve our operating profit margins, make acquisitions or expand geographically. In Puerto Rico, several managed care plans and other entities were awarded contracts for Medicare Advantage or stand-alone Medicare prescription drug plans. These other plans and entered that market in 2006 and 2007. We anticipate that these other plans willthey can aggressively market their benefits to our current and our prospective members. Although we believe that we market an attractive offering, there are no assurances that we will be able to compete successfully with these other plans for new members, or that our current members will not choose to terminate their relationship with us and enroll in these other plans. Concentration in our industry also has created an increasingly competitive environment, both for customers and for potential acquisition targets, which may make it difficult for us to grow our business. The parent companies of some of our competitors are larger and have greater financial and other resources than we do. We may have difficulty competing with larger managed care companies, which can create downward price pressures on premium rates. We may not be able to compete successfully against current and future competitors. Competitive pressures faced by us may adversely affect our business, financial condition and results of operations. In addition, our rights under the BCBSA license only extend to the use of the “Blue Shield” name and mark in Puerto Rico. The exclusive right to use the “Blue Cross” name and mark in Puerto Rico is currently held by La Cruz Azul de Puerto Rico
Future legislation at the federal and local levels also may result in increased competition in our market. While we do not anticipate that any of the current legislative proposals of which we are aware would increase the competition we face, future legislative proposals, if enacted, might do so.
Complementary Products
The property and casualty insurance market in Puerto Rico is extremely competitive. Due to the relatively low level of economic growth in Puerto Rico,Rico’s stagnant economy, there are few new sources of business in this segment. As a result, property and casualty insurance companies compete for the same accounts through aggressive

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pricing, more favorable policy terms and better quality of services. We also face heavy competition in the life and disability insurance market.

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We believe these trends will continue. There can be no assurance that these competitive pressures will not adversely affect our business, financial condition and results of operations.
As a holding company, we are largely dependent on rental payments, dividends and other payments from our subsidiaries, although the ability of our regulated subsidiaries to pay dividends or make other payments to us is subject to the regulations of the Commissioner of Insurance, including maintenance of minimum levels of capital, as well as covenant restrictions in their indebtedness.
As a holding company, we are largely dependent on rental payments, dividends and other payments from our subsidiaries, although the ability of our regulated subsidiaries to pay dividends or make other payments to us is subject to the regulations of the Commissioner of Insurance, including maintenance of minimum levels of capital, as well as covenant restrictions in their indebtedness.
We are a holding company whose assets include, among other things, all of the outstanding shares of common stock of our subsidiaries, including our regulated insurance subsidiaries. We principally rely on rental income and dividends from our subsidiaries to fund our debt service, dividend payments and operating expenses, although our subsidiaries do not declare dividends every year. We also benefit to a lesser extent from income on our investment portfolio.
Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance. See “—“Risks Related to Our Business — Our insurance subsidiaries are subject to minimum capital requirements. Our failure to meet these requirementsstandards could subject us to regulatory action”.actions.” These regulations, among other things, require insurance companies to maintain certain levels of capital, thereby restricting the amount of earnings that can be distributed. Our subsidiaries’ ability to make any payments to us will also depend on their earnings, the terms of their indebtedness, if any, and other business and other legal restrictions. Furthermore, our subsidiaries are not obligated to make funds available to us, and creditors of our subsidiaries have a superior claim to such subsidiaries’ assets. Our subsidiaries may not be able to pay dividends or otherwise contribute or distribute funds to us in an amount sufficient for us to meet our financial obligations. In addition, from time to time, we may find it necessary to provide financial assistance, either through subordinated loans or capital infusions to our subsidiaries.
In addition, we are subject to RBC requirements by the BCBSA. See “—“Risks Related to Our Business — The termination or modification of our license agreements to use the Blue ShieldBCBS name and mark could have a material adverse effect on our business, financial condition and results of operations”operations.”.
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry.
Results of companies in the insurance industry, and particularly the property and casualty insurance industry, historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:
 • rising levels of actual costs that are not known by companies at the time they price their products;
 
 • volatile and unpredictable developments, including man-made and natural catastrophes;
 
 • changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and
 
 • fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital.
Historically, the financial performance of the insurance industry has fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting from increased competition, followed by periods of high premium rates and a shortage of underwriting capacity resulting from decreased competition. Fluctuations in underwriting capacity, demand and competition, and the impact on us of the other factors identified above, could have a negative impact on our results of operations and financial condition. We believe that underwriting capacity and price competition in the current market is increasing. This additional underwriting capacity may result in increased competition from other insurers seeking to expand the kinds or amounts of business they write or cause some insurers to seek to maintain market share at the expense of underwriting discipline. We may not be able to retain or attract customers in the future at prices we consider adequate.

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If we do not effectively manage the growth of our operations, we may not be able to achieve our profitability targets.
Our growth strategy includes enhancing our market share in Puerto Rico, entering new geographic markets, introducing new insurance products and programs, further developing our relationships with independent agencies or brokers and pursuing acquisition opportunities. Our strategy is subject to various risks, including risks associated with our ability to:
 • identify profitable new geographic markets to enter;
 
 • operate in new geographic areas, as we have very limited experience operating outside Puerto Rico;
 
 • obtain licenses in new geographic areas in which we wish to market and sell our products;
 
 • successfully implement our underwriting, pricing, claims management and product strategies over a larger operating region;
 
 • properly design and price new and existing products and programs and reinsurance facilities for markets in which we have no direct experience;
 
 • identify, train and retain qualified employees;
 
 • identify, recruit and integrate new independent agencies and brokers and expand the range of Triple-S products carried by our existing agents and brokers;
 
 • develop a network of physicians, hospitals and other managed care providers that meets our requirements and those of applicable regulators; and
 
 • augment our internal monitoring and control systems as we expand our business.
We also may encounter difficulties in the implementation of our growth strategies. For instance, our BCBSA license entitles us to use the Blue Shield name and mark only in Puerto Rico. We currently are not able to use the Blue Shield name and mark in areas outside Puerto Rico. In addition, we may enter into markets or product lines in which we have little or no prior experience. For example, we plan to expand our operations outside Puerto Rico and to expand our property and casualty insurance segment through the establishment of an auto preferred rate insurance company, which will write personal auto policies at discounted rates.
Any such risks or difficulties could limit our ability to implement our growth strategies or result in diversion of senior management time and adversely affect our financial results.
We face intense competition to attract and retain employees and independent agents and brokers.
We are dependent on retaining existing employees, attracting and retaining additional qualified employees to meet current and future needs and achieving productivity gains. Our life insurance subsidiary, TSV, has historically experienced a very high level of turnover in its home service agents, through which it places a majority of its premiums, and we expect this trend to continue. Our inability to retain existing employees or attract additional employees could have a material adverse effect on our business, financial condition and results of operations.
In addition, in order to market our products effectively, we must continue to recruit, retain and establish relationships with qualified independent agents and brokers. We may not be able to recruit, retain and establish relationships with agents and brokers. Independent agents and brokers are typically not exclusively dedicated to us and may frequently also market our competitors’ managed care products. We face intense competition for the services and allegiance of independent agents and brokers. If such agents and brokers do not help us to maintain our current customer accounts or establish new accounts, our business and profitability could be adversely affected.
Our investment portfolios are subject to varying economic and market conditions.
We have exposure to market risk and credit risk in our investment activities. The fair values of our investments vary from time to time depending on economic and market conditions. Fixed maturity securities expose us to interest rate risk as well as credit risk. Equity securities expose us to equity price risk. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the equity securities owned by us.

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The outlook of our investment portfolio depends on the future direction of interest rates, fluctuations in the equity securities market and in the amount of cash flows available for investment. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—“Item 7A. Quantitative and Qualitative Disclosures About Market Risk’’Risk” for an analysis of our exposure to interest and equity price risks and the procedures in place to manage these risks. Our investment portfolios may lose money in future periods, which could have a material adverse effect on our financial condition.
In addition, our insurance subsidiaries are subject to local laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain riskier investment categories, such as below-investment-grade fixed income securities, mortgage loans, and real estate and equity investments, amongst others, which could generate higher returns on our investments. If we fail to comply with these laws and

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regulations, any investments exceeding regulatory limitations would be treated as non-admitted assets for purposes of measuring statutory surplus and risk-based capital, and, in some instances, we may be required to sell those investments.capital.
The securities and credit markets recently have been experiencing extreme volatility and disruption.
Adverse conditions in the U.S. and global capital markets can significantly and adversely affect the value of our investments in debt and equity securities, and other investments, our profitability and/orand our financial position, and we do not expect these conditions to improve in the near future.
The global capital markets, including credit markets, have experiencedbeen experiencing extreme volatility, uncertainty and disruption during 2008 and the beginning of 2009.volatility. As an insurer, we have a substantial investment portfolio that is comprised particularly of debt securities of issuers located in the U.S. As a result, the income we earn from our investment portfolio is largely driven by the level of interest rates in the U.S, financial markets, and volatility, uncertainty and/or disruptions in the global capital markets, particularly the U.S. credit markets, and governments’ monetary policy, particularly the easing of U.S. monetary policy, can significantly and adversely affect the value of our investment portfolio, our profitability and/or our financial position by:
 • Significantly reducing the value of the debt securities we hold in our investment portfolio, and creating net realized capital losses that reducesreduce our operating results and/or net unrealized capital losses that reduce our shareholders’ equity.
 
 • ReducingLowering interest rates on high quality short-term debt securities and thereby materially reducing our net investment income and operating results.
 
 • Making it more difficult to value certain of our investment securities, for example if trading becomes less frequent, which could lead to significant period-to-period changes in our estimates of the fair values of those securities and cause period-to-period volatility in our operating results and shareholders’ equity.
 
 • Reducing our ability to issue other securities.
The volatility and disruption in the securities and credit markets has impacted our investment portfolio. We evaluate our investment securities for other-than-temporary impairment on a quarterly basis. This review is subjective and requires a high degree of judgment. It also requires us to make certain assessments about the potential recovery of the assets we hold. For the purpose of determining gross realized gains and losses, the cost of investment securities is based upon specific identification. During 2008,the years ended December 31, 2010 and 2009, we realized losses associated with other-than-temporary impairments of $16.5 million. Gross$3.0 million and $7.1 million, respectively. The gross unrealized losses of our available-for-sale and held-to-maturity securities were $3.5$5.4 million and gross unrealized gains were $6.1$14.9 million at December 31, 2008.2010 and 2009, respectively. The gross unrealized gains of our available-for-sale and held-to-maturity securities were $47.8 million and $26.4 million at December 31, 2010 and 2009, respectively. Given current market conditions, there is a continuing risk that further declines in fair value may occur and additional material realized losses from sales or other-than-temporary impairments may be recorded in future periods.
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement, taken together, provide adequate resources to fund ongoing operating and regulatory requirements. However, continuing adverse securities and credit market conditions could significantly affect the availability of credit.

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The geographic concentration of our business in Puerto Rico may subject us to economic downturns in the region.
Substantially all of our business activity is with insureds located throughout Puerto Rico, and as such, we are subject to the risks associated with the Puerto Rico economy. Preliminary reports on the performance of the Puerto Rico economy for fiscal year 2008 indicate that real gross national product decreased 2.5% and the forecast for fiscal year 2009 projects a decline of 3.4%. The major factors affecting the economy are, among others, high oil prices, the slowdown of economic activity in the United States, and the continuing economic uncertainty generated by the budgetary deficiency affecting the government of Puerto Rico and the effects on the economy of a recently implemented sales tax.Rico.
The Commonwealth of Puerto Rico government is currently facing a fiscalstructural deficit which has been estimated at approximately $3.0 billion or over 30% of its annual budget.between recurring government revenues and expenses. On March 9, 2009, the Governor signed the Special Lay on themulti-year Fiscal Emergency,Stabilization and Economic Reconstruction Plan, which provides for additional revenue generation measures, sets forth a cost reduction plan, including a reduction in public-sector employment, and provides for a number of financial initiatives geared towards achieving a balanced budget in four years. Since the government is an important source of employment on the Island, thesesin Puerto Rico, these measures could have the effect of intensifying the current recessionary cycle.

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If economic conditions in Puerto Rico continue to deteriorate, we may experience a reduction in existing and new business, which could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to retain our executive officers and significant employees, and the loss of any one or more of these officers and their expertise could adversely affect our business.
Our operations are highly dependent on the efforts of our senior executives, each of whom has been instrumental in developing our business strategy and forging our business relationships. While we believe that we could find replacements, the loss of the leadership, knowledge and experience of our executive officers could adversely affect our business. Replacing many of our executive officers might be difficult or take an extended period of time because a limited number of individuals in the industries in which we operate have the breadth and depth of skills and experience necessary to successfully operate and expand successfully a business such as ours. We do not currently maintain key-man life insurance on any of our executive officers.officers nor do we have a non-competition agreement in place with any executive officer, other than our Chief Executive Officer.
The success of our business depends on developing and maintaining effective information systems.
Our business and operations may be affected if we do not maintain and upgrade our information systems and the integrity of our proprietary information. We are materially dependent on our information systems for all aspects of our business operations, including monitoring utilization and other factors, supporting our managed care management techniques, processing provider claims and providing data to our regulators, and our ability to compete depends on our ability to continue to adapt technology on a timely and cost-effective basis. Malfunctions in our information systems, communication and energy disruptions, security breaches or the failure to maintain effective and up-to-date information systems could disrupt our business operations, alienate customers, contribute to customer and provider disputes, result in regulatory violations and possible liability, increase administrative expenses or lead to other adverse consequences. The use of patientmember data by all of our businesses is regulated at federal and local levels. These laws and rules change frequently and developments require adjustments or modifications to our technology infrastructure.
Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs. If we are unable to maintain or expand our systems, we could suffer from, among other things, operational disruptions, such as the inability to pay claims or to make claims payments on a timely basis, loss of members, difficulty in attracting new members, regulatory problems, and increases in administrative expenses. We have substantially completed a system conversion process related to our property and casualty insurance business, which was begun in April 2005, at an estimated cost of $4.0 million. In addition, we selected Quality Care Solutions, Inc., a wholly owned subsidiary of Trizzetto,The TriZetto Group, Inc, to assess and implement new core business applications for our managed care segment. We completed an initial assessment during 2007 withand commenced the first lineimplementation of businessthe new application in 2008. Our Managed Care segment began transitioning to the new application in 2010. The transitioning process is expected to be converted incontinue into 2011, when we expect to complete the first half of the 2010. We expect the managed care conversion process to be completed by 2012, at a total cost of approximately $64.0 million.full migration. If we are unsuccessful in implementing these improvements in a timely manner or if these improvements do not meet our customers’ requirements, we may not be able to recoup these costs and expenses and effectively compete in our industry.
Our business requires the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other eventevents or developments could result in compromises or breaches of our security system and patient data stored in our information systems. Anyone who circumvents our security measures could misappropriate our confidential

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information or cause interruptions in services or operations. The Internetinternet is a public network and data is sent over this network from many sources. In the past, computer viruses or software programs that disable or impair computers have been distributed and have rapidly spread over the Internet.internet. Computer viruses could be introduced into our systems, or those of our providers or regulators, which could disrupt our operations, or make our systems inaccessible to our providers or regulators.
     We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. Because of the confidential health information we store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and loss. Our security measures may be inadequate to prevent security breaches, and our business operations would be adversely affected by cancellation of contracts and loss of members if theysecurity breaches are not prevented.prevented or appropriately remediated.

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     In September 2010, we have recently learned of a breach and other unauthorized access to a specific internet database managed by TCI. We have completed our investigation and determined that the intrusions were the result of the unauthorized use of one of more active user IDs and passwords and not the result of a breach to our security system. See “Item 3. Legal Proceedings — Intrusions into Triple-C, Inc. Internet IPA Database”.
We face risks related to litigation.
In addition to the litigation risks discussed above in “—Risks Relating to Our Capital Stock”, we are, or may be in the future, a party to a variety of legal actions that affect any business, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims and intellectual property-related litigation. In addition, because of the nature of our business, we may be subject to a variety of legal actions relating to our business operations, including the design, management and offering of our products and services. These could include:
 • claims relating to the denial of managed care benefits;
 
 • medical malpractice actions;
 
 • allegations of anti-competitive and unfair business activities;
 
 • provider disputes over compensation and termination of provider contracts;
 
 • disputes related to self-funded business;
 
 • disputes over co-payment calculations;
 
 • claims related to the failure to disclose certain business practices;
 
 • claims relating to customer audits and contract performance; and
 
 • claims by regulatory agencies or whistleblowers for regulatory non-compliance, including but not limited to fraud.fraud and health information privacy (including HIPAA).
We are a defendant in various lawsuits, including a class action, some of which involve claims for substantial and/or indeterminate amounts and the outcome of which is unpredictable. While we are defending these suits vigorously, we will incur expenses in the defense of these suits. Any adverse judgment against us resulting in such damage awards could have an adverse effect on our cash flows, results of operations and financial condition. See ''Item 3—“Item 3. Legal Proceedings’’Proceedings”.
Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations.
Puerto Rico has historically been at a relatively high risk of natural disasters such as hurricanes and earthquakes. If Puerto Rico were to experience a large-scale natural disaster, claims incurred by our managed care, property and casualty and life insurance segmentsegments would likely increase and our properties may incur substantial damage, which could have a material adverse effect on our business, financial condition and results of operations.
CovenantsNon-financial covenants in our secured term loan and note purchase agreements may restrict our operations.
We are a party to a secured loan with a commercial bank for an aggregate amount of $41.0 million, for which we had an outstanding balance of $24.3$21.0 million as of December 31, 2008.2010. Also, we have an aggregate principal amount of $145.0$120.0 million of senior unsecured notes outstanding, consisting of a $50.0 million aggregate principal amount of 6.30% notes due 2019, $60.0a $35.0 million aggregate principal amount of 6.60% notes due 2020 and a $35.0 million aggregate principal amount of 6.70% notes due 2021 (collectively, the notes). The secured term loan and the note purchase agreements governing the notes contain non-financial covenants that restrict, among other things, the granting of certain liens, limitations on acquisitions and limitations on changes in control. These non-financial covenants could restrict our operations. In addition, if we fail to make any required payment under our secured term loan or note purchase agreements governing the notes or to

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comply with any of the non-financial covenants included therein, we would be in default and the lenders or holders of our debt, as the case may be, could cause all of our outstanding debt obligations under our secured term loan or note purchase agreements to become immediately due and payable, together with accrued and unpaid interest and, in the case of the secured term loan, cease to make further extensions of credit. If the indebtedness under our secured term loan or note purchase agreements is accelerated, we may be unable to repay or financere-finance the amounts due and our business may be materially adversely affected.

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We may incur additional indebtedness in the future. Covenants related to such indebtedness could also adversely affect our ability to pursue desirable business opportunities.
We may incur additional indebtedness in the future. Our debt service obligations may require us to use a portion of our cash flow to pay interest and principal on debt instead of for other corporate purposes, including funding future expansion. If our cash flow and capital resources are insufficient to service our debt obligations, we may be forced to seek extraordinary dividends from our subsidiaries, sell assets, seek additional equity or debt capital or restructure our debt. However, these measures might be prohibited by applicable regulatory requirements or unsuccessful or inadequate in permitting us to meet scheduled debt service obligations.
We may also incur future debt obligations that might subject us to restrictive covenants that could affect our financial and operational flexibility. Our breach or failure to comply with any of these covenants could result in a default under our secured term loan and note purchase agreements and the acceleration of amounts due thereunder. Indebtedness could also limit our ability to pursue desirable business opportunities, and may affect our ability to maintain an investment grade rating for our indebtedness.
We expect tomay pursue acquisitions in the future.
We may acquire additional companies or assets if consistent with our strategic plan for growth. The following are some of the potential risks associated with acquisitions that could have a material adverse effect on our business, financial condition and results of operations:
 • disruption of on-going business operations, distraction of management, diversion of resources and difficulty in maintaining current business standards, controls and procedures;
 
 • difficulty in integrating information technology of an acquired entity and unanticipated expenses related to such integration;
 
 • difficulty in the integration of the new company’san acquired entity’s accounting, financial reporting, management, information, human resources and other administrative systems and the lack of control if such integration is delayed or not implemented;
 
 • difficulty in the implementation of controls, procedures and policies appropriate for filers with the SEC at companies that prior to acquisition lacked such controls, policies and procedures;
 
 • potential unknown liabilities associated with the acquired company;
 
 • failure of acquired businesses to achieve anticipated revenues, earnings or cash flow;
 
 • dilutive issuances of equity securities and incurrence of additional debt to finance acquisitions;
 
 • other acquisition-related expenses, including amortization of intangible assets and write-offs; and
 
 • competition with other firms, some of which may have greater financial and other resources, to acquire attractive companies.
In addition, we may not successfully realize the intended benefits of any acquisition or investment.
We could be subject to possible regulatory actions in connection with alleged illegal political contributions.
Miguel Vázquez-Deynes, who was president and chief executive officer of the Company from January 1990 to April 2002, prior to the time that we became an SEC registrant, stated during a radio interview in October 2007 that he had testified to a federal grand jury to having caused the Company to effect illegal political contributions totaling over $100,000 between 1996 and 2000. Mr. Vázquez-Deynes has stated

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publicly that the payments in question were made to Puerto Rico public relations firms for the purpose of concealing the fact that they exceeded the amounts permitted by applicable Puerto Rico election laws. Mr. Vázquez-Deynes’ testimony was given in connection with an ongoing investigation by the U.S. Attorney’s Office for the District of Puerto Rico into illegal political contributions in Puerto Rico. The Puerto Rico Legislative Assembly, the Puerto Rico Department of Justice and the Puerto Rico Office of the Commissioner of Insurance subsequently launched separate investigations into the matters described by Mr. Vázquez-Deynes. The Company is cooperating fully with all requests made of it in connection with these investigations.
There may be, or could in the future be, other investigations by governmental authorities relating to these matters. The current and any such future investigations could result in actions against us or certain of our current or former employees. These actions could result in fines, penalties, sanctions, injunctions against future conduct, third party litigation or other actions that could have a material adverse effect on our business, financial condition, share price and reputation, including by impairing government contracts and adversely affecting our ability to obtain future contracts and participate in governmental payor programs.
Following the airing of Mr. Vázquez’s allegations, the Company’s board of directors hired outside counsel from Clifford Chance US, LLP, a law firm that had no prior relationship with the Company, to conduct an internal investigation into these allegations. The investigation was completed in February 2008 and concluded that any misconduct was limited to the matters alleged by Mr. Vázquez-Deynes and limited to the period when he was an officer of the Company. No current officer or director of the Company was found to have acted improperly. Our internal controls today are substantially more comprehensive than those in place during the period when these events took place and we believe these controls reduce the possibility of any similar event occurring in the future. Although we cannot predict the outcome of the government investigations described above, management does not currently believe that they will result in actions having a material adverse effect on the Company.

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Risks Relating to Taxation
If the Company is considered to be a controlled foreign corporation under the related person insurance income rules for U.S. federal income tax purposes, U.S. persons that own the Company’s shares of Class B common stock could be subject to adverse tax consequences.
The Company does not expect that it will be considered a controlled foreign corporation under the related person insurance income rules (a RPII CFC)“RPII CFC”) for U.S. federal income tax purposes. However, because RPII CFC status depends in part upon the correlation between an insurance company’s shareholders and such company’s insurance customers and the extent of such company’s insurance business outside its country of incorporation, there can be no assurance that the Company will not be a RPII CFC in any taxable year. The Company does not intend to monitor whether or not it generates RPII or becomes an RPII CFC. If the Company were a RPII CFC in any taxable year, certain adverse tax consequences could apply to U.S. persons that own the Company’s shares of Class B common stock.

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If the Company is considered to be a passive foreign investment company for U.S. federal income tax purposes, U.S. persons that own the Company’s shares of Class B common stock could be subject to adverse tax consequences.
The Company does not expect that it will be considered a ''passive“passive foreign investment company’’company” (a PFIC)“PFIC”) for U.S. federal income tax purposes. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25 percent owned equity investments and the Company’s ability to use the proceeds from its initial public offering in a timely fashion) from time to time, there can be no assurance that the Company will not be considered a PFIC for any taxable year. The Company’s belief that it is not a PFIC is based, in part, on the fact that the PFIC rules include provisions intended to provide an exception for bona fide insurance companies predominately engaged in an insurance business. However, the scope of this exception is not entirely clear and there are no administrative pronouncements, judicial decisions or Treasury regulations that provide guidance as to the application of the PFIC rules to insurance companies. If the Company were treated as a PFIC for any taxable year, certain adverse consequences could apply to certain U.S. persons that own the Company’s shares of Class B common stock.
Risks Relating to the Regulation of Our Industry
Changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations.
Our business is subject to changing Federalsubstantial federal and local legal,regulation and frequent changes to the applicable legislative and regulatory environments,schemes, including general business regulations and laws relating to taxation, privacy, data protection, pricing, insurance, Medicare and pricing.health care fraud and abuse laws. Please refer to “Item 1—1. Business — Regulation”. In addition,Changes in these laws, enactment of new laws or regulations, changes in interpretation of these laws or changes in enforcement of these laws and regulations may materially impact our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance. Some of the more significant proposed regulatorybusiness. Such changes that may affect our business are:include without limitation:
 • initiatives to provide greater access to coverage for uninsured and under-insured populations;populations without adequate funding to health plan or to be funded through taxes or other negative financial levy on health plans;
 
 • enhanced effortspayments to improvehealth plans that are tied to achievement of certain quality of health care;performance measures;
 
 • Reform andother efforts or specific legislative changes to the Medicare reform legislation;or Medicaid programs, including changes in the bidding process or other means of materially reducing premiums;
 
 • local government plans and initiatives;regulatory changes;
 
 • increased government concerns regardingenforcement, or changes in interpretation or application, of fraud and abuse;abuse laws; and
 
 • initiativesregulations that increase the operational burden on health plans that increase a health plan’s exposure to increase health care regulation,liabilities, including efforts to expand the tort liability of health plans.
On February 26, 2009, President Obama announced his proposed budget for fiscal year 2010, which supports his comprehensive health care reform agenda. The Obama health care reform plan is expected to address increasing access to health care coverage, reducing the cost of care, and improving the quality of care rendered. The Obama health care reform plan is expected to be financed in large part by reduced expenditures for the Medicare program. The proposed budget projects a minimum savings on health care

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expenditures of $316 billion by the Federal government over the next decade in the Medicare program, including $176 billon of which will be realized through reduced payments to Medicare Advantage plans as a result of changes in the competitive bidding process for Medicare Advantage contracts. In addition, President Obama’s proposed budget calls for premium increases for certain high-income Medicare beneficiaries.
The U.S. Congress is developing legislation aimed at patient protection, including proposed laws that could expose insurance companies to damages, and in some cases punitive damages, for certain coverage determinations including the denial of benefits or delay in providing benefits to members. Similar legislation has been proposed in Puerto Rico. Congressional committees are currently considering MedPac recommendations to lower Medicare Advantage rates to ensure financial neutrality with the traditional Medicare program.We cannot provide any assurance if, when or to what degree Congress may act on any of the proposals and we do not know whether any proposal which may be enacted into law will change the way health insurance benefits are structured, sold or administered in the future. The enactment of laws that change the way health insurance benefits are structured, sold or administered could have a material adverse effect on the Company’s business, financial conditions and results of operations.
Regulations imposed by the Commissioner of Insurance, among other things, influence how our insurance subsidiaries conduct business and solicit subscriptions for shares of capital stock, and place limitations on investments and dividends. Possible penalties for violations of such regulations include fines, orders to cease or change practices or behavior and possible suspension or termination of licenses. The regulatory powers of the Commissioner of Insurance are designed to protect policyholders, not shareholders. While we cannot predict the terms of future regulation, the enactment of new legislation could affect the cost or demand of insurance policies, limit our ability to obtain rate increases in those cases where rates are regulated, otherwise restrict our operations, limit the expansion of our business, expose us to expanded liability or impose additional compliance requirements. In addition, we may incur additional operating expenses in order to comply with new legislation and may be required to revise the ways in which we conduct our business.
Future regulatory actions by the Commissioner of Insurance or other governmental agencies, including federal regulations, could have a material adverse effect on the profitability or marketability of our business, financial condition and results of operations.

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We may be subject to government audits, regulatory andproceedings or investigative proceedings,actions, which may find that our policies, procedures, andpractices or contracts doare not fully complycompliant with, complex and changingor are in violation of, applicable healthcare regulations.
The Commissioner of Insurance, as well as other     Federal and Puerto Rico government authorities, including but not limited to the Commissioner of Insurance, ASES, CMS, the OIG, the Office of the Civil Rights of HHS, the U.S. Department of Justice, the U.S. Department of Labor, and the OPM, regularly make inquiries and conduct audits concerning our compliance with applicable insurance and other laws and regulations. We may also become the subject of non-routine regulatory or other investigations or proceedings brought by these or other authorities, and our compliance with and interpretation of applicable laws and regulations may be challenged. In addition, our regulatory compliance may also be challenged by private citizens under the “whistleblower provisions” of applicable laws. The defense of any such challenge could result in substantial cost, diversion of resources, and a diversion of management’s time and attention. Thus, any such challenge could have apossible material adverse effect on our business, regardless of whether it ultimately is successful. If we fail to comply with any applicable laws, or a determination is made that we have failed to comply with these laws, our financial condition and results of operations could be adversely affected.business.
An adverse review, audit or an investigationaction could result in one or more of the following:
 • recoupment of amounts we have been paid pursuant to our government contracts;
 
 • mandated changes in our business practices;
 
 • imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key employees;
 
 • loss of our right to participate in Medicare the Reform or other federal or local programs; damage to our reputation;
 
 • increased difficulty in marketing our products and services;

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 • inability to obtain approval for future services or geographic expansions; and
 
 • loss of one or more of our licenses to act as an insurance company, preferred provider or managed care organization or other licensed entity or to otherwise provide a service.
Our failure to maintain an effective corporate compliance program may increase our exposure to civil damages and penalties, criminal sanctions and administrative remedies, such as program exclusion, resulting from an adverse review. Any adverse review, audit or investigation could reduce our revenue and profitability and otherwise adversely affect our operating results.
As a Medicare Advantage program participant, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties, and our Medicare Advantage contracts may be terminated.terminated or our operations may be required to change in a manner that has a material impact on our business.
The laws and regulations governing Medicare Advantage program participants are complex, subject to interpretation and can expose us to penalties for non-compliance. If we fail to comply with these laws and regulations, we could be subject to criminal fines, civil penalties or other sanctions, including the termination of our Medicare Advantage contracts.
The revised rate calculation system for Medicare Advantage and the payment system for the Medicare Part D established by the MMA could reduce our profitability.
Effective January 1, 2006, a revised rate calculation system based on a competitive bidding process was instituted for Medicare Advantage managed care plans, including ourMedicare SelectoandMedicare Optimoplans. The statutory payment rate was relabeled as the benchmark amount, and plans submit competitive bids that reflect the costs they expect to incur in providing the base Medicare benefits. If the accepted bid is less than the benchmark, Medicare pays the plan its bid plus a rebate of 75% of the amount by which the benchmark exceeds the bid. However, these rebates can only be used to enhance benefits or lower premiums and co-pays for plan members. If the bid is greater than the benchmark, the plan will be required to charge a premium to enrollees equal to the difference between the bid and the benchmark, which could affect our ability to attract enrollees. CMS reviews the methodology and assumptions used in bidding with respect to medical and administrative costs, profitability and other factors. CMS could challenge such methodology or assumptions or seek to cap or limit plan profitability.
Furthermore, President Obama’s proposed budget expects     A number of legislative proposals, as well as PPACA, includes efforts to save over $175 billion over a ten year period based onfederal funds by implementing significant rate reductions in subsidies to Medicare Advantage plans bythrough changes in the competitive bidding process.process, tying the country benchmarks to Medicare fee for service expenditures, or other means.

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In addition, the Medicare Part D prescription drug benefit payments to plans are determined through a competitive bidding process, and enrollee premiums also are tied to plan bids. The bids reflect the plan’s expected costs for a Medicare beneficiary of average health; CMS adjusts payments to plans based on enrollees’ health and other factors. The program is largely subsidized by the federal government and is additionally supported by risk-sharing between Medicare Part D plans and the federal government through risk corridors designed to limit the profits or losses of the drug plans and reinsurance for catastrophic drug costs. The government payment amount to plans is based on the national weighted average monthly bid for basic Part D coverage, adjusted for member demographics and risk factor payments. The beneficiary will be responsible for the difference between the government payment amount and his or her plan’s bid, together with the amount of his or her plan’s supplemental premium (before rebate allocations), subject to the co-pays, deductibles and late enrollment penalties, if applicable. Additional subsidies are provided for dual-eligible beneficiaries and specified low-income beneficiaries. Medicare also subsidizes 80% of drug spending above an enrollee’s catastrophic threshold.
We face the risk of reduced or insufficient government funding and we may need to terminate our Medicare Advantage and/or Part D contracts with respect to unprofitable markets, which may have a material adverse effect on our financial position, results of operations or cash flows. In addition, as a result of the competitive bidding process, our ability to participate in the Medicare Advantage and/or the Part D programs is effectedaffected by the pricing and design of our competitors’ bids. Moreover, we may in the future be required to reduce benefits or charge our members an additional premium in order to maintain our current

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level of profitability, either of which could make our health plans less attractive to members and adversely affect our membership.
CMS’s risk adjustment payment system and budget neutrality factors make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.
CMS has implemented a risk adjustment payment system for Medicare Advantage plans to improve the accuracy of payments and establish incentives for such plans to enroll and treat less healthy Medicare beneficiaries. CMS phased in this payment methodology with a risk adjustment model that bases a portion of the total CMS reimbursement payments on various clinical and demographic factors. CMS requires that all managed care companies capture, collect and submit the necessary diagnosis code information to CMS for reconciliation with CMS’s internal database. As a result of this process, it is difficult to predict with certainty our future revenue or profitability. In addition, our own risk scores for any period may result in favorable or unfavorable adjustments to the payments we receive from CMS and our Medicare payment revenue. There can be no assurance that our contracting physicians and hospitals will be successful in improving the accuracy of recording diagnosis code information, which has an impact on our risk scores.
Payments     Between 2003 and 2010, payments to Medicare Advantage plans are also adjusted by a ''budget neutrality’’“budget neutrality” factor that was implemented in 2003 by Congress and CMS to prevent health plan payments from being reduced overall while, at the same time, directing risk adjusted payments to plans with more chronically ill enrollees. In general, this adjustment has favorably impacted payments to all Medicare Advantage plans. However, this adjustment is schedule to be gradually beinghas been phased out by 2011.out. Furthermore, even with the enactment of PPACA, MedPac continuesand other constituencies continue to recommend that Congress enact legislation that reduceswould reduce Medicare Advantage payment to equalize payments for services made through Medicare Advantage plans and the traditional fee-for-service Medicare program. As of the date of this Annual Report on Form 10-K, Congress has not enacted legislation that contains the MedPac recommendations. However, weWe cannot provide assurance if, when or to what degree Congress may enact legislation including the MedPac recommendations,any such recommendation, but any reduction in Medicare Advantage rates could have a material adverse effect on our revenue, financial position, results of operations or cash flow.
If during the open enrollment season our Medicare Advantage members enroll in another Medicare Advantage plan, they will be automatically disenrolled from our plan, possibly without our immediate knowledge.
Pursuant to the MMA, members enrolled in one insurer’s Medicare Advantage program will be automatically unenrolled from that program if they enroll in another insurer’s Medicare Advantage program. If our members enroll in another insurer’s Medicare Advantage program during the open enrollment season, we may not discover that such member has been unenrolled from our program until such time as we fail to receive reimbursement from the CMS in respect of such member, which may occur several months after the end of the open season. As a result, we may discover that a member has unenrolled from our program after we have already provided services to such

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individual. Our profitability would be reduced as a result of such failure to receive payment from CMS if we had made related payments to providers and were unable to recoup such payments from them.
If we are deemed to have violated the insurance company change of control statutes in Puerto Rico, we may suffer adverse consequences.
We are subject to change of control statutes applicable to insurance companies. These statutes regulate, among other things, the acquisition of control of an insurance company or a holding company of an insurance company. Under these statutes, no person may make an offer to acquire or to sell the issued and outstanding voting stock of an insurance company, which constitutes 10% or more of the issued and outstanding stock of an insurance company, or of the total stock issued and outstanding of a holding company of an insurance company, or solicit or receive funds in exchange for the issuance of new shares of ourthe holding company’s or ourits insurance subsidiaries’ capital stock, without the prior approval of the Commissioner of Insurance. Our amended and restated articles of incorporation (the articles) prohibit any institutional investor from owning 10% or more of our voting power and any person that is not an institutional investor from owning 5% or more of our voting power. We cannot, however, assure you that ownership of our securities will remain below these thresholds. To the extent that a person, including an institutional

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investor, acquires shares in excess of these limits, our articles provide that we will have the power to take certain actions, including refusing to give effect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the articles. If the Commissioner of Insurance determines that a change of control has occurred, we could be subject to fines and penalties, and in some instances the Commissioner of Insurance would have the discretion to revoke our operating licenses.
We are also subject to change of control limitations pursuant to our BCBSA license agreements. The BCBSA ownership limits restrict beneficial ownership of our voting capital stock to less than 10% for an institutional investor and less than 5% for a non-institutional investor, both as defined in our articles. In addition, no person may beneficially own shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest, whether voting or non-voting, in our company. This provision in our articles cannot be changed without the prior approval of the BCBSA and the vote of holders of at least 75% of our common stock.
Our insurance subsidiaries are subject to minimum capital requirements. Our failure to meet these standards could subject us to regulatory actions.
Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance, among other things, require insurance companies to maintain certain levels of capital, thereby restricting the amount of earnings that can be distributed by our insurance subsidiaries to us. Although we are currently in compliance with these requirements, there can be no assurance that we will continue to comply in the future. Failure to maintain required levels of capital or to otherwise comply with the reporting requirements of the Commissioner of Insurance could subject our insurance subsidiaries to corrective action, including government supervision or liquidation, or require us to provide financial assistance, either through subordinated loans or capital infusions, to our subsidiaries to ensure they maintain their minimum statutory capital requirements.
We are also subject to minimum capital requirements pursuant to our BCBSA license agreements. See “—“Risks Related to Our Business — The termination or modification of our license agreements to use the Blue ShieldBCBS name and mark could have ana material adverse effect on our business, financial condition and results of operations”.operations.”
We are required to comply with laws governing the transmission, security and privacy of health information.
Certain implementing regulations of HIPAA require us to comply with standards regarding the formats for electronic transmission, and the privacy and security of certain health information within our company and with third parties, such as managed care providers, business associates and our members. While we have agreements in place with our business associates, we have limited control over their operations regarding the privacy and security of protected heath information. The HIPAA regulations also provide access rights and other rights for health plan beneficiaries with respect to their health information. These regulations include standards for certain electronic transactions, including encounter and claims information, health plan eligibility and payment information. Compliance with HIPAA is enforced by HHS’s Office for Civil Rights for privacy, CMS for security and electronic transactions, and by the U.S. Department of Justice for criminal violations, and by States Attorneys General once the

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HIPAA amendments under the Stimulus are implemented. In addition, last fall CMS advised all Medicare Advantage plans, including TSS, of CMS’ intention to increase its enforcement activities of the privacy regulations under HIPAA with respect to Medicare beneficiaries. Further, the Gramm-Leach-Bliley Act imposes certain privacy and security requirements on insurers that may apply to certain aspects of our business as well.
We continue to implement and revise our health information policies and procedures to monitor and ensure our compliance with these laws and regulations, including the HIPAA amendments under the Stimulus. Furthermore, Puerto Rico’s ability to promulgate its own laws and regulations (including those issued in response to the Gramm-Leach-Bliley Act), such as Act No. 194 of August 25, 2000, also known as the Patient’s Rights and Responsibilities Act, including those more stringent than HIPAA, and uncertainty regarding many aspects of such state requirements, make compliance with applicable health information laws more difficult. For these reasons, our total compliance costs may increase in the future.
Puerto Rico insurance laws and regulations and provisions of our articles and bylaws could delay, deter or prevent a takeover attempt that shareholders might consider to be in their best interests and may make

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it more difficult to replace members of our board of directors and have the effect of entrenching management.
Puerto Rico insurance laws and the regulations promulgated thereunder, and our articles and bylaws may delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider to be in their best interests. For instance, they may prevent our shareholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
Our license agreements with the BCBSA require that our articles contain certain provisions, including ownership limitations. See “—“Risks Relating to the Regulation of Our Industry — If we are deemed to have violated the insurance company change of control provisionsstatutes in Puerto Rico, insurance laws, we may suffer adverse consequences’’.consequences.”
Other provisions included in our articles and bylaws may also have anti-takeover effects and may delay, defer or prevent a takeover attempt that our shareholders might consider to be in their best interests. In particular, our articles and bylaws:
 • permit our board of directors to issue one or more series of preferred stock;
 
 • divide our board of directors into three classes serving staggered three-year terms;
 
 • limit the ability of shareholders to remove directors;
 
 • impose restrictions on shareholders’ ability to fill vacancies on our board of directors;
 
 • impose advance notice requirements for shareholder proposals and nominations of directors to be considered at meetings of shareholders; and
 
 • impose restrictions on shareholders’ ability to amend our articles and bylaws.
See also “—“Risks Relating to the Regulation of Our Industry — If we are deemed to have violated the insurance company change of control provisionsstatutes in Puerto Rico, insurance laws, we may suffer adverse consequences’’.consequences.”
Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance may also delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider to be in their best interests. For instance, the Commissioner of Insurance must review any merger, consolidation or new issue of shares of capital stock of an insurer or its parent company and make a determination as to the fairness of the transaction. Also, a director of an insurer must meet certain requirements imposed by Puerto Rico insurance laws.
These voting and other restrictions may operate to make it more difficult to replace members of our board of directors and may have the effect of entrenching management regardless of their performance.
Item 1B. Unresolved Staff Comments
None.

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Item 2. Properties
We own a seven story (including the basement floor) building located at 1441 F.D. Roosevelt Avenue, in San Juan, Puerto Rico, and two adjacent buildings, as well as the adjoining parking lot. In addition, we own five floors of a fifteen-story building located at 1510 F.D. Roosevelt Avenue, in Guaynabo, Puerto Rico. The properties are subject to liens under our credit facilities. See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources”.
     We also own land in the municipality of Mayagüez, Puerto Rico, in which we have begun to build a multi-segment customer service center. In addition to the properties described above, we or our subsidiaries are parties to operating leases that are entered into in the ordinary course of business.

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We believe that our facilities are in good condition and that the facilities, together with capital improvements and additions currently underway, are adequate to meet our operating needs for the foreseeable future. The need for expansion, upgrading and refurbishment of facilities is continually evaluated in order to keep facilities aligned with planned business growth and corporate strategy.
Item 3. Legal Proceedings.Proceedings
As of December 31, 2008,2010, the Company is a defendant in various lawsuits arising in the ordinary course of business. We are also defendants in various other claims and proceedings, some of which are described below. Furthermore, the Commissioner of Insurance, as well as other Federal and Puerto Rico government authorities, regularly make inquiries and conduct audits concerning the Corporation’s compliance with applicable insurance and other laws and regulations.
Management believes that the aggregate liabilities, if any, arising from all such claims, assessments, audits and lawsuits will not have a material adverse effect on the consolidated financial position or results of operations of the Corporation. However, given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain matters could have a material adverse effect on our financial condition, operating results and/or cash flows. Where the Corporation believes that a loss is both probable and estimable, such amounts have been recorded. In other cases, it is at least reasonably possible that the Corporation may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Corporation is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.
Additionally, we may face various potential litigation claims that have not to date been asserted, including claims from persons purporting to have contractual rights to acquire shares of the Corporation on favorable terms or to have inherited such shares notwithstanding applicable transfer and ownership restrictions. See “Item 1A—1A. Risk Factors — Risks Relating to our Capital Stock”.
Hau et al Litigation (formerly known as Jordan et al)
On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the Corporation, TSIthe Corporation’s subsidiary TSS and others in the Court of First Instance for San Juan, Superior Section (the “Court”“Court of First Instance”), alleging, among other things, violations by the defendants of provisions of the Puerto Rico Insurance Code, antitrust violations, unfair business practices, RICO violations, breach of contract with providers, and damages in the amount of $12 million. Following years of complaint amendments, motions practice and interim appeals up to the level of the Puerto Rico Supreme Court, the plaintiffs amended their complaint on June 20, 2008 to allege with particularity the same claims initially asserted but on behalf of a more limited group of plaintiffs, and increase their claim for damages to approximately $207 million. At a status conference heldAfter extensive discovery, plaintiffs amended their complaint for the third time and dropped all claims predicated on August 18, 2008,violations of the parties informedantitrust and RICO laws and the Court that they had reached an agreement to try to simplify the case. Based on the agreement, which was approved by the Court, the defendants sent a letter toPuerto Rico Insurance Code. In addition, the plaintiffs on September 19, 2008 explaining the reasons why the allegationsvoluntarily dismissed with prejudice any and all claims against officers of the amended complaint should be dismissed. We are currently waiting for the plaintiffs to reply.
Thomas Litigation
On May 22, 2003, Kenneth A. Thomas, M.D.Corporation and Michael Kutell, M.D. filed a putative class action suit against the Blue Cross Blue Shield Association and substantially allTSS. Two of the other Blue Cross and Blue Shield plans inoriginal plaintiffs were also eliminated from the United States, including TSI.Third Amended Complaint (TAC). The complaintTAC only alleges that the defendants, on their own and as partbreach of a common scheme, systematically deny, delay and diminish the payments dueseven share acquisition agreements (see Item 1A — Risk Factors — Risks Relating to doctors so that they are not paid in a timely manner for the covered medically necessary services they render. TSI, along with the other defendants, moved to dismiss the complaint on multiple grounds, including but not limited an arbitration right and the applicabilityour Capital Stock), breach of the McCarran Ferguson Act.provider contract by way of discriminatory audits and improper payment of services rendered. Against a former President of TSM, Plaintiffs allege a claim for libel and slander. Discovery is ongoing. The parties announced a Settlement Agreement on April 27, 2007 and on April 19, 2008, the Court granted final approval of the settlement. A small group of physicians filed an appeal of the settlement that is pending in the Eleventh Circuit. The Company recorded an accrual for the settlement that is included within accounts payable and accrued liabilities in the accompanying consolidated financial statements.Corporation intends to vigorously defend this claim.

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Colón Litigation
On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSI predecessor stock, filed suit against TSI and the Puerto Rico Commissioner of Insurance (the Commissioner) in the Court of First Instance for San Juan, Superior Section. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner in which the sale of 1,582 shares to a number of TSI shareholders was voided. The Puerto Rico Court of Appeals upheld the order on March 31, 2000. The plaintiff requests that the court direct TSI to return his share of stock and pay damages in excess of $500,000 and attorney’s fees. TSI, however, had appealed the Commissioner’s order before the Puerto Rico Court of Appeals, which upheld the order on March 31, 2000. Therefore, management plans to vigorously contest this lawsuit because, among other reasons, the Commissioner’s order is final and cannot be collaterally attacked in this litigation.
Puerto Rico Center for Municipal Revenue Collection
On March 1, 2006 and March 3, 2006, respectively, the Puerto Rico Center for Municipal Revenue Collection (CRIM) imposed a real property tax assessment of approximately $1.3 million and a personal property tax assessment of approximately $4.0 million upon TSI for fiscal years 1992-1993 through 2002-2003. During that time, TSI qualified as a tax-exempt entity under Puerto Rico law pursuant to rulings issued by the Puerto Rico tax authorities. In imposing the tax assessments, CRIM revoked the tax rulings retroactively, based on its contention that a for-profit corporation such as TSI is not entitled to such an exemption. On March 28, 2006 and March 29, 2006, respectively, TSI challenged the real and personal property tax assessments in the Court of First Instance for San Juan, Superior Section. The court granted summary judgment affirming the real property and personal property tax assessments on October 29, 2007 and December 5, 2007, respectively.
After unsuccessfully filing motions for reconsideration in both cases, TSI appealed the court’s decisions before the Puerto Rico Court of Appeals on November 29, 2007 and February 21, 2008, respectively. TSI also requested a consolidation of both cases, which the Court of Appeals approved on April 17, 2008. On May 27, 2008, TSI submitted a motion to the Court of Appeals requesting the Court to take notice of a recent decision of the Puerto Rico Supreme Court that addresses administrative law issues involving other parties and which TSI believes confirms its position that the rulings issued by the Puerto Rico tax authorities may not be revoked on a retroactive basis. On June 30, 2008 the Court of Appeals confirmed the summary judgment issued by the Court of First Instance in both property tax cases. On September 29, 2008, TSI timely filed a certiorari petition with the Puerto Rico Supreme Court, which is currently pending. Management believes that these municipal tax assessments are improper and expects to prevail in this litigation.
Dentists Association Litigation
On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico, or “CCD”)Rico) filed a complaint in the Puerto Rico Court of First Instance for San Juan against 24 health plans operating in Puerto Rico that offer dental health coverage. The Company, TSI,Corporation and two of its subsidiaries, TSS and Triple-C, Inc. (“TCI”), a Company subsidiary, were included as defendants. This litigation purports to be a class action filed on behalf of Puerto Rico dentists who are similarly situated; however, the complaint does not include a single dentist as a class representative nor a definition of the intended class.
The complaint alleges that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to dentists so that they are not paid in a timely and complete manner for the covered medically necessary services they render. The complaint also alleges, among other things, violations to the Puerto Rico Insurance Code, antitrust laws, the Puerto Rico racketeering statute, unfair business practices, breach of contract with providers, and damages in the amount of $150 million. In addition, the complaint claims that the Puerto Rico Insurance Companies Association (“ACODESE” for its Spanish acronym) is the hub of an alleged conspiracy concocted by the member plans to defraud dentists.
There are numerous available defenses to oppose both the request for class certification and the merits. The CompanyCorporation intends to vigorously defend this claim.
     Two codefendant plans, whose main operations are outside Puerto Rico, removed the case to federal court in Florida, which the plaintiffs and the other codefendants, including the Corporation, opposed. The federal district court in Florida decided that it lacked jurisdiction under the Class Action Fairness Act (“CAFA”) and remanded the case to state court. The removing defendants petitioned to appeal to the First Circuit Court of Appeals. Having accepted the appeal, the First Circuit Court of Appeals issued an order in late October 2009 which found the lower court’s decision premature. The Court of Appeals remanded the case to the federal district court in Puerto Rico (the “DC”) and allowed limited discovery to determine whether the case should be heard in federal court pursuant to CAFA. The parties completed the limited discovery in August 2010 and supplemented their previous filings.
     On February 8, 2011 the DC issued its Opinion and Order, denying plaintiff’s motion to remand the case to state court because the injuries alleged in the complaint could be suffered outside Puerto Rico. It also decided to retain jurisdiction.
     We plan to petition the DC to reconsider its ruling, pointing to clear evidence that the removing defendants are not primary defendants for purposes of CAFA and therefore, the case should be heard in state court.
Colón Litigation
     On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSS predecessor stock, filed suit against TSS and the Puerto Rico Commissioner of Insurance (the “Commissioner”) in the Court of First Instance. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner in which the sale of 1,582 shares to a number of TSS shareholders was voided. TSS, however, appealed the Commissioner’s order before the Puerto Rico Court of Appeals, which upheld the order on March 31, 2000. Plaintiff requests that the court direct TSS to return his share of stock and compensate him for alleged damages in excess of $500,000 plus attorney’s fees. On January 13, 2011 case was dismissed with prejudice and plaintiff filed an appeal on the Puerto Rico Court of Appeals. The Corporation is vigorously contesting this lawsuit because, among other reasons, the Commissioner’s order is final and cannot be collaterally attacked in this litigation.
Claims by Heirs of Former Shareholders
The CompanyCorporation and TSITSS are also defending fourfive individual lawsuits, and one purported class action, all filed in state court, from persons who claim to have inherited a total of 9071 shares of the CompanyCorporation or one of its

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predecessors or affiliates (before giving effect to the 3,000-for-one stock split). While each case presents unique facts and allegations, the lawsuits generally allege that the redemption of the shares by the CompanyCorporation pursuant to transfer and ownership restrictions contained in the Company’sCorporation’s (or its predecessor’s)predecessors’ or affiliates’) articles of incorporation and bylaws was improper. On February 18, 2009, the Court of First Instance for San Juan, Superior Section, issued an order granting our motion to dismiss the purported class action suit, on grounds that the claim was time barred under the Puerto Rico Securities Act. Motions to dismiss are pending in a majorityOne of the remaining cases is in its initial stage and one other case was dismissed with prejudice and plaintiff has filed a request for reconsideration. In the other cases, discovery has begun in all of them.been completed and the parties are awaiting trial. Management believes all these claims are time barred under one or more statutes of limitations and other grounds and is vigorously defending them. This belief is supported by the outcome of a similar claim brought by non-medical heirs against us in 2009. The Puerto Rico Court of Appeals dismissed that case as time barred under the two year statute

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of limitations contained in the local securities law, and the Puerto Rico Supreme Court denied the plaintiffs petition for certiorari in January 2011.
ACODESE Investigation
     During April 2010, each of the Company’s wholly-owned insurance subsidiaries received subpoenas for documents from the U.S. Attorney for the Commonwealth of Puerto Rico (the “U.S. Attorney”) and the Puerto Rico Department of Justice (“PRDOJ”) requesting information principally related to the Asociación de Compañías de Seguros de Puerto Rico, Inc. (“ACODESE” by its Spanish acronym). Also in April, the Company’s insurance subsidiaries received a request for information from the Office of the Commissioner of Insurance of Puerto Rico (“OCI”) related principally to ACODESE. The Company’s insurance subsidiaries are members of ACODESE, an insurance trade association established in Puerto Rico since 1975, and their current presidents have participated over the years on ACODESE’s board of directors.
     The Company believes similar subpoenas and information requests were issued to other member companies of ACODESE in connection with the investigation of alleged payments by the former Executive Vice President of ACODESE to members of the Puerto Rico Legislative Assembly beginning in 2005. The Company, however, has not been informed of the specific subject matter of the investigations being conducted by the U.S. Attorney, the PRDOJ or the OCI. The Company is fully complying with the subpoenas and the request for information and intends to vigorously defend againstcooperate with any related government investigation. The Company at this time cannot reasonably assess the outcome of these investigations or their impact on the Company.
Intrusions into Triple-C, Inc. Internet IPA Database
     On September 21, 2010, we learned from a competitor that a specific internet database managed by our subsidiary TCI containing information pertaining to individuals previously insured by TSS under the Government of Puerto Rico’s Health Insurance Plan (“HIP”) and to independent practice associations (“IPAs”) that provided services to those individuals, had been accessed without authorization by certain of our competitor’s employees from September 9 to September 15, 2010. TCI served as a third-party administrator for TSS in the administration of its HIP contracts until September 30, 2010. We conducted a thorough investigation with the assistance of external resources and identified the information that was accessed and downloaded into the competitor’s system. The September 2010 intrusions may have potentially compromised protected health information of approximately 398,000 beneficiaries in the North and Metro-North regions of the HIP. Our investigation also revealed that protected health information of approximately 5,500 HIP beneficiaries, 2,500 Medicare beneficiaries and IPA data from all three HIP regions previously serviced by TSS was accessed through multiple, separate intrusions into the TCI IPA database from October 2008 to August 2010. We have no evidence indicating that the stolen information included Social Security numbers. We attempted to notify by mail all such beneficiaries whose information may have been compromised by these intrusions. We also established a toll-free call center to address inquiries and complaints from the individuals to whom notice was provided. We received a total of approximately 1,530 inquiries and no complaints from these individuals.
     Our investigation has revealed that the security breaches were the result of unauthorized use of one or more active user IDs and passwords specific to the TCI IPA database, and not the result of breaches of TCI’s, TSS’s or the Corporation’s system security features. Nonetheless, we took measures to strengthen TCI’s server security and credentials management procedures and conducted an assessment of our system-wide data and facility security to prevent the occurrence of a similar incident in the future.
     We were unable to determine the purpose of these breaches and do not know the extent of any fraudulent use of the information or its impact on the potentially affected individuals and IPAs. According to representations made by our competitor, however, the target was financial information related to IPAs rather than the beneficiaries’ information.
     We notified the appropriate Puerto Rico and federal government agencies of these events, including public notice of the breaches as required under Puerto Rico and federal law. We received a number of inquiries and requests for information related to these events from these government agencies and are cooperating with them. The Puerto Rico government agency that oversees the HIP levied a fine of $100,000 on TSS in connection with these incidents, but following our request for reconsideration, the agency withdrew the fine until the pertinent federal authorities conclude their investigations of this matter. We do not have sufficient information at this time to predict

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whether any future action by government entities or others as a result of the data breaches would adversely affect our business, financial condition and results of operations.
Item 4. Submissions of Matters to a Vote of Security Holders.Removed and Reserved
None.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Securities
Market Information
There is no established public trading market for our Class A common stock.     Our Class B common stock is listed and began trading on the New York Stock Exchange (the NYSE) on December 7, 2007 under the trading symbol “GTS”. Prior to this date our Class B common stock had no established public trading market. There is no established public trading market for our Class A common stock.
The following table presents high and low sales prices for the periods in whichof our Class B common stock was publicly traded:for the each quarter of the years ended December 31, 2009 and 2010:
                
 High Low High Low 
2007
 
Fourth quarter (beginning December 7, 2007) $21.20 $14.78 
2008
 
2009
 
First quarter $21.69 $16.83  $15.00 $10.67 
Second quarter 19.94 16.34  16.23 12.06 
Third quarter 18.05 15.19  17.84 14.50 
Fourth quarter 16.43 6.55  18.88 15.52 
2010
 
First quarter $18.67 $15.85 
Second quarter 20.12 17.30 
Third quarter 21.34 14.65 
Fourth quarter 21.23 16.15 
On February 27, 2009x, 2011 the closing price of our Class B common stock on the NYSE was $11.51.$xx.xx.
Holders
As of February 27, 2009,x, 2011, there were 9,042,809 and 21,069,77319,772,614 shares of Class A and Class B common Stock outstanding, respectively. The number of our holders of Class A andcommon stock as of February x, 2011 was x,xxx. The number of our holders of Class B common stock as of February 5, 2009January 15, 2011 was 1,922 and 4,357, respectively.x,xxx.
Dividends
Subject to the limitations under Puerto Rico corporation law and any preferential dividend rights of outstanding preferred stock, of which there is currently none outstanding, holders of common stock are entitled to receive their pro rata share of such dividends or other distributions as may be declared by our board of directors out of funds legally available therefore.
Our ability to pay dividends is dependent on cash dividends from our subsidiaries. Our subsidiaries are subject to regulatory surplus requirements and additional regulatory requirements, which may restrict their ability to declare and pay dividends or distributions to us. We are required to maintain minimum capital of $1.0 million for our managed care subsidiary, $2.5 million for our life insurance subsidiary and $3.0

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million for our property and casualty insurance subsidiary. In addition, our secured term loan restricts our ability to pay dividends if a default thereunder has occurred and is continuing. Please refer to “Item 7—7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —– Liquidity and Capital Resources —– Restriction on Certain Payments by the Corporation’s Subsidiaries”...
In March 2007, we declared and paid dividends amounting to approximately $2.4 million. In January 2006 we declared and paid dividends amounting to $6.2 million.     We did not declare any dividends in prior years.
Weduring the two most recent fiscal years and do not expect to pay any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and expand our business. The ultimate decision to pay a dividend, however, remains within the discretion of our board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements,

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level of indebtedness, statutory and contractual limitations and other considerations our board of directors deems relevant.
Securities Authorized for Issuance Under Equity Compensation Plan
The information required by this itemItem is incorporated herein by reference to the section “Compensation Discussion and Analysis” included infrom our definitive Proxy Statement.Statement for our 2011 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Recent Sales of Unregistered Securities
Not applicable.
Purchases of Equity Securities by the Issuer
The following table presents information related to our repurchases of common stock for the period indicated:
                 
          Total Number of Approximate Dollar
          Shares Purchased as Value of Shares
          Part of Publicly that May Yet Be
  Total Number of Average Price Paid Announced Purchased Under the
(Dollar amounts in millions, except pershare data) Shares Purchased per Share Programs1 Programs
December 1, 2008 to December 31, 2008  1,181,500  $11.75   1,181,500  $26.1 
                 
              Approximate 
          Total Number  Dollar Value of 
          of Shares
Purchased as		  Shares that
May Yet Be		 
          Part of  Purchased 
  Total Number      Publicly  Under the 
  of Shares  Average Price Paid  Announced  Programs 
(Dollar amounts in millions, except per share data) Purchased  per Share  Programs1  (in millions) 
October 1, 2010 to October 31, 2010  176,300  $17.02   176,300  $26.6 
November 1, 2010 to November 30, 2010  60,419  $18.21   60,419  $25.5 
December 1, 2010 to December 31, 2010  91,672   18.87   91,672   23.8 
 
1 In October 2008,September 29, 2010, the Board of Directors authorized a $40.0$30.0 million share repurchase program of Class B shares only, which commenced on December 8, 2008.September 29, 2010.
Performance Graph
The following graph compares the cumulative total return to shareholders on our Class B common stock for the period from December 7, 2007, the date our Class B common stock began trading on the NYSE, through December 31, 2008,2010, with the cumulative total return over such period of (i) the Standard and Poor’s 500 Stock Index (the S&P 500 Index) and (ii) the Morgan Stanley Healthcare Payor Index (the MSHP Index). For illustrative purposes, the graph assumes an investment of $100 on December 7, 2007 in each of our Class B common stock, the S&P 500 Index and the MSHP Index. The performance graph is not necessarily indicative of future performance.
The comparisons shown in the graph are based on historical data and the Corporation cautions that the stock price in the graph below is not indicative of, and is not intended to forecast, the potential future performance of our Class B common stock. Information used in the preparation of the graph was obtained from Bloomberg, a source we believe to be reliable, however, the Corporation is not responsible for any errors or omissions in such information.

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Comparison of cumulative return of Class B Common Stock 12/7/2007 $100.00 12/31/2007 $133.40 $97.59 $100.38 3/31/2008 $116.50 $87.91 $65.25 6/30/2008 $107.92 $85.07 $58.66 9/30/2008 $107.52 $77.52 $61.83 12/31/2008 $75.91 $60.03 $45.37
                                 
  Period Ending 
Index 12/07/07  12/31/07  06/30/08  12/31/08  06/30/09  12/31/09  06/30/10  12/31/10 
  | | | | | | | |
Triple-S Management Corporation  100.00   133.40   107.92   75.91   102.90   116.17   122.44   125.94 
S&P 500  100.00   97.59   85.07   60.03   61.10   74.11   68.50   83.58 
Morgan Stanley Healthcare Payor Index  100.00   100.38   58.66   45.37   52.42   69.59   66.12   79.94 

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Item 6. Selected Financial Data.Data
Statement of Earnings Data
                                        
 2008 2007 2006 (1) 2005 2004 2010 2009 2008 2007 2006 
(Dollar amounts in millions, except per share data)           
  
Years ended December 31,
 ��  
Premiums earned, net $1,695.5 1,483.6 1,511.6 1,380.2 1,299.0  $1,901.1 $1,869.1 $1,692.4 $1,483.6 $1,511.6 
Administrative service fees 19.2 14.0 14.1 14.4 9.2  39.6 48.6 19.2 14.0 14.1 
Net investment income 56.2 47.2 42.7 29.1 26.8  49.1 52.1 56.2 47.2 42.7 
Total operating revenues 1,770.9 1,544.8 1,568.4 1,423.7 1,335.0  1,989.8 1,969.8 1,767.8 1,544.8 1,568.4 
Net realized investments gains (losses)  (13.9) 5.9 0.8 7.2 11.0  2.5 0.6  (13.9) 5.9 0.8 
Net unrealized investment gain (loss) on trading securities  (21.1)  (4.1) 7.7  (4.7) 3.0  5.4 10.5  (21.1)  (4.1) 7.7 
Other income (loss), net  (2.5) 3.2 2.3 3.7 3.4 
Other income (expense), net 0.9 1.3  (2.5) 3.2 2.3 
Total revenues 1,733.4 1,549.8 1,579.2 1,429.9 1,352.4  1,998.6 1,982.2 1,730.3 1,549.8 1,579.2 
Benefits and expenses:  
Claims incurred 1,434.9 1,223.8 1,259.0 1,208.3 1,115.8  1,596.8 1,605.8 1,431.8 1,223.8 1,259.0 
Operating expenses 251.9 237.5 236.1 181.7 171.9  305.0 279.4 251.9 237.5 236.1 
Total operating costs 1,686.8 1,461.3 1,495.1 1,390.0 1,287.7  1,901.8 1,885.2 1,683.7 1,461.3 1,495.1 
Interest expense 14.7 15.9 16.6 7.6 4.6  12.6 13.3 14.7 15.9 16.6 
Total benefits and expenses 1,701.5 1,477.2 1,511.7 1,397.6 1,292.3  1,914.4 1,898.5 1,698.4 1,477.2 1,511.7 
Income before taxes 31.9 72.6 67.5 32.3 60.1  84.2 83.7 31.9 72.6 67.5 
Income tax expense 7.1 14.1 13.0 3.9 14.3  17.4 14.9 7.1 14.1 13.0 
Net income 24.8 58.5 54.5 28.4 45.8  $66.8 $68.8 $24.8 $58.5 $54.5 
Basic net income per share (2): $0.77 2.15 2.04 1.06 1.71 
Basic net income per share (1): $2.30 $2.33 $0.77 $2.15 $2.04 
Diluted net income per share: $0.77 2.15 2.04 1.06 1.71  $2.28 $2.33 $0.77 $2.15 $2.04 
 
Dividend declared per common share (3): $— 0.82 0.23 — — 
Dividend declared per common share (2): $— $— $— $0.82 $0.23 
Balance Sheet Data
                    
                     2010 2009 2008 2007 2006 
          
December 31, 2008 2007 2006 (1) 2005 2004 
Cash and cash equivalents $45.0 $40.4 $46.1 $240.2 $81.6 
Cash and cash equivalents $46.1 240.2 81.6 49.0 35.1 
 
Total assets $1,548.5 1,659.5 1,345.5 1,137.5 919.7  $1,759.7 $1,648.7 $1,559.2 $1,659.5 $1,345.5 
 
Long-term borrowings $169.3 170.9 183.1 150.6 95.7  $166.0 $167.7 $169.3 $170.9 $183.1 
 
Total stockholders’ equity $485.9 482.5 342.6 308.7 301.4  $617.3 $537.8 $485.9 $482.5 $342.6 

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Additional Managed Care Data (3)(4)
                                        
 2008 2007 2006 (1) 2005 2004 2010 2009 2008 2007 2006 
Additional Managed Care Data (4)
 
Years ended December 31,
            
Medical loss ratio  88.9%  87.1%  87.6%  90.3%  88.3%  88.1%  89.9%  88.9%  87.0%  87.6%
 
Operating expense ratio  10.5%  11.2%  11.5%  10.8%  10.8%  11.6%  10.7%  10.5%  11.2%  11.5%
 
Medical membership (period end) 1,195,450 977,190 979,506 1,252,649 1,236,108  788,881 1,347,033 1,195,450 977,190 979,506 
(1)On January 31, 2006 we completed the acquisition of GA Life (now TSV). The results of operations and financial condition of GA Life are included in this table for the period following the effective date of the acquisition. See note 18 to the audited consolidated financial statements for the years ended December 31, 2008, 2007 and 2006.
(2) Further details of the calculation of basic earnings per share are set forth in notes 2 and 2223 of the audited financial consolidated financial statements for the years ended December 31, 2008, 20072010, 2009 and 2006.2008.
 
(3)(2) Shareowners holding qualifying shares were excluded from dividend payment. See note 1920 of the audited financial consolidated financial statements for the years ended December 31, 2008, 20072010, 2009 and 2006.2008.
 
(4)(3) Does not reflect inter-segment eliminations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
This financial discussion contains an analysis of our consolidated financial position and financial performance as of December 31, 20082010 and 2007,2009, and consolidated results of operations for 2008, 20072010, 2009 and 2006.2008. This analysis should be read in its entirety and in conjunction with the consolidated financial statements, notes and tables included elsewhere in this Annual Report on Form 10-K.
Overview
We are the largestone of the leading companies in the managed care companyindustry in Puerto Rico in terms of membership, withand have over 50 years of experience in the managed carethis industry. We offer a broad portfolio of managed care and related products in the Commercial Commonwealth of Puerto Rico Health Reform (the Reform) and the Medicare (including Medicare Advantage and the Part D stand-alone prescription drug plans (PDP)(“PDP”)) markets. The Reform is aWe also participated in the government of Puerto Rico-funded managed care program for the medically indigent, similarRico Health Care Plan (similar to the Medicaid program in the U.S.Medicaid) (“Medicaid”) up to September 30, 2010.
     We have the exclusive right to use the Blue Cross and Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands, and serve approximately 1.2 million789,000 members across all regions of Puerto Rico and hold a leading market position covering approximately 30%21.2% of the population. For the years ended December 31, 20082010 and 20072009 respectively, our managed care segment represented approximately 89.2%89.4% and 87.7%89.8% of our total consolidated premiums earned, net, and approximately 62.6%72.4% and 68.7%67.6% of our operating income. We also have significant positions in the life insurance and property and casualty insurance markets. Our life insurance segment had a market share of approximately 11%8% (in terms of premiums written) as of December 31, 2007.for the nine-month period ended September 30, 2010. Our property and casualty segment had a market share of approximately 8% (in terms of direct premiums) as of December 31, 2007.during the nine-month period ended September 30, 2010.
We participate in the managed care market through our subsidiary, TSI.TSS. Our managed care subsidiary is a BCBSA licensee, which provides us with exclusive use of the Blue Cross and Blue Shield brand in Puerto Rico.Rico and U.S. Virgin Islands. We offer products to the Commercial, including corporate accounts, U.S. federal government employees, local government employees, individual accounts, and Medicare Supplement, Reform and Medicare (including Medicare Advantage and PDP) markets..
We participate in the life insurance market through our subsidiary, TSV, and in the property and casualty insurance market through our subsidiary, STS.TSP. TSV and STSTSP represented approximately 5.5% each,5.6% and 5.2%, respectively, of our consolidated premiums earned, net for the year ended December 31, 20082010 and 14.9%19.7% and 15.6%4.1%, respectively, of our operating income for that period.

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The Commissioner of Insurance of the Commonwealth of Puerto Rico recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the Puerto Rico insurance laws and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the Commissioner of Insurance of the Commonwealth of Puerto Rico to financial statements prepared in accordance with U.S. generally

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accepted accounting principles (GAAP) in making such determinations. See note 2526 to our audited consolidated financial statements.
Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. Except as otherwise indicated, the numbers presented in this Annual Report on Form 10-K do not reflect intersegment eliminations. These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income. The following table shows premiums earned, net and net fee revenue and operating income for each segment, as well as the intersegment premiums earned, service revenues and other intersegment transactions, which are eliminated in the consolidated results:
                        
 Years ended December 31, Years ended December 31, 
(Dollar amounts in millions) 2008 2007 2006 2010 2009 2008 
Premiums earned, net:
  
Managed care $1,513.0 1,301.8 1,339.8  $1,700.3 $1,677.1 $1,509.9 
Life insurance 92.8 88.9 86.9  105.8 100.1 92.8 
Property and casualty insurance 93.8 96.9 88.5  99.2 96.2 93.8 
Intersegment premiums earned  (4.1)  (4.0)  (3.6)  (4.2)  (4.3)  (4.1)
Consolidated premiums earned, net $1,695.5 1,483.6 1,511.6  $1,901.1 $1,869.1 $1,692.4 
  
Administrative service fees:
  
Managed care $22.5 17.2 16.9  $43.2 $51.3 $22.5 
Intersegment premiums earned  (3.3)  (3.2)  (2.8)
Intersegment administrative service fees  (3.6)  (2.7)  (3.3)
Consolidated administrative service fees $19.2 14.0 14.1  $39.6 $48.6 $19.2 
  
Operating income:
  
Managed care $52.6 57.4 45.5  $63.8 $57.2 $52.6 
Life insurance 12.5 10.7 11.2  17.3 14.6 12.5 
Property and casualty insurance 13.1 10.7 11.2  3.6 8.8 13.1 
Intersegment premiums earned 5.9 4.7 5.4 
Intersegment and other 3.3 4.0 5.9 
Consolidated operating income $84.1 83.5 73.3  $88.0 $84.6 $84.1 
We have one-year contracts with the government of Puerto Rico to be the Reform insurance carrier for two of the eight geographical regions into which Puerto Rico is divided for purposes of the Reform. In October 2006, the contract for the Metro-North region, for which we were the carrier, was awarded to another managed care company, effective November 1, 2006. This region was awarded to us again on an ASO basis for a one year period beginning November 1, 2008. The premiums earned, net of the Metro-North region during the years 2006 and 2005 amounted to $161.6 million and $200.9 million, respectively. The operating income of this region during the years 2006 and 2005 amounted to $5.4 million and $3.5 million, respectively.
Results of Operations
Revenue
General.Our revenue consists primarily of (i) premium revenue we generate from our managed care business, (ii) administrative service fees we receive for administrative services provided to self-insured employers (ASO), (iii) premiums we generate from our life insurance and property and casualty insurance businesses and (iv) investment income.

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Managed Care Premium Revenue.Our revenue primarily consists of premiums earned from the sale of managed care products to the Commercial market sector, including corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement, as well as to the Medicare Advantage (including PDP) and, Reformup to September 30, 2010, the Medicaid sectors. We receive a monthly payment from or on behalf of each member enrolled in our commercial managed care plans (excluding ASO). We recognize all premium revenue in our managed care business during the month in which we are obligated to provide services to an enrolled member. Premiums we receive in advance of that date are recorded as unearned premiums.
Premiums are generallyset prospectively, meaning that a fixed bypremium rate is determined at the beginning of each contract in advanceyear and revised at renewal. We renegotiate the premiums of the period during which healthcare is covered. Our Commercial premiums are generally fixed for the plan year in thedifferent groups as their existing annual renewal process.contracts become due. Our Medicare Advantage contracts entitle us to premium payments from CMS on behalf of each Medicare beneficiary enrolled in our plans, generally on a per member per month (PMPM)(“PMPM”) basis. We submit rate proposals to CMS in June for each Medicare Advantage product that will be offered beginning January 1 of the subsequent year in accordance with the new competitive bidding process under the MMA. Retroactive rate adjustments

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are made periodically with respect to our Medicare Advantage plans based on the aggregate health status and risk scores of our plan participants.
Premium payments from CMS in respect of our Medicare Part D prescription drug plans are based on written bids submitted by us which include the estimated costs of providing the prescription drug benefits.
Administrative Service Fees.Administrative service fees include amounts paid to us for administrative services provided to self-insured employers.contracts. We provide a range of customer services pursuant to our administrative services only (ASO)(“ASO”) contracts, including claims administration, billing, access to our provider networks and membership services. Administrative service fees are recognized in the month in which services are provided.
Other Premium Revenue.Other premium revenue includes premiums generated from the sale of life insurance and property and casualty insurance products. Premiums on life insurance policies are billed in the month prior to the effective date of the policy, with a one-month grace period, and the related revenue is recorded as earned during the coverage period. If the insured fails to pay within the one-month grace period, we may cancel the policy. We recognize premiums on property and casualty contracts as earned on a pro rata basis over the policy term. Property and casualty policies are subscribed through general agencies, which bill policy premiums to their clients in advance or, in the case of new business, at the inception date and remit collections to us, net of commissions. The portion of premiums related to the period prior to the end of coverage is recorded in the consolidated balance sheet as unearned premiums and is transferred to premium revenue as earned.
Investment Income and Other Income.Investment income consists of interest and dividend income from investment securities and other income primarily consists of net realizedunrealized gains (losses) on investment securities.of derivative instruments. See note 2(e)2 to our audited consolidated financial statements.
Expenses
Claims Incurred.Our largest expense is medical claims incurred, or the cost of medical services we arrange for our members. Medical claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. We generally pay our providers on one of three bases: (1) fee-for-service contracts based on negotiated fee schedules; (2) capitatedcapitation arrangements, generally on a fixed PMPM payment basis, whereby the provider generally assumes some of the medical expense risk; and (3) risk-sharing arrangements, whereby we advance a capitated PMPM amountpayment and share the risk of thecertain medical costs of our members with the provider based on actual experience as measured against pre-determined sharing ratios. Claims incurred also include claims incurred in our life insurance and property and casualty insurance businesses. Each segment’s results of operations depend in significant part on our ability to accurately predict and effectively manage claims.claims and losses. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period.
The medical loss ratio (MLR)(“MLR”), which is calculated by dividing managed care claims incurred by managed care premiums earned, net is one of our primary management tools for measuring these costs and their

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impact on our profitability. The medical loss ratioMLR is affected by the cost and utilization of services. The cost of services is affected by many factors, in particular our ability to negotiate competitive rates with our providers. The cost of services is also influenced by inflation and new medical discoveries, including new prescription drugs, therapies and diagnostic procedures. Utilization rates, which reflect the extent to which beneficiaries utilize healthcare services, significantly influence our medical costs. The level of utilization of services depends in large part on the age, health and lifestyle of our members, among other factors. As the medical loss ratioMLR is the ratio of claims incurred to premiums earned, net it is affected not only by our ability to contain cost trends but also by our ability to increase premium rates to levels consistent with or above medical cost trends. We use medical loss ratiosMLRs both to monitor our management of healthcare costs and to make various business decisions, including what plans or benefits to offer and our selection of healthcare providers.
Operating Expenses.Operating expenses include commissions to external brokers, general and administrative expenses, cost containment expenses such as case and disease management programs, and depreciation and amortization. The operating expense ratio is calculated by dividing operating expenses by premiums earned, net and administrative service fees. A significant portion of our operating expenses are fixed costs. Accordingly, it is important that we maintain or increase our volume of business in order to distribute our fixed costs over a larger membership base. Significant changes in our volume of business will affect our operating expense ratio and results of operations. We also have variable costs, which vary in proportion to changes in volume of business.

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Membership
Our results of operation depend in large part on our ability to maintain or grow our membership. In addition to driving revenues, membership growth is necessary to successfully introduce new products, maintain an extensive network of providers and achieve economies of scale. Our ability to maintain or grow our membership is affected principally by the competitive environment and general market conditions.
In recent years, we have experienced a decrease inJuly 1, 2009, our fully insured commercial membership due tosubsidiary TSS completed the highly aggressive pricingacquisition of our competitors, which has also affected our ability to increase premiums, and the shiftingcertain managed care assets of Medicare eligibles from our Medicare Supplement program to Medicare Advantage plans offered by our competitors and, to a lesser extent, ourselves. Membership in our Reform program has also been affected by the shifting of Reform program members to such Medicare Advantage plans.
The Medicare Advantage program (including PDP) provided us a significant opportunity for growth in membership. We commenced offering Medicare Advantage products in 2005, with the introduction of ourMedicare SelectoandMedicare Optimoplans. Membership enrolled in our Medicare Advantage programs increased by 71.4% in 2008; from 38,070 asLa Cruz Azul de Puerto Rico, including members. As of December 31, 20072009, the membership attributable to 65,243 members as of December 31, 2008. In January 2006, we launched our stand-alone PDP plan,FarmaMed, which as of December 31, 2008 and 2007 had 10,037 and 11,175 members, respectively. We expect our Medicare Advantage enrollment to continue to grow, but not at the same pace as we have seen in the past.this transaction was 108,502.
The following table sets forth selected membership data as of the dates set forth below:
                        
 As of December 31, As of December 31, 
 2008 2007 2006 2010 2009 2008 
Commercial(1)
 592,723 574,251 580,850  725,328 737,286 592,723 
Reform(2)
 527,447 353,694 357,515 
Medicare(3)
 75,280 49,245 41,141 
Medicare(2)
 63,553 69,605 75,280 
Medicaid(3)
 — 540,142 527,447 
Total 1,195,450 977,190 979,506  788,881 1,347,033 1,195,450 
(1) Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, Federal government employees and local government employees.
 
(2) Includes rated and self-funded members.
(3)Includes Medicare Advantage as well as stand-alone PDP plan membership.
(3)Medicaid membership includes rated and self-funded members. We participated in this sector up to September 30, 2010.

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Consolidated Operating Results
The following table sets forth our consolidated operating results for the years ended December 31, 2008, 20072010, 2009 and 2006.2008.
                        
(Dollar amounts in millions) 2008 2007 2006 2010 2009 2008 
 
Years ended December 31,
  
Revenues:  
Premiums earned, net $1,695.5 1,483.6 1,511.6  $1,901.1 $1,869.1 $1,692.4 
Administrative service fees 19.2 14.0 14.1  39.6 48.6 19.2 
Net investment income 56.2 47.2 42.7  49.1 52.1 56.2 
Total operating revenues 1,770.9 1,544.8 1,568.4  1,989.8 1,969.8 1,767.8 
Net realized investment (losses) gains  (13.9) 5.9 0.8 
Net realized investment gains (losses) 2.5 0.6  (13.9)
Net unrealized investment gain (loss) on trading securities  (21.1)  (4.1) 7.7  5.4 10.5  (21.1)
Other income (expense), net  (2.5) 3.2 2.3  0.9 1.3  (2.5)
Total revenues 1,733.4 1,549.8 1,579.2  1,998.6 1,982.2 1,730.3 
Benefits and expenses:  
Claims incurred 1,434.9 1,223.8 1,259.0  1,596.8 1,605.8 1,431.8 
Operating expenses 251.9 237.5 236.1  305.0 279.4 251.9 
Total operating costs 1,686.8 1,461.3 1,495.1  1,901.8 1,885.2 1,683.7 
Interest expense 14.7 15.9 16.6  12.6 13.3 14.7 
Total benefits and expenses 1,701.5 1,477.2 1,511.7  1,914.4 1,898.5 1,698.4 
Income before taxes 31.9 72.6 67.5  84.2 83.7 31.9 
Income tax expense 7.1 14.1 13.0  17.4 14.9 7.1 
Net income $24.8 58.5 54.5  $66.8 $68.8 $24.8 

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Year ended December 31, 20082010 compared with the year ended December 31, 20072009
Operating Revenues
Consolidated premiums earned, net and administrative service fees increased by $217.1$32.0 million, or 14.5%1.7%, to $1.7$1.9 billion during the year ended December 31, 20082010 compared to the year ended December 31, 2007.2009. The increase was primarily due to the net effect of an increase in the premiums earned in our managed care segment, primarily from growth in Commercial member months enrollment, as well as higher premium rates across all businesses, offset in part by the termination of the Medicaid contracts effective September 30, 2010.
     The decrease in the administrative service fees of the managed care segment of $9.0 million in the 2010 period is attributed to a lower self-funded member months enrollment after the termination of the Medicaid contract for Metro-North region, which we served on an ASO basis until September 30, 2010.
     Consolidated net investment income decreased by $3.0 million, or 5.8%, to $49.1 million during the year ended December 31, 2010 mostly as the result of lower yields in fixed income investments acquired during the period.
Net Realized Investment Gains
     Consolidated net realized investment gains of $2.5 million during the year ended December 31, 2010 are the result of net realized gains from the sale of fixed income and equity securities amounting to $5.5 million. The net realized gains were partially offset by $3.0 million of other-than-temporary impairments related to fixed income and equity securities.
Net Unrealized Gains on Trading Securities and Other Income, Net
     The combined balance of our consolidated net unrealized gain on trading securities and other income, net decreased by $5.5 million, to $6.3 million during the year ended December 31, 2010. This decrease is attributable to a lower increase in the fair value of our trading securities portfolio as compared to last year’s increase. The unrealized gain experienced on our trading portfolio represents a combined increase of 12.4% in the market value of the portfolio, which is slightly lower than the changes experienced by the comparable indexes; the Standard and Poor’s 500 Index increased by 12.8% and the Russell 1000 Growth increased by 14.9%.
Claims Incurred
     Consolidated claims incurred during the year ended December 31, 2010 decreased by $9.0 million, or 0.6%, to $1.6 billion when compared to the claims incurred during the year ended December 31, 2009. This decrease is principally due to the termination of the Medicaid contracts effective September 30, 2010 offset in part by increased claims in the managed care segment’s Commercial business as a result of higher volume. The consolidated loss ratio decreased by 1.9 percentage points to 84.0%, mostly as the result of lower MLRs in the managed care segment’s Commercial and Medicare businesses.
Operating Expenses
     Consolidated operating expenses during the year ended December 31, 2010 increased by $25.6 million, or 9.2%, to $305.0 million as compared to the operating expenses during the year ended December 31, 2009. The consolidated operating expense ratio increased by 1.1 percentage points, to 15.7%, primarily attributed to higher costs associated to the implementation of a new information system in the managed care segment, intangible asset amortization, and the effect of the lower volume of business in the managed care segment after the termination of the Medicaid contracts.
Income tax expense
     Consolidated income tax expense during the year ended December 31, 2010 increased by $2.5 million to $17.4 million as compared to the income tax expense during the year ended December 31, 2009. The effective tax rate increased by 2.9 percentage points to 20.7% primarily due to the use of tax credits during the 2009 period and a higher taxable income in the managed care segment, which operates at a higher effective tax rate.

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Year ended December 31, 2009 compared with the year ended December 31, 2008
Operating Revenues
     Consolidated premiums earned, net increased by $176.7 million, or 10.4%, to $1.87 billion during the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase was primarily due to an increase in the premiums earned, net in our managed care segment, principally due to aprimarily from growth in Commercial member months enrollment, reflecting, in large part, the La Cruz Azul de Puerto Rico, Inc. (“LCA”) transaction, as well as higher volumepremium rates across all businesses.
     The increase in the Medicare Advantage business and general increases in premium rates. The administrative service fees of the managed care segment also increased duringof $29.4 million in the 20082009 period mostly as the result of an increasedis attributed to a higher self-insured member months enrollmentenrollment. Increase is mostly due to the fact that is mainly attributed toTSS was granted the contract for the Reform’s Metro-North region, which began on November 1, 2008 on an ASO basis.basis and added approximately 190,000 members to our enrollment, as well as new members enrolled in our Commercial business principally as the result of the aforementioned LCA transaction.
Consolidated net investment income presented an increase of $9.0decreased by $4.1 million, or 19.1%7.3%, to $56.2$52.1 million during the year ended December 31, 2008.2009. This increasedecrease is attributed to a higherlower yield in 2008 as well as to a higher balance of invested assets.investments acquired during the period.
Net Realized Investment LossesGains
Consolidated net realized investment lossesgains of $13.9$0.6 million during the year ended December 31, 20082009 are primarily the result of other-than-temporary impairments related to equity and fixed income securities amounting to $16.5 million due to other-than-temporary impairments in three equity mutual funds that replicate the Russell 1000, Standard & Poor’s 500 and EAFE indexes as well as for certain perpetual preferred securities. The other-than-temporary impairments were offset in part by $2.6 million of net realized gains from the sale of fixed income and equity securities amounting to $7.7 million. The net realized gains were offset in part by $7.1 million of other-than-temporary impairments related to fixed income and equity securities.
Net Unrealized LossGains on Trading Securities and Other Income, (Expense), Net
The combined balance of our consolidated net unrealized lossgain on trading securities and other income, (expense), net was a loss of $23.6increased by $35.4 million, to $11.8 million during the year ended December 31, 2008, an increase of $22.7

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million, as compared to the combined loss of $0.9 million in 2007.2009. This increase is attributable to the net result of the unrealized loss on the trading portfolio, together with a decreasean increase in the fair value of our trading securities portfolio and in the derivative component of our investment in structured notes linked to the Euro Stoxx 50 and Nikkei 225 stock indexes amounting to $4.7 millionindexes; both fluctuations are due to general market conditions.fluctuations. The unrealized lossgain experienced on our trading securitiesportfolio represents a decreasecombined increase of 36.67% and 35.78% in TSI and 36.82% in STS29.0% in the fairmarket value of the portfolio, which is lower thancompares favorably with the decreasechanges experienced by the comparable indexes of 37.0% inindexes; the S&PStandard and Poor’s 500 Index increased by 23.5% and 38.44% in the Russell 1000. The change in the fair value of the derivative component of these structured notes is included within other income (expense), net.1000 Growth increased by 34.8%.
Claims Incurred
Consolidated claims incurred during the year ended December 31, 20082009 increased by $211.1$174.0 million, or 17.2%12.2%, to $1.4$1.61 billion when compared to the claims incurred during the year ended December 31, 2007.2008. This increase is principally due to increased claims in the managed care segment as a result of higher enrollment and utilization trends.MLR. The consolidated loss ratio increased by 2.11.3 percentage points to 84.6% in the 2008 period,85.9%, primarily due to higher utilization trends in the managed care segment forand the period, particularlyeffect of reserve developments, offset by the risk score premium adjustment in the Medicare Advantage business.
Operating Expenses
Consolidated operating expenses during the year ended December 31, 20082009 increased by $14.4$27.5 million, or 6.1%10.9%, to $251.9$279.4 million as compared to the operating expenses during the 2007 period.year ended December 31, 2008. This increase is primarily attributed to a higher volume of business, particularly in our managed care segment as a result of the Metro-North region which began in November 2008, the LCA transaction and the increased volume in the Medicare businessand Commercial businesses. In addition, an accrual for litigation expense of our Managed Care segment.approximately $7.5 million was recorded during the 2009 period, partially offset by the effect in this period of $3.6 million related to the settlement of an insurance recovery of legal expenses. The consolidated operating expense ratio decreased by 1.20.1 percentage points to 14.7%, during the 2008 period mainly due to the aforementioned increase in volume.14.5%.

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Income tax expense
The decrease in consolidated     Consolidated income tax expense during the year ended December 31, 2008 is primarily the result of the lower income before tax during the period. The consolidated effective tax rate for the 2008 period reflects an increase of 2.9 percentage points2009 increased by $7.8 million to $14.9 million as compared to the 2007 period, from 19.4% in 2007 to 22.3% in 2008, due to a lower taxable income during 2008 as compared to the 2007 period.
Year ended December 31, 2007 compared with the year ended December 31, 2006
Operating Revenues
Consolidated premiums earned, net and administrative service fees decreased by $28.1 million, or 1.8%, to $1.5 billiontax expense during the year ended December 31, 2007 compared2008. The effective tax rate decreased by 4.5 percentage points to the year ended December 31, 2006. This decrease was17.8% primarily due to a decreasethe use of tax credits during the 2009 period, the increase in the premiums earned, net in our managed care segment, principally due to the decreased volumeweight of the Reform business after the termination of the contract for the Metro-North region, offset in part by the growth of our Medicare Advantage business and the increases in premium rates of the Reform business during 2007.
Consolidated net investmentexempt income presented an increase of $4.5 million, or 10.5%, to $47.2 million during the year ended December 31, 2007. This increase is primarily the result of an increase of $3.5 million attributed to a higher yield in 2007, a higher balance of invested assets and the acquisition of GA Life effective January 31, 2006. Net investment income earned by GA Life during the month of January 2006 amounted to $1.0 million, which is not included in our consolidated financial statements.
Net Realized Investment Gains
Consolidated net realized investment gains increased by $5.1 million to $5.9 million during 2007. This increase is primarily the result of higher sales of investments in 2007, particularly in trading securities, in order to keep the portfolio within our established targets in each investment sector.
Net Unrealized Gain (Loss) on Trading Securities and Other Income, Net
The combined balance of our consolidated net unrealized loss on trading securities and other income, net was a loss of $0.9 million during the year ended December 31, 2007, a decrease of $10.9 million, as compared to the combined gain of $10.0 million in 2006. This decrease is attributable to the net result of

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the unrealized loss on the trading portfolio, offset in part by an increasetaxable income and a higher taxable income in the fair value of the derivative component of our investment in structured notes linked to foreign stock indexes. This unrealized loss on trading securitiesLife segment, which is due to the sale of one equity portfolio which had a net unrealized gaintaxed at the time of sale. This sale had the effect of eliminating the unrealized gain that was offsetting unrealized losses in our trading portfolio.
Claims Incurred
Consolidated claims incurred during the year ended December 31, 2007 decreased by $35.2 million, or 2.8%, to $1.2 billion when compared to the claims incurred during the year ended December 31, 2006. This decrease is principally due to decreased claims in the managed care segment as a result of the decreased volume of the Reform business due to the termination of the contract for the Metro-North region, net of increased enrollment in the Medicare Advantage business. The consolidated loss ratio decreased by 0.8 percentage points, to 82.5% in the 2007 period. The lower loss ratio is mainly the result of an overall increase in premium rates, lower utilization trends and a change in the mix of business. During the year ended December 31, 2007, the weight in the mix of business of the managed care segment corresponding to the Reform business decreased as a result of the termination of the contract for the Metro-North area. The Reform business has a higher loss ratio than other businesses within this segment. On the other hand, the Medicare Advantage business, which at the time had a lower loss ratio than other businesses within the managed care segment, has a higher weight in the mix of business in the 2007 period.rate.
Operating Expenses
Consolidated operating expenses during the year ended December 31, 2007 increased by $1.4 million, or 0.6%, to $237.5 million as compared to operating expenses during the 2006 period. This increase is primarily attributed to increases in professional services expense (mainly legal expenses), normal increases in payroll and payroll related expense, as well as higher technology related costs due to the new systems initiative of our managed care subsidiary. This increase is offset in part by the decrease in the operating expenses for the Reform business resulting from the reduction in volume of this business. The consolidated operating expense ratio increased by 0.4 percentage points during the 2007 period mainly due to fixed expenses not affected by a reduction in volume.
Income tax expense
The consolidated effective tax rate remained flat, with a slight increase of 0.1 percentage points, from 19.3% in 2006 to 19.4% in 2007.
Managed Care Operating Results
We offer our products in the managed care segment to three distinct market sectors in Puerto Rico: Commercial, Reform and Medicare (including Medicare Advantage and PDP). and Medicaid up to September 30, 2010. For the year ended December 31, 2008,2010, the Commercial sector represented 43.3%49.8% and 37.7%5.6% of our consolidated premiums earned, net and operating income, respectively. During the same period the Reform sector represented 20.1% and 12.5%, of our consolidated premiums earned, net and our operating income, respectively. Premiums earned, net and operating income generated from our Medicare contracts (including PDP) during the year ended December 31, 20082010 represented 25.9%24.6% and 12.4%45.2%, respectively, of our consolidated earned premiums, net and operating income, respectively. During the same period the Medicaid sector represented 15.0% and 21.6%, of our consolidated premiums earned, net and our operating income, respectively.
             
(Dollar amounts in millions) 2010  2009  2008 
 
Operating revenues:            
Medical premiums earned, net:            
Commercial $947.1  $822.1  $734.2 
Medicare  468.4   506.9   435.6 
Medicaid  284.8   348.1   340.1 
 
Medical premiums earned, net  1,700.3   1,677.1   1,509.9 
Administrative service fees  43.2   51.3   22.5 
Net investment income  19.8   21.6   23.1 
 
Total operating revenues  1,763.3   1,750.0   1,555.5 
 
Medical operating costs:            
Medical claims incurred  1,497.8   1,508.2   1,342.3 
Medical operating expenses  201.7   184.6   160.6 
 
Total medical operating costs  1,699.5   1,692.8   1,502.9 
 
Medical operating income $63.8  $57.2  $52.6 
 
Additional data:            
Member months enrollment:            
Commercial:            
Fully-insured  5,982,094   5,421,586   4,947,854 
Self-funded  2,966,291   2,726,036   2,049,140 
 
Total Commercial member months  8,948,385   8,147,622   6,996,994 
Medicaid:            
Fully-insured  3,078,288   4,016,332   4,101,905 
Self-funded  1,782,426   2,321,144   376,975 
 
Total Medicaid member months  4,860,714   6,337,476   4,478,880 
 
Medicare:            
Medicare Advantange  670,250   742,666   727,274 
Stand-alone PDP  112,297   117,700   127,658 
 
Total Medicare member months  782,547   860,366   854,932 
 
Total member months  14,591,646   15,345,464   12,330,806 
 
Medical loss ratio  88.1%  89.9%  88.9%
Operating expense ratio  11.6%  10.7%  10.5%
 

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(Dollar amounts in millions) 2008 2007 2006
 
             
Operating revenues:
            
Medical premiums earned, net:
            
Commercial $734.2   718.7   713.2 
Reform  340.1   327.5   455.8 
Medicare  438.7   255.6   170.8 
 
Medical premiums earned, net
  1,513.0   1,301.8   1,339.8 
Administrative service fees
  22.5   17.2   16.9 
Net investment income
  23.1   19.7   18.8 
 
Total operating revenues
  1,558.6   1,338.7   1,375.5 
 
Medical operating costs:
            
Medical claims incurred
  1,345.4   1,133.2   1,173.6 
Medical operating expenses
  160.6   148.1   156.4 
 
Total medical operating costs
  1,506.0   1,281.3   1,330.0 
 
Medical operating income
 $52.6   57.4   45.5 
 
Additional data:
            
Member months enrollment:
            
Commercial:            
Fully-insured  4,947,854   4,983,980   5,272,987 
Self-funded  2,049,140   1,930,850   1,861,833 
 
Total Commercial member months  6,996,994   6,914,830   7,134,820 
Reform:            
Fully-insured  4,101,905   4,262,248   6,484,270 
Self-funded  376,975   —   — 
 
Total Reform member months  4,478,880   4,262,248   6,484,270 
Medicare:            
Medicare Advantange  727,274   416,512   281,274 
Stand-alone PDP  127,658   137,528   180,444 
 
Total Medicare member months  854,932   554,040   461,718 
 
Total member months
  12,330,806   11,731,118   14,080,808 
 
Medical loss ratio
  88.9%  87.0%  87.6%
Operating expense ratio
  10.5%  11.2%  11.5%
 
Year ended December 31, 20082010 compared with the year ended December 31, 20072009
Medical Operating Revenues
Medical premiums earned during 2008for the year ended December 31, 2010 increased by $211.2$23.1 million, or 16.2%1.4%, to $1.5$1.7 billion when compared to the medical premiums earned premiums during 2007.the year ended December 31, 2009. This increase is principally the result of the following:
 • Medical premiums generated by the MedicareCommercial business increased by $183.1$125.0 million, or 71.6%15.2%, to $438.7 million,$947.1 million. This fluctuation is primarily due tothe result of an increase in member months enrollment of 300,892,560,508, or 54.3%10.3%, and a change in the mixhigher average premium rates per member of products. The increaseapproximately 4.4%. Increase in member months iswas mainly attributed to the La Cruz Azul acquisition and organic growth, mostly in large accounts. Premium rate increases were consistent with claims trends.
•Medicare premiums decreased by $38.5 million, or 7.6%, to $468.4 million, primarily due to a lower member months enrollment of approximately 77,800 or 9.0%, mostly in our dual eligible product, particularly during the first half of the year and resulting from changes in our product offering. In addition, the premiums for the year ended December 31, 2010 reflect a lower final risk score adjustment as compared to 2009. The 2010 and 2009 periods include the net resulteffect of an increase of 310,762, or 74.6%,approximately $3.0 million and $8.7 million in the membership ofadjustments related to CMS final risk score adjustment corresponding to prior periods. These fluctuations were partially offset by higher average premium rates, mostly due to higher risk scores in our Medicare Advantage products, mainly in dual eligible members, and a decrease of 9,870, or 7.2%, in the membership of our PDPdual-eligible product.
 
 • Medical premiums generatedearned in the Medicaid business decreased by the Commercial business increased by $15.5$63.3 million, or 2.2%18.2%, to $734.2$284.8 million during 2008.the year ended December 31, 2010. This fluctuation is primarilyresults from the net resulttermination of an increase in the average premium ratesMedicaid contracts effective September 30, 2010. Total Medicaid enrollment as of approximately 4.4%September 30, 2010 was 544,448 members. This decrease is offset in part by an increase in premiums of $11.7 million as the result of a decrease in fully-insured member months enrollmentclean up of 36,126 or 0.7%.
•Medical premiums earnedaccounts receivable and the reversal of allowances for unresolved reconciling items with the Reform business increased by $12.6 million, or 3.8%, to $340.1 million during 2008. This fluctuation is primarily due to the increases in premium ratesgovernment of approximately 10% effective on July 1, 2008 and during 2007 of 8.6%, partially offset by a decrease in member months enrollment of 160,343, or 3.8%.Puerto Rico.

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Administrative service fees increaseddecreased by $5.3$8.1 million, or 30.8%, to $22.5$43.2 million during the 2008 period. This fluctuation is primarily2010 period, mainly due to an increasea decrease in self-funded member months enrollment of self-funded arrangements298,463 members. Such decrease results from the net effect of 495,265, or 25.7%. The higherthe termination of the Medicaid contract effective September 30, 2010 and an increase in the Commercial ASO member months enrollment is mainlyresulting from the result of the contract for the Reform’s Metro-North region, which beganLCA acquisition on NovemberJuly 1, 2008. This contract is on an ASO basis2009 and represented an increase in member months of 376,975.organic growth.
Medical Claims Incurred
Medical claims incurred during the year ended December 31, 2008 increased2010 decreased by $212.2$10.4 million, or 18.7%0.7%, to $1.3$1.5 billion, when compared to the year ended December 31, 2007.2009. The medical loss ratio (MLR)MLR of the segment increased 1.9decreased by 1.8 percentage points during 2008,the 2010 period, to 88.9%88.1%. These fluctuations are primarily attributed to the effect of the following:
 • The medical claims incurred of the MedicareCommercial business increased by $190.0$106.9 million during the 20082010 period mainlyand its MLR decreased by 0.7 percentage points. The increase in claims relates primarily to the increase in member month enrollment during this year. The lower MLR is primarily due to lower utilization trends in 2010 and stable pricing environment.
•The medical claims incurred of the Medicare business decreased by $52.6 million during the 2010 period primarily due to the lower member months enrollment. The MLR for the year was 83.9%, 4.1 percentage points lower than 2009. Adjusting the MLR for changes in prior period reserve developments and risk score premium adjustments, the 2010 MLR would have decreased by 2.7 percentage points as compared to the adjusted MLR for 2009. The lower adjusted MLR is primarily the result of the new risk sharing agreement with our providers in the dual-eligible product, changes in benefits and higher average premium rates.
•The medical claims incurred of the Reform business decreased by $64.7 million and its MLR decreased by 2.3 percentage points during the year ended December 31, 2010. Excluding the effect of prior period reserve developments and premium adjustments, the MLR would have increased 1.3 percentage points, mostly resulting from a lower premium yield due to the extension of prior year’s Medicaid contracts without premium rate increases until September 2010.

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Medical Operating Expenses
     Medical operating expenses for the year ended December 31, 2010 increased by $17.1 million, or 9.3%, to $201.7 million when compared to the year ended December 31, 2009. The increase in the operating expenses is mainly due to the segment’s higher volume in the Commercial business, as well as to the costs related to the implementation of a new information system and a higher amortization of intangibles. The operating expense ratio increased by 0.9 percentage points, from 10.7% in 2009 to 11.6% in 2010. The higher operating expense ratio is primarily the result of expenses related to the implementation of the segment’s new IT system, including information systems consultants and depreciation and amortization expense, which increased by approximately $6.2 million. The higher operating expense ratio was also attributed to the effect of the termination of the Medicaid contracts. In addition, the operating expenses were affected by an increase of $1.4 million related to a new product launched during January 2010 and higher charges and amortization expense related to the intangible assets recorded after the LCA acquisition by approximately $2.3 million. In the 2009 period a contingent property tax accrual of approximately $7.5 million was recorded, offset in part by the effect of $3.6 million related to the settlement of an insurance recovery receivable of legal expenses. This contingent property tax accrual was approximately $2.1 million higher than the actual payment made during the 2010 period.
Year ended December 31, 2009 compared with the year ended December 31, 2008
Medical Operating Revenues
     Medical premiums earned for the year ended December 31, 2009 increased by $167.2 million, or 11.1%, to $1.68 billion when compared to the medical premiums earned during the year ended December 31, 2008. This increase is principally the result of the following:
•Medical premiums generated by the Commercial business increased by $87.9 million, or 12.0%, to $822.1 million during the year ended December 31, 2009. This fluctuation is primarily the result of an increase in member months enrollment of 473,732, or 9.6%, and higher average premium rates per member of approximately 2.9%. Increase in member months was mainly attributed to new members acquired from LCA effective July 1, 2009, which represented 49.1% of the increase in member months enrollment during this period, and to new groups acquired during the period.
•Medical premiums generated by the Medicare business increased during the year ended December 31, 2009 by $71.3 million, or 16.4%, to $506.9 million, primarily due to higher average premium rates by approximately 11% and an increase in member months enrollment of 5,434 or 0.6%. The fluctuation in member months is the net result of an increase of 15,392, or 2.1%, in the membership of our Medicare Advantage products and a higherdecrease of 9,958, or 7.8%, in the membership of our PDP product. In addition, the premiums for the year ended December 31, 2009 include the net effect of approximately $8.7 million in adjustments related to CMS final risk score adjustment for 2008. The premiums for the year ended December 31, 2008 include the net effect of approximately $1.4 million related to CMS final risk score adjustments for 2007.
•Medical premiums earned in the Medicaid business increased by $8.0 million, or 2.4%, to $348.1 million during the year ended December 31, 2009. This fluctuation is due to an increase in premium rates, effective July 1, 2008, of approximately 10%, offset in part by a lower member months enrollment in the Reform’s fully-insured membership by 85,573, or 2.1% and premium adjustments of approximately $8.3 million to provide for unresolved reconciling items with the government of Puerto Rico.
     Administrative service fees increased by $28.8 million, to $51.3 million during the 2009 period, mainly due to an increase in self-funded member months enrollment of 2,621,065. Such increase is mainly the result of the contract obtained to administer the Reform’s Metro-North region, which began on an ASO basis on November 1, 2008, new ASO Commercial contracts effective January 1, 2009, as well as the ASO members from the contracts acquired from LCA. In addition, as the result of the savings achieved in the Metro-North region, during 2009 we recognized a performance incentive of approximately $6.0 million. Total ASO member months enrollment for the Metro-North region and LCA for the year ended December 31, 2009 totaled 2,321,144 and 469,530, respectively.
Medical Claims Incurred
     Medical claims incurred during the year ended December 31, 2009 increased by $165.9 million, or 12.4%, to $1.51 billion, when compared to the year ended December 31, 2008. The MLR of the segment increased by 1.0

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     percentage points during the 2009 period, to 89.9%. These fluctuations are primarily attributed to the effect of the following:
•The medical claims incurred of the Commercial business increased by $99.3 million during the 2009 period and its MLR increased by 10.02.8 percentage points.points during the year ended December 31, 2009. The higherincrease in claims was partially attributed to the increase in members. The increase in the MLR is in partprimarily due to the effect of prior period reserve developments in the 2009 and 2008 periods and higher utilization trends. Excluding the effect of prior period reserve developments, the MLR increased by 1.6 percentage points. This variance in the MLR is due to a higher than expected claims experience in the local government employees’ policy, mainly in the utilization of pharmacy and in-patient benefits, and the effect of the AH1N1 flu of approximately $4.4 million, or 0.5 percentage points.
•The medical claims incurred of the Medicare business increased by $55.3 million during the 2009 period primarily due to the higher member months enrollment of this business. The MLR for the year ended December 31, 2009 was 88.1%, 1.6 percentage points lower than 2008. The reduction in MLR is attributed to the effect of risk score premium adjustments recorded during this period, as well as premium rate increases and lower utilization trends. Excluding the effect of prior period reserve developments in the 20072009 and 2008 periods, as well as premium adjustments, the MLR increaseddecreased by 7.14.7 percentage points. The increasepoints, mostly due to the effect of lower medical costs resulting from an improvement in utilization trends is primarily the result of higher utilization in outpatient visits and drug benefits for the dual eligible product. The higher MLR is also the result of a change in enrollment mix between dual and non-dual eligible members within the business. Member months during the year ended December 31, 2008 have a higher concentration of dual eligible members than the prior year. Dual eligible members have higher utilization and MLR than non-dual eligible members.premium rate increases effective January 1, 2009.
 
 • The medical claims incurred of the Reform business increased by $16.9$11.3 million during the 2008 period and its MLR increased by 1.6 percentage points during the year ended December 31, 2008. The higher MLR is primarily the effect of prior period reserve developments and the retroactive premium rate increase received by this business during June 2007 amounting to $2.8 million corresponding to 2006. Excluding the effect of prior period reserve developments in the 2007 and 2008 periods and considering the effect of this retroactive premium rate increase, the MLR actually decreased by 1.5 percentage points during the 2008 period.
•The medical claims incurred of the Commercial business increased by $5.3 million during the 2008 period and its MLR decreased by 1.2 percentage points during the year ended December 31, 2008.2009. The lowerincrease in MLR is primarily due to reserve development in the 2009 and 2008 periods and the effect of the premium adjustments to provide for unresolved reconciling items with the government of Puerto Rico. Such increase is also a result of the re-pricing or terminationextension during 2009 of less profitable groups, cost containment initiativesthe current Reform contracts to all the participating insurance companies without the re-negotiation of premium rates. In addition, during 2008 we recognized a retroactive adjustment due to a reduction in capitation rates. Excluding the effect of these items in the 2009 and lower utilization trends in drug and medical services.2008 periods the MLR increased by 1.9 percentage points.
Medical Operating Expenses
Medical operating expenses for the year ended December 31, 20082009 increased by $12.5$24.0 million, or 8.4%14.9%, to $160.6$184.6 million when compared to 2007.the year ended December 31, 2008. This increase is primarily attributedmainly due to the higher volume of business of the segment, particularlyassociated to the higher member months enrollment, as well as to the operating costs related to the administration of the Metro-North region and the acquisition and administration of the LCA customers. In addition, an accrual for litigation expense of approximately $7.5 million was recorded during the 2009 period, partially offset by the effect in this period of $3.6 million related to the Medicare business.settlement of an insurance recovery of legal expenses. The segment’s operating expenseexpenses ratio decreasedincreased by 0.70.2 percentage points, during thefrom 10.5% in 2008 period, to 10.5%.10.7% in 2009.

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Life Insurance Operating Results
             
(Dollar amounts in millions) 2010 2009 2008
 
Years ended December 31,
            
Operating revenues:            
Premiums earned, net            
Premiums earned, net $111.4  $106.2  $100.1 
Premiums earned ceded  (5.6)  (6.1)  (7.6)
 
Net premiums earned  105.8   100.1   92.5 
Commission income on reinsurance  —   —   0.3 
 
Premiums earned, net  105.8   100.1   92.8 
Net investment income  17.1   16.8   16.5 
 
Total operating revenues  122.9   116.9   109.3 
 
Operating costs:            
Policy benefits and claims incurred  49.8   50.3   47.4 
Underwriting and other expenses  55.8   52.0   49.4 
Total operating costs  105.6   102.3   96.8 
 
Operating income $17.3  $14.6  $12.5 
 
             
Additional data:            
Loss ratio  47.1%  50.2%  51.1%
Expense ratio  52.7%  51.9%  53.2%
 
Year ended December 31, 20072010 compared with the year ended December 31, 20062009
Medical Operating Revenues
Medical premiums     Premiums earned, during 2007 decreasednet for the segment increased by $38.0$5.7 million, or 2.8%5.7%, to $1.3 billion when compared to earned premiums during 2006, principally as a result of the following:
Medical premiums earned in the Reform business decreased by $128.3$105.8 million or 28.1%, to $327.5 million during the 2007 period. This fluctuation is due to a decrease in member months enrollment in the Reform business by 2,222,022, or 34.3%, mainly as the result of the termination of the contract for the Metro-North region, the tightening of membership restrictions by the Puerto Rico government, and the shift in membership of dual eligibles to Medicare Advantage policies offered by us and our competitors. The member months enrollment of the Metro-North region was 2,040,714 during the year ended December 31, 2006. The effect2010 as compared to the year ended December 31, 2009, primarily as the result of this decreasehigher sales in membership was mitigated by an increase in premium rates, effective July 1, 2007,the Cancer and Individual Life lines of approximately 8.7% and a retroactive increase in rates of approximately 6.7% effective November 1, 2006.

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•Medical premiums generated by the Medicare business increased during 2007 by $84.8 million, or 49.6%, to $255.6 million, primarily due to an increase in member months enrollment of 92,322, or 20.0%. The increase in member months is the net result of an increase of 135,238, or 48.1%, in the membership of our Medicare Advantage products and a decrease of 42,916, or 23.8%, in the membership of our PDP product. We expect that Medicare Advantage enrollment will continue to experience growth, but at a slower pace than in prior periods. In addition, the segment recognized an additional premium adjustment of $3.2 million related to the 2006 risk scores review performed by CMS.
•Medical premiums generated by the Commercial business increased by $5.5 million, or 0.8%, to $718.7 million during the 2007 period. This increase is primarily the result of an increase in average premium rates of 6.5%, partially offset by a decrease in member months enrollment of 289,007, or 5.5%.
Administrative service fees increased by $0.3 million, or 1.8%, to $17.2 million during the 2007 period due to an increase in member months enrollment of self-funded arrangements of 69,017, or 3.7%,period.
Policy Benefits and to a shift of several self-funded groups to arrangements where the administrative service fee is based on contracts instead of claims paid.
Medical Claims Incurred
Medical     Policy benefits and claims incurred during the year ended December 31, 20072010 decreased by $40.4$0.5 million, or 3.4%1.0%, to $1.1 billion when compared to$49.8 million during the year ended December 31, 2006. The decrease in medical claims incurred2010. This fluctuation is mostly related toprimarily the medical claims incurredresult of the Reform business, which decreased by $119.9 million due its decreased enrollment, partially offset by a combined increase of $85.7 millionreduction in the medical claims incurred ofchange in the Medicare Advantage and PDP businesses dueliability for future policy benefits when compared to an increase in members. The medical loss ratio decreased by 0.6 percentage points during the 2007 period, to 87.0%, primarily due to an overall increase in premium rates, lower utilization trends and2009, resulting from a change in the mix of business subscribed by the segment. As a result of the segment. Duringreduction in policy benefits, the loss ratio improved by 3.1 percentage points, to 47.1% during the year ended December 31, 2007 the weight in the mix of business corresponding to the Reform business decreased as a result of the termination of the contract2010.
Underwriting and Other Expenses
     Underwriting and other expenses for the Metro-North area. The Reform business has a higher medical loss ratio than other businesses within the segment. On the other hand, the Medicare Advantage business, which at this time had a lower medical loss ratio than other businesses, had a higher weight in the mix of business in the 2007 period.
Medical Operating Expenses
Medical operating expenses forsegment increased by $3.8 million, or 7.3%, to $55.8 million during the year ended December 31, 2007 decreased by $8.3 million, or 5.3%, to $148.1 million when compared to 2006. This decrease is2010 primarily attributed to the decrease in directresult of a higher amortization of deferred policy acquisition costs and the higher volume of the Reform business due to its reduction in volume.of this segment. The segment’s operating expense ratio decreasedincreased by 0.30.8 percentage points, to 52.7% during the 2007 period, to 11.2%.

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Life Insurance Operating Results
             
(Dollar amounts in millions) 2008 2007 2006
 
             
Years ended December 31,
            
Operating revenues:            
Premiums earned, net            
Premiums earned, net $100.1   97.4   91.9 
Premiums earned ceded  (7.6)  (8.8)  (9.7)
Assumed premiums earned  —   —   4.4 
 
Net premiums earned  92.5   88.6   86.6 
Commission income on reinsurance  0.3   0.3   0.3 
 
Premiums earned, net  92.8   88.9   86.9 
Net investment income  16.5   15.0   13.7 
 
Total operating revenues  109.3   103.9   100.6 
 
Operating costs:            
Policy benefits and claims incurred  47.4   45.7   43.6 
Underwriting and other expenses  49.4   47.5   45.8 
 
Total operating costs  96.8   93.2   89.4 
 
Operating income $12.5   10.7   11.2 
 
             
Additional data:            
Loss ratio  51.1%  51.4%  50.2%
Expense ratio  53.2%  53.4%  52.7%
2010 period.
Year ended December 31, 20082009 compared with the year ended December 31, 20072008
Operating Revenues
Premiums earned, net for the segment increased by $3.9$7.3 million, or 4.4%7.9%, to $92.8$100.1 million during the year ended December 31, 20082009 as compared to the year ended December 31, 2007,2008, primarily as the result of higher sales in the Cancer and Home Service lines of business during 2008.the period, offset in part by a lower sales in the Group Life and Disability business.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred during the year ended December 31, 20082009 increased by $1.7$2.9 million, or 3.7%6.1%, to $47.4$50.3 million in 2008.during the year ended December 31, 2009. This increasefluctuation is primarily the result of anthe

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segments increased volume in the Cancer and Home Service lines of business and a higher amount of claims incurred in the DisabilityOrdinary Life business, partially offset by a lower volume and Cancer linesclaims experience in the Group Life line of business. DespiteThe segment also experienced an increase in the higher claim experience, as a resultchange of the increased volume of premiums, the segment experienced a lowerliability for future policy benefits. The segment’s loss ratio decreased by 0.30.9 percentage points, to 51.1%.50.2% during the year ended December 31, 2009.
Underwriting and Other Expenses
Underwriting and other expenses for the segment increased by $1.9$2.6 million, or 4.0%5.3%, to $49.4$52.0 million during the year ended December 31, 20082009 primarily as athe result of the higher net commissions attributable to new business.volume of business of this segment. The segment’s operating expense ratio decreased by 0.21.3 percentage points, to 51.9% during 2008, from 53.4% in 2007 to 53.2% in 2008.the 2009 period.
Property and Casualty Insurance Operating Results
             
(Dollar amounts in millions) 2010 2009 2008
 
Years ended December 31,
            
Operating revenues:            
Premiums earned, net:            
Premiums written $159.2  $163.3  $168.0 
Premiums ceded  (63.7)  (67.5)  (72.1)
Change in unearned premiums  3.7   0.4   (2.1)
 
Premiums earned, net  99.2   96.2   93.8 
Net investment income  10.1   11.7   12.5 
 
Total operating revenues  109.3   107.9   106.3 
 
Operating costs:            
Claims incurred  49.2   47.3   42.1 
Underwriting and other operating expenses  56.5   51.8   51.1 
 
Total operating costs  105.7   99.1   93.2 
 
Operating income $3.6  $8.8  $13.1 
 
Additional data:            
Loss ratio  49.6%  49.2%  44.9%
Expense ratio  57.0%  53.8%  54.5%
 
Year ended December 31, 20072010 compared with the year ended December 31, 20062009
Operating Revenues
Premiums earned, net for the segment increased by $2.0 million, or 2.3%, to $88.9 million during the year ended December 31, 2007 as compared to the year ended December 31, 2006, principally reflecting the acquisition of GA Life effective January 31, 2006. This increase is principally the result of the following:

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•The premiums earned generated by the segment increased by $5.5 million, or 6.0%, to $97.4 million during the 2007 period. Premiums earned by GA Life during the month of January 2006 were $6.6 million, which are not reflected in our consolidated financial statements. Eliminating the effect of GA Life’s premiums for the month of January 2006, the premiums earned in the segment decreased by $1.1 million primarily the result of lower sales in the Group Disability and Group Life businesses offset in part by an increase in the premiums of the Individual Life and Cancer businesses.
•On December 22, 2005, we entered into a coinsurance funds withheld agreement with GA Life pursuant to which our former subsidiary SVTS assumed 69% of all the business written by GA Life (prior to its acquisition by us) as of and after the effective date of the agreement. Our results reflect premiums assumed under this agreement of $4.4 million, which represents our share of premiums for the month of January 2006 under the coinsurance agreement. The effects of the reinsurance transactions corresponding to this agreement were eliminated for consolidated financial statement purposes for the period following January 31, 2006.
Policy Benefits and Claims Incurred
Policy benefits and claims incurred during the year ended December 31, 2007 increased by $2.1 million, or 4.8%, to $45.7 million in the 2007 period when compared to the 2006 period, principally reflecting the acquisition of GA Life effective January 31, 2006. Policy benefits and claims incurred by GA Life during the month of January 31, 2006, net of the effect of the coinsurance agreement, were $1.0 million. Eliminating the effect of GA Life’s policy benefits and claims incurred for the month of January 2006, this segment presented an increase of $1.1 million. This increase is primarily driven by increases in the benefits of the Cancer and Group Life businesses, as well as to an increase in policy surrenders. These increases were partially offset by decreases in the benefits of the Group Disability and Individual Life businesses. The segment’s loss ratio increased by 1.2 percentage points, from 50.2% in 2006 to 51.4% in the 2007 period, principally as a result of the inclusion of twelve months of GA Life benefits and claims incurred in the 2007 period (as compared to eleven months in 2006) and a higher loss ratio in the cancer business.
Underwriting and Other Expenses
Underwriting and other expenses for the segment increased by $1.7 million, or 3.7%, to $47.5 million during the year ended December 31, 2007. Considering the effect of underwriting and other expenses of $1.7 million incurred by GA Life during the month of January 2006, net of the effect of the coinsurance agreement, the underwriting and other expenses of the segment remained flat during the 2007 period. The segment’s operating expense ratio increased by 0.7 percentage points during the year 2007, from 52.7% in 2006 to 53.4% in 2007.

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Property and Casualty Insurance Operating Results
             
(Dollar amounts in millions) 2008 2007 2006
 
             
Years ended December 31,
            
Operating revenues:            
Premiums earned, net:            
Premiums written $168.0   170.9   158.9 
Premiums ceded  (72.1)  (69.1)  (65.7)
Change in unearned premiums  (2.1)  (4.9)  (4.7)
 
Premiums earned, net  93.8   96.9   88.5 
Net investment income  12.5   11.8   9.6 
 
Total operating revenues  106.3   108.7   98.1 
 
Operating costs:            
Claims incurred  42.1   44.9   41.7 
Underwriting and other operating expenses  51.1   53.1   45.2 
 
Total operating costs  93.2   98.0   86.9 
 
Operating income $13.1   10.7   11.2 
 
Additional data:            
Loss ratio  44.9%  46.3%  47.1%
Expense ratio  54.5%  54.8%  51.1%
Combined ratio  99.4%  101.1%  98.2%

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Year ended December 31, 2008 compared with the year ended December 31, 2007
Operating Revenues
Total premiums written during the year ended December 31, 20082010 decreased by $2.9$4.1 million, or 1.7%2.5%, to $168.0 million. This fluctuation is$159.2 million, mostly due to the decrease in the premiums written for the Commercial Auto and inland marine insurance policies amounting to $7.3 million. These decreases were partially offset by increases in the Commercial Multi-Peril and Dwelling insurance policies of $4.4 million.its commercial multi-peril product. The Commercial products arecommercial business continues under soft market conditions, thus reducing premiums and increasing competition for renewals and new business. The AutoAlso, economic conditions affected the construction activity affecting the volume of related insurance products have been affected by lower economic activity in sales and auto loan originations.premiums.
Premiums ceded to reinsurers increased by $3.0 million, or 4.3%, to $72.1 million during the year ended December 31, 2008.2010 decreased by approximately $3.8 million, or 5.6%, to $63.7 million. The ratio of premiums ceded to premiums written increaseddecreased by 2.51.3 percentage points, from 40.4%to 40.0% in 2007 to 42.9% in 2008, primarily due to2010. This fluctuation was the effectresult of non-proportional reinsurance treaties in relation to the level of premiums written as well as to the mix of business. The cost of non-proportional treaties is negotiated for the whole year based on expected premium volume; however, since volume for the year was lower than expected, the costa reduction of reinsurance as a percentagecessions in quota share contracts for commercial and personal property insurance risks of premiums was higher.3.0% and 2.2%, respectively.
The change in unearned premiums presented a decreasean increase of $2.8$3.3 million, when compared to $3.7 million during the prior year ended December 31, 2010, primarily as the result of the lower volume of business written during the period.premiums written.
Claims Incurred
Claims incurred during the year ended December 31, 2008 decreased2010 increased by $2.8$1.9 million, or 6.2%4.0%, to $42.1$49.2 million. The loss ratio decreasedincreased by 1.40.4 percentage points, to 49.6% during this period,the year ended December 31, 2010, primarily due to 44.9% in 2008, primarily as the result of the segment’s underwriting guidelines focus on good selection, disciplined pricing, well diversified business, and with a low risk profile. In addition, we have made enhancements to the claims handling process to speed up claims processing. These efforts have resulted in improvedan unfavorable loss ratiosexperience in the Commercial Multi-PerilMulti-peril, General Liability, and Liability coverages.Personal Auto insurance.

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Underwriting and Other Operating Expenses
Underwriting and other operating expenses for the year ended December 31, 2008 decreased2010 increased by $2.0$4.7 million, or 3.8%9.1%, to $51.1$56.5 million. This increase is primarily due to a higher amortization of deferred acquisition costs as a result of lower premiums. The operating expense ratio decreasedincreased by 0.33.2 percentage points during the same period, to 54.5%57.0% in 2008. This decrease is primarily2010 due to a lower net commission expense resulting from the segment’s lower volume of business.business of the segment.
Year ended December 31, 20072009 compared with the year ended December 31, 20062008
Operating Revenues
Total premiums written during the year ended December 31, 2007 increased2009 decreased by $12.0$4.7 million, or 7.6%2.8%, to $170.9$163.3 million. This fluctuation is primarily due to a decrease in premiums written in the Commercial Auto, Dwelling and Property Mono-line, Commercial Multi-peril and Builder’s Risk lines of business insurance policies of approximately $10.0 million, principally as a result ofoffset in part by increases in the General Liability and Personal Auto lines of business. The commercial multi-peril,business continues under soft market conditions, thus reducing premiums and increasing competition for renewals and new business. Also, the lower activity in auto and dwelling lines of business of $11.2 million.mortgage loan originations and in construction, due to the economic slowdown, has affected the volume in the market.
Premiums ceded to reinsurers increasedduring the year ended December 31, 2009 decreased by $3.4approximately $4.6 million, or 5.2%6.4%, to $69.1 million during 2007.$67.5 million. The ratio of premiums ceded to premiums written decreased by 0.91.6 percentage points, fromto 41.3% in 20062009. This fluctuation was the result of the a reduction of reinsurance cessions in quota share contracts for commercial and personal property insurance risks of 5.0% and 7.2%, respectively. This decrease is offset in part by the increase in the cost of non-proportional insurance treaties.
     The change in unearned premiums presented an increase of $2.5 million, to 40.4% in 2007$0.4 million during the year ended December 31, 2009, primarily as athe result of the lower costsvolume of facultative reinsurance and the effects of the mix of business.premiums written.
Claims Incurred
Claims incurred during the year ended December 31, 20072009 increased by $3.2$5.2 million, or 7.7%12.4%, to $44.9$47.3 million. The loss ratio decreasedincreased by 0.84.3 percentage points, to 49.2% during this period,the year ended December 31, 2009, primarily due to 46.3% in 2007, primarily as the result of the segment’s adherence to underwriting guidelines and enhancements to the claims handling process, which included hiring additional in-house claim adjusters. These efforts have resulted in improvedan unfavorable loss ratiosexperience in the commercial multi-peril, general liability, auto liabilityCommercial Multi-peril, Dwelling and commercial auto physical damage lines of business.Property Mono-line, and Personal Auto insurance.

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Underwriting and Other Operating Expenses
Underwriting and other operating expenses for the year ended December 31, 20072009 increased by $7.9$0.7 million, or 17.5%1.4%, to $53.1$51.8 million. This increase is primarily due to an increase in net commissions due to lower reinsurance commissions received during the year. The operating expense ratio increaseddecreased by 3.70.7 percentage points during the same period, to 54.8%53.8% in 2007. This increase is primarily due to increases in net commission expense, payroll and payroll related expenses, corporate costs allocations and a provision for a possible loss contingency. The segment has also experienced an increase in its depreciation expense, including the depreciation and amortization expense related to the segment’s investment in a new IT system.2009.

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Liquidity and Capital Resources
Cash Flows
A summary of our major sources and uses of cash for the periods indicated is presented in the following table:
                        
(dollar amounts in millions) 2008 2007 2006 2010 2009 2008
 
Years ended December 31,
  
Sources of cash:  
Cash provided by operating activities $— 115.9 75.6 
Net proceeds from investments sold — 1.0 — 
Proceeds from long-term borrowings — — 35.0 
Net cash provided by operating activities $37.7 $72.6 $— 
Proceeds from annuity contracts 8.0 6.1 6.0  10.7 4.3 8.0 
Net proceeds from initial public offering — 70.3 — 
Net proceeds from borrowings 40.6 — — 
Other 18.3 — —  0.2 — 18.3 
Total sources of cash 26.3 193.3 116.6  89.2 76.9 26.3 
Uses of cash:  
Cash used in operating activities  (3.0) — — 
Net cash used in operating activities — —  (3.0)
Net purchases of investment securities  (178.6) —  (9.3)  (23.7)  (17.3)  (178.6)
Acquisition of GA Life, net of cash acquired — —  (27.8)
Capital expenditures  (22.4)  (9.4)  (11.9)  (19.2)  (18.7)  (22.4)
Dividends —  (2.4)  (6.2)
Payments of long-term borrowings  (1.6)  (12.1)  (2.5)  (26.4)  (1.6)  (1.6)
Payments of short-term borrowings — —  (1.7)
Surrenders of annuity contracts  (7.1)  (7.4)  (16.0)  (9.1)  (7.1)  (7.1)
Repurchase and retirement of common stock  (7.6) — —   (6.2)  (32.3)  (7.6)
Other —  (3.4)  (8.7) —  (5.6) — 
Total uses of cash  (220.3)  (34.7)  (84.1)  (84.6)  (82.6)  (220.3)
Net increase (decrease) in cash and cash equivalents $(194.0) 158.6 32.5  $4.6 $(5.7) $(194.0)
Year ended December 31, 20082010 compared to year ended December 31, 20072009
Cash flows from operating activities decreased by $118.9$34.9 million during the year ended December 31, 2010 as compared to the year ended December 31, 2009, principally due to the increases claims paid and cash paid to suppliers and employees amounting to $23.7 million and $4.2 million, respectively, offset in part by the effect of increase in premiums collections by $12.3 million and lower income tax payments by $11.1 million. The increase in premiums collected is the result of a higher member months enrollment, mainly in the managed care segment’s Commercial business offset in part by a higher amount in accounts receivable. The fluctuation in claims paid is primarily the result of the effect of the run-off of the Medicaid business and a higher volume in the Commercial business. The decrease in income tax payments results from the use of tax credits acquired during the year ended December 31, 2009.
     Net acquisition of investment securities remained in line during the year ended December 31, 2010 when compared to the prior year.
     Net proceeds from borrowings increased by $40.6 million during the year ended December 31, 2010. The increase in borrowings is the net result of proceeds from securities sold under agreements of repurchases amounting to $15.6 million and $25.0 million from a long-term repurchase agreement to partially repay a long-term borrowing. The higher repayments of long term borrowings amounting by $24.8 million results from the refinancing of $25.0 million of one of our senior unsecured notes with the long-term repurchase agreement to lower our overall interest expense.
     Capital expenditures increased by $0.5 million as a result of the capitalization of costs related to the implementation of the new system in our managed care segment.
     The net proceeds from policyholder deposits increased by $4.4 million during the year ended December 31, 2010 primarily due to deposits received during the period.
     The increase in the other sources (uses) of cash of $5.8 million is attributed to changes in the amount of outstanding checks over bank balances in the 2010 period.

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     On September 29, 2010 we announced the immediate commencement of a $30.0 million share repurchase program. We paid approximately $5.6 million under the stock repurchase program during the year ended December 31, 2010. During the year ended December 31, 2009 we paid approximately $32.3 million under the $40.0 million stock repurchase program that began in December 2008.
Year ended December 31, 2009 compared to year ended December 31, 2008
     Cash flows from operating activities increased by $75.6 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008, principally due to the effect of an increase in the amount of claims paid of $246.3 million;premiums collections by $248.8 million, offset in part by anincreases claims paid and cash paid to suppliers and employees amounting of $127.8 million and $43.8 million, respectively. The increase in premiums collected of $128.2 million. These fluctuations are primarilyis the result of thea higher volume and increased utilization trends in our managed care segment, particularlymember months enrollment, mainly in the Medicare business. The increase inand Commercial businesses, particularly after the acquisition by TSS of LCA’s membership. Also, the amount of premiums collected last year would have been higher when considering the $22.8 million of managed care premiums collected in December 2007 but corresponding to January 2008. In addition, asThe fluctuation in claims paid is primarily the result of December 31, 2008 the higher volume and increased utilization trends in our managed care segment, experienced a significant increase in its premiums receivable amounting to $41.1 million, mostly from the government of Puerto Rico and its instrumentalities. A significant amount of these balances has been collected by the managed care segment subsequent to December 31, 2008.
The increaseparticularly in the other sources of cash of $18.3 million is attributed to a higher balance in outstanding checks over bank balances in 2008.Medicare and Commercial businesses.

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Net acquisitionsacquisition of investment securities increaseddecreased by $179.6$161.3 million during the year ended December 31, 2008,2009, principally as the result of acquisitions of available for sale securities mainly in our managed care segment and the effect of purchases of investments with trade date in December 2007 and a settlement date in January 2008, amounting to $117.5 million.million and cash used in financing activities.
     The decrease in the other sources (uses) of cash of $23.9 million is attributed to changes in the amount of outstanding checks over bank balances in the 2009 period.
Capital expenditures increased by $13.0$3.7 million as a result of the capitalization of costs related to the implementation of the new systems initiativesystem in our managed care segment.
     The net proceeds from policyholder deposits decreased by $3.7 million during the year ended December 31, 2009 primarily due to the lower deposits received during the period.
On December 8, 2008 we announced the immediate commencement of oura $40.0 million share repurchase program. As of December 31, 2008, we haveWe paid approximately $7.6$32.3 million under ourthe stock repurchase program.
We repaid upon its maturity on August 1, 2007 the outstanding balance of $10.5 million of one of our secured term loans.
In March 2007, we declared and paid dividends to our stockholders of $2.4 million.
Year ended December 31, 2007 compared to year ended December 31, 2006
Cash provided by operating activities increased by $40.3 million, or 53.3%, to $115.9 million forprogram during the year ended December 31, 2007, principally due to the net effect of an increase of $14.2 million in net proceeds received from the sale of trading securities, a reduction in claims paid of $54.4 million, a reduction in cash paid to suppliers and employees of $8.6 million, partially offset by a reduction in premiums collected of $16.2 million. These fluctuations were impacted by the termination of the contract for the Metro-North region of our managed care segment. In addition, in 2007 there was an increase of $23.1 million in the amount of income taxes paid that is the result of the higher taxable income in 2007 of our managed care subsidiary, which has a higher effective tax rate than the other segments.
Proceeds from long-term borrowings amounted to $35.0 million during 2006 as a result of the issuance and sale of our 6.7% senior unsecured notes during the first quarter of 2006, which were used for the acquisition of GA Life.
On December 2007, the Corporation received net proceeds amounting to $70.3 million upon our initial public offering.
On January 31, 2006, we acquired GA Life at a cost of $27.8 million, net of $10.4 million of cash acquired.
Capital expenditures decreased by $2.5 million as the result of the completion of the renovation of a building adjacent to our corporate headquarters which was completed during the last quarter of 2006. In addition, our property and casualty insurance segment acquired new hardware and software as part of its new insurance application during 2006.
In March 2007, we declared and paid dividends to our stockholders amounting to $2.4 million.
On August 1, 2007, we repaid the outstanding balance of $10.5 million of one of our secured term loans upon its maturity.2009.
Financing and Financing Capacity
We have several short-term facilities available to address timing differences between cash receipts and disbursements. These short-term facilities are mostly in the form of arrangements to sell securities under repurchase agreements. As of December 31, 2008,2010, we had $131.0$215.0 million of available credit under these facilities. There were no$15.6 millions outstanding short-term borrowings under these facilities as ofborrowing at December 31, 2008.2010.
As of December 31, 2008,2010, we had the following senior unsecured notes payable:
On January 31, 2006, we issued and sold $35.0 million of our 6.7% senior unsecured notes payable due January 2021 (the 6.7% notes). The 6.7% notes were privately placed to various institutional accredited investors. The notes pay interest each month until the principal becomes due and payable. These notes can be redeemed after five years at par, in whole or in part, as determined by us. The proceeds obtained from this issuance were used to finance the acquisition of 100% of the common stock of GA Life effective January 31, 2006.

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•On January 31, 2006, we issued and sold $35.0 million of our 6.7% senior unsecured notes payable due January 2021 (the 6.7% notes). The 6.7% notes were privately placed to various institutional accredited investors. The notes pay interest each month until the principal becomes due and payable. These notes can be redeemed after five years at par, in whole or in part, as determined by us. The proceeds obtained from this issuance were used to finance the acquisition of 100% of the common stock of GA Life effective January 31, 2006.
 • On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes due December 2020 (the 6.6% notes). The 6.6% notes were privately placed to various institutional accredited investors. The notes pay interest each month until the principal becomes due and payable. These notes can be redeemed after five years at par, in whole or in part, as determined by us. The proceeds obtained from this issuance were used to pay the ceding commission to GA Life on the effective date of the coinsurance funds withheld reinsurance agreement. On October 1, 2010 we repaid $25.0 million of the principal of these senior unsecured notes.
 
 • On September 30, 2004, our managed care subsidiaryTSS issued and sold $50.0 million of its 6.3% senior unsecured notes due September 2019 (the 6.3% notes). The 6.3% notes are unconditionally guaranteed as to payment of principal premium, if any, and interest by us. The notes were privately placed to various institutional accredited investors.

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The notes pay interest semiannually until the principal becomes due and payable. These notes can be prepaid after five years at par, in whole or in part, as determined by our managed care subsidiary.TSS. Most of the proceeds obtained from this issuance were used to repay $37.0 million of short-term borrowings. The remaining proceeds were used for general business purposes.
•On November 1, 2010, we entered into a $25.0 million arrangement to sell securities under repurchase agreements that matures on November 2015. The repurchase agreement pays interest quarterly at 1.96%. The investment securities underlying such agreements were delivered to the financial institution with whom the agreement was transacted. The dealers may have loaned, or used as collateral such securities in the normal course of business operations. We maintain effective control over the investment securities pledged as collateral and accordingly, such securities continue to be carried on our consolidated balance sheet. At December 31, 2010 investment securities available for sale with fair value of $27.2 million (face value of $19.7 million) were pledged as collateral under this agreement. The proceeds obtained from this agreement were used to repay $25.0 million of the 6.6% notes.
The 6.3% notes, the 6.6% notes and the 6.7% notes contain certain non-financial covenants. At December 31, 2008,2010, we and our managed care subsidiary,TSS, as applicable, understand are in compliance with these covenants.
In addition, as of December 31, 20082010 we are a party to a secured term loan with a commercial bank, FirstBank Puerto Rico. This secured loan bears interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 100 basis points and requires monthly principal repayment of $0.1 million. As of December 31, 2008,2010, this secured loan had an outstanding balance of $24.3$21.0 million and an average annual interest rate of 2.4%1.66%.
This secured loan is guaranteed by a first lien on our land, buildings and substantially all leasehold improvements, as collateral for the term of the agreements under a continuing general security agreement. This secured loan contains certain non-financial covenants which are customary for this type of facility, including, but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of December 31, 2008,2010, we understand are in compliance with these covenants. Failure to meet these non-financial covenants may trigger the accelerated payment of the secured loan’s outstanding balances. Principal repayments on this loan are expected to be paid out from our operating and investing cash flows.
We were also a party to another secured loan whose outstanding balance of $10.5 million was repaid upon its maturity on August 1, 2007.
We anticipate that we will have sufficient liquidity to support our currently expected needs.
Planned Capital Expenditures
During 2005, our managed care business began a project to change a significant part of its operations computer system. This project is expected to be carried out in phases until 2012 at a cost ofthe third quarter in 2011. Total external costs for the entire project are expected to amount approximately $64.0$55.0 million. Our managed care business expects to incur costs of approximately $26$15.9 million during 2008.2011. We estimate that $17$2.2 million of the costs expected to be incurred in 20092011 will be capitalized over the system’s useful life and the remaining amount will be expensed. This amount is expected to be paid out of the operating cash flows of our managed care business.
Contractual Obligations
Our contractual obligations impact our short and long-term liquidity and capital resource needs. However, our future cash flow prospects cannot be reasonably assessed based solely on such obligations. Future cash outflows, whether contractual or not, will vary based on our future needs. While some cash outflows are completely fixed (such as commitments to repay principal and interest on borrowings), most are dependent on future events (such as the payout pattern of claim liabilities which have been incurred but not reported).
The table below describes the payments due under our contractual obligations, aggregated by type of contractual obligation, including the maturity profile of our debt, operating leases and other long-term liabilities, and excludes an estimate of the future cash outflows related to the following liabilities:

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 • Unearned premiums — This amount accounts for the premiums collected prior to the end of coverage period and does not represent a future cash outflow. As of December 31, 2008,2010, we had $110.1$98.3 million in unearned premiums.
 
 • Policyholder deposits — The cash outflows related to these instruments are not included because they do not have defined maturities, such that the timing of payments and withdrawals is uncertain. There are currently no significant policyholder deposits in paying status. As of December 31, 2008,2010, our policyholder deposits had a carrying amount of $48.7$49.9 million.

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Other long-term liabilities — Due to the indeterminate nature of their cash outflows, $74.9 million of other long-term liabilities are not reflected in the following table, including $51.2 million of liability for pension benefits and $15.0 million in liabilities to the Federal Employees’ Health Benefits Plan Program.
                             
  Contractual obligations by year
(Dollar amounts in millions) Total 2011 2012 2013 2014 2015 Thereafter
 
Short-term borrowings $15.6  $15.6  $—  $—  $—  $—  $— 
Long-term borrowings (1)  266.8   11.7   12.1   12.3   12.5   38.8   179.4 
Operating leases  36.0   7.5   7.8   7.9   8.1   1.8   2.9 
Purchase obligations (2)  151.2   147.5   1.8   1.0   0.3   0.3   0.3 
Claim liabilities (3)  328.8   238.2   59.2   9.8   10.4   3.5   7.7 
Estimated obligation for future policy benefits (4)  954.8   75.6   64.0   60.1   56.7   53.9   644.5 
 
  $1,753.2  $496.1  $144.9  $91.1  $88.0  $98.3  $834.8 
 
 • Other long-term liabilities — Due to the indeterminate nature of their cash outflows, $64.5 million of other long-term liabilities are not reflected in the following table, including $44.1 million of liability for the pension benefits and $11.2 million in liabilities to the Federal Employees’ Health Benefits Plan Program.
                             
      Contractual obligations by year
(Dollar amounts in millions) Total 2009 2010 2011 2012 2013 Thereafter
 
                             
Long-term borrowings (1) $283.4   11.7   11.6   11.6   11.5   11.5   225.5 
Operating leases  16.9   6.0   4.4   2.7   1.2   0.5   2.1 
Purchase obligations (2)  151.6   148.5   1.3   1.1   0.5   0.2   — 
Claim liabilities (3)  293.3   206.2   52.3   11.3   10.5   5.5   7.5 
Estimated obligation for future policy benefits (4)  994.9   70.2   61.3   57.8   55.0   52.6   698.0 
 
  $1,740.1   442.6   130.9   84.5   78.7   70.3   933.1 
 
(1) As of December 31, 2008,2010, our long-term borrowings consist of our managed care subsidiary’s 6.3% senior unsecured notes payable (which are unconditionally guaranteed as to payment of principal, premium, if any, and interest by us), our 6.6% senior unsecured notes payable, our 6.7% senior unsecured notes payable, a $25.0 million arrangement to sell securities under repurchase agreements which requires quarterly interest payments at 1.96%, and a loan payable to a commercial bank. Total contractual obligations for long-term borrowings include the current maturities of long term debt. For the 6.3%, 6.6% and 6.7% senior unsecured notes and the arrangement to sell securities under repurchase agreements, scheduled interest payments were included in the total contractual obligations for long-term borrowings until the maturity dates of the notes in 2019, 2020, 2021, and 2021,2015 respectively. We may redeem the senior unsecured notes starting five years after issuance; however no redemption is considered in this schedule. The interest payments related to our loan payable were estimated using the interest rate applicable as of December 31, 2008.2010. The actual amount of interest payments of the loansloan payable will differ from the amount included in this schedule due to the loans’loan’s variable interest rate structure. See the “Financing and Financing Capacity” section for additional information regarding our long-term borrowings.
 
(2) Purchase obligations represent payments required by us under material agreements to purchase goods or services that are enforceable and legally binding and where all significant terms are specified, including: quantities to be purchased, price provisions and the timing of the transaction. Other purchase orders made in the ordinary course of business for which we are not liable are excluded from the table above. Estimated pension plan contributions amounting to $7$10.0 million were included within the total purchase obligations. However, this amount is an estimate which may be subject to change in view of the fact that contribution decisions are affected by various factors such as market performance, regulatory and legal requirements and plan funding policy.
 
(3) Claim liabilities represent the amount of our claims processed and incomplete as well as an estimate of the amount of incurred but not reported claims and loss-adjustment expenses. This amount does not include an estimate of claims to be incurred subsequent to December 31, 2008.2010. The expected claims payments are an estimate and may differ materially from the actual claims payments made by us in the future. Also, claim liabilities are presented gross, and thus do not reflect the effects of reinsurance under which $30.4$31.4 million of reserves had been ceded at December 31, 2008.2010.
 
(4) Our life insurance segment establishes, and carries as liabilities, actuarially determined amounts that are calculated to meet its policy obligations when a policy matures or surrenders, an insured dies or becomes disabled or upon the occurrence of other covered events. A significant portion of the estimated obligation for future policy benefits to be paid included in this table considers contracts under which we are currently not making payments and will not make payments until the occurrence of an insurable event not under our control, such as death, illness, or the surrender of a policy. We have estimated the timing of the cash flows related to these contracts based on historical experience as well as expectations of future payment patterns. The amounts presented in the table above represent the estimated cash payments for benefits under such contracts based on assumptions related to the receipt of future premiums and assumptions related to mortality, morbidity, policy lapses, renewals, retirements, disability incidence and other contingent events as appropriate for the respective product type. All estimated cash payments included in this table are not discounted to present value nor do they take into account estimated future premiums on policies in-force as of December 31, 2010 and are gross of any

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becomes disabled or upon the occurrence of other covered events. A significant portion of the estimated obligation for future policy benefits to be paid included in this table considers contracts under which we are currently not making payments and will not make payments until the occurrence of an insurable event not under our control, such as death, illness, or the surrender of a policy. We have estimated the timing of the cash flows related to these contracts based on historical experience as well as expectations of future payment patterns. The amounts presented in the table above represent the estimated cash payments for benefits under such contracts based on assumptions related to the receipt of future premiums and assumptions related to mortality, morbidity, policy lapses, renewals, retirements, disability incidence and other contingent events as appropriate for the respective product type. All estimated cash payments included in this table are not discounted to present value nor do they take into account estimated future premiums on policies in-force as of December 31, 2008, and are gross of any reinsurance recoverable. The $994.9 million total estimated cash flows for all years in the table is different from the liability of future policy benefits of $207.5 million included in our audited consolidated financial statements principally due to the time value of money. Actual cash payments to policyholders could differ significantly from the estimated cash payments as presented in this table due to differences between actual experience and the assumptions used in the estimation of these payments.
reinsurance recoverable. The $954.8 million total estimated cash flows for all years in the table is different from the liability of future policy benefits of $236.5 million included in our audited consolidated financial statements principally due to the time value of money. Actual cash payments to policyholders could differ significantly from the estimated cash payments as presented in this table due to differences between actual experience and the assumptions used in the estimation of these payments.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources.
Restriction on Certain Payments by the Corporation’s Subsidiaries
Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance of the Commonwealth of Puerto Rico.Rico (the “Commissioner of Insurance of Puerto Rico”). These regulations, among other things, require insurance companies to maintain certain levels of capital, thereby restricting the amount of earnings that can be distributed by the insurance subsidiaries to TSM. Our managed care subsidiary is required to have minimum capital of $1.0 million, our life insurance subsidiary is required to have minimum capital of $2.5 million and our property and casualty insurance subsidiary is required to have minimum capital of $3.0 million. As of December 31, 2008,2010, our insurance subsidiaries were in compliance with such minimum capital requirements.
During 2008,     Since 2009, local insurers and health organizations are required by the Insurance Code to submit to the Commissioner of Insurance approvedPuerto Rico RBC reports following the requirement to use the National Association of Insurance Commissioners’ (NAIC)NAIC’s RBC Model Act by all local insurersand accordingly are subject to the relevant measures and actions as required based on their capital levels in determining minimum capital level. This requirement goesrelation to the determined risk based capital. In February 2010 Insurance Regulation No. 92 entered into effect in 2009,establishing guidelines to implement the RBC requirements. Rule 92 provides for a gradual compliance and will be phased in over a five-year period.transition period, including dividend payment restriction and exemption to comply with requirements.
These regulations are not directly applicable to us, as a holding company, since we are not an insurance company.
Our secured term loan restricts the amount of dividends that we and our subsidiaries can declare or pay to shareholders. Under the secured term loan, dividend payments cannot be made in excess of the accumulated retained earnings of the paying entity.
We do not expect that any of the previously described dividend restrictions will have a significant effect on our ability to meet our cash obligations.
Solvency Regulation
To monitor the solvency of the operations, the BCBSA requires us and our managed care subsidiary to comply with certain specified levels of risk-based capital (RBC).RBC. RBC is designed to identify weakly capitalized companies by comparing each company’s adjusted surplus to its required surplus (RBC ratio). The RBC ratio reflects the risk profile of insurance companies. At December 31, 2008,2010, both we and our managed care subsidiary’s estimated RBC ratio were above the 200% of our RBC required by the BCBSA and the 375% of our RBC level required by the BCBSA to avoid monitoring.

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Other Contingencies
Legal Proceedings
Various litigation claims and assessments against us have arisen in the course of our business, including but not limited to, our activities as an insurer and employer. Furthermore, the Commissioner of Insurance, as well as other Federal and Puerto Rico government authorities, regularly make inquiries and conduct audits concerning our compliance with applicable insurance and other laws and regulations.
Based on the information currently known by our management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have a material adverse effect on our financial position, results of operations and cash flows. However, given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain matters could, from time to time, have an adverse effect on our operating results and/or cash flows. See “Item 3—3. Legal Proceedings”.

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Guarantee Associations
To operate in Puerto Rico, insurance companies, such as our insurance subsidiaries, are required to participate in guarantee associations, which are organized to pay policyholders contractual benefits on behalf of insurers declared to be insolvent. These associations levy assessments, up to prescribed limits, on a proportional basis, to all member insurers in the line of business in which the insolvent insurer was engaged. During the years ended December 31, 20082010, 2009 and 2007,2008, no assessment or payment was made in connection with insurance companies declared insolvent. During 2006, we paid assessments in connection with insurance companies declared insolvent in the amount of $1.0 million. It is the opinion of management that any possible future guarantee association assessments will not have a material effect on our operating results and/or cash flows, although there is no ceiling on these payment obligations.
Pursuant to the Puerto Rico Insurance Code, our property and casualty insurance subsidiary is a member of Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de Responsabilidad Profesional Médico-Hospitalaria (SIMED) and of the Sindicato de Aseguradores de Responsabilidad Profesional para Médicos. Both syndicates were organized for the purpose of underwriting medical-hospital professional liability insurance. As a member, the property and casualty insurance segment shares risks with other member companies and, accordingly, is contingently liable in the event the previously mentioned syndicates cannot meet their obligations. During 2008, 20072010, 2009 and 2006,2008, no assessment or payment was made for this contingency. It is the opinion of management that any possible future syndicate assessments will not have a material effect on our operating results and/or cash flows, although there is no ceiling on these payment obligations.
In addition, pursuant to Article 12 of Rule LXIX of the Insurance Code, our property and casualty insurance subsidiary is a member of the Compulsory Vehicle Liability Insurance Joint Underwriting Association (the Association). The Association was organized in 1997 to underwrite insurance coverage of motor vehicle property damage liability risks effective January 1, 1998. As a participant, the segment shares the risk proportionally with other members based on a formula established by the Insurance Code. During the years 2008, 20072010, 2009 and 2006,2008, the Association distributed the Company a dividend based on the good experience of the business amounting to $1.1$1.3 million, $1.0$1.2 million and $0.8$1.1 million, respectively.
Critical Accounting Estimates
Our consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate the accounting policies and estimates we use to prepare our consolidated financial statements. In general, management’s estimates are based on historical experience and various other assumptions it believes to be reasonable under the circumstances. The following is an explanation of our accounting policies considered most significant by management. These accounting policies require us to make estimates and assumptions that affect the amounts reported in the financial statements and

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accompanying notes. Such estimates and assumptions could change in the future as more information is known. Actual results could differ materially from those estimates.
The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. For all these policies, management cautions that future events may not necessarily develop as forecasted, and that the best estimates routinely require adjustment. Management believes that the amounts provided for these critical accounting estimates are adequate.

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Claim Liabilities
Claim liabilities by segment as of December 31, 2008 by segment2010 were as follows:
                 
          Property and    
  Managed  Life  Casualty    
(Dollar amounts in millions) Care  Insurance  Insurance  Consolidated 
 
                 
Claims processed and incomplete(1)
 $78.2   31.3   46.6   156.1 
Unreported losses(2)
  119.3   8.3   22.5   150.1 
Unpaid loss-adjustment expenses(3)
  4.4   0.3   12.8   17.5 
 
  $201.9   39.9   81.9   323.7 
 
     
(Dollar amounts in millions)    
 
Managed care $236.2 
Life insurance  41.2 
Property and casualty insurance  82.8 
 
Consolidated $360.2 
 
(1)The liability for claims processed and incomplete represents those claims that have been incurred and reported to us that remain unpaid as of the balance sheet date. This amount includes claims that have been investigated and adjusted but have not been paid as well as those reported claims that have not gone through the investigation and adjustment process.
(2)The liability for estimated unreported losses is the amount needed to provide for the estimated ultimate cost of settling those claims related to insured events that have occurred but have not been reported to us.
(3)The liability for unpaid loss-adjustment expenses is the amount needed to provide for the estimated ultimate cost required to investigate and adjust claims related to insured events that have occurred as of the balance sheet date, whether or not the claims have been reported to us at that date.
Management continually evaluates the potential for changes in its claim liabilities estimates, both positive and negative, and uses the results of these evaluations to adjust recorded claim liabilities and underwriting criteria. Our profitability depends in large part on our ability to accurately predict and effectively manage the amount of claims incurred, particularly those of the managed care segment and the losses arising from the property and casualty and life insurance segment. Management regularly reviews its premiums and benefits structure to reflect our underlying claims experience and revised actuarial data; however, several factors could adversely affect our underwriting results. Some of these factors are beyond management’s control and could adversely affect its ability to accurately predict and effectively control claims incurred. Examples of such factors include changes in health practices, economic conditions, change in utilization trends, healthcare costs, the advent of natural disasters, and malpractice litigation. Costs in excess of those anticipated could have a material adverse effect on our results of operations.
We recognize claim liabilities as follows:
Managed Care Segment
At December 31, 2008,2010, claim liabilities for the managed care segment amounted to $201.9$236.2 million and represented 62.4%65.6% of our total consolidated claim liabilities and 19.0%20.7% of our total consolidated liabilities.
Liabilities for reported but incomplete claims are recorded at the contractual rate. Liabilities for unreported losses     Claim liabilities are determined employing actuarial methods that are commonly used by managed care actuaries and meet Actuarial Standards of Practice, which require that the claim liabilities be adequate under moderately adverse circumstances. The segment determines the amount of the liability for unreported losses by following a detailed actuarial process that entails using both historical claim payment patterns as well as emerging medical cost trends to project a best estimate of claim liabilities. Under this process, historical claims incurred dates are compared to actual dates of claims payment. This information is analyzed to

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create “completion” or “development” factors that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the total expected claims incurred. The majority of unpaid claims, both reported and unreported, for any period, are those claims which are incurred in the final months of the period. Since the percentage of claims paid during the period with respect to claims incurred in those months is generally very low, the above-described completion factor methodology is less reliable for such months. In order to complement the analysis to determine the unpaid claims, historical completion factors and payment patterns are applied to incurred and paid claims for the most recent twelve months and compared to the prior twelve month period. Incurred claims for the most recent twelve months also take into account recent claims expense levels and health care trend levels (trend factors). Using all of the above methodologies, our actuaries determine based on the different circumstances the unpaid claims as of the end of period.
Because the reserve methodology is based upon historical information, it must be adjusted for known or suspected operational and environmental changes. These adjustments are made by our actuaries based on their knowledge and their estimate of emerging impacts to benefit costs and payment speed.
Circumstances to be considered in developing our best estimate of reserves include changes in enrollment, utilization levels, unit costs, mix of business, benefit plan designs, provider reimbursement levels, processing system conversions and changes, claim inventory levels, regulatory and legislative requirements, claim processing patterns, and claim submission patterns. A comparison or prior period liabilities to re-estimated claim liabilities based on subsequent claims development is also considered in making the liability determination. In the actuarial process, the methods and assumptions are not changed as reserves are recalculated, but rather the availability of additional paid

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claims information drives our changes in the re-estimate of the unpaid claim liability. Changes in such development are recorded as a change to current period benefit expense. The re-estimates or recasts are done monthly for the previous four calendar quarters. On average, about 77% of the claims are paid within three months after the last day of the month in whishwhich they were incurred and about 13% are within the next three months, for a total of 90% paid within six months after the last day of the month in which they were incurred.
Management regularly reviews its assumptions regarding claim liabilities and makes adjustments to claims incurred when necessary. If management’s assumptions regarding cost trends and utilization are significantly different than actual results, our statement of earningearnings and financial position could be impacted in future periods. Changes to prior year estimates may result in an increase in claims incurred or a reduction of claims incurred in the period the change is made. Further, due to the considerable variability of health care costs, adjustments to claims liabilities are made in each period and are sometimes significant as compared to the net income recorded in that period. Prior year development of claim liabilities is recognized immediately upon the actuary’s judgment that a portion of the prior year liability is no longer needed or that an additional liability should have been accrued. Health care trends are monitored in conjunction with the claim reserve analysis. Based on these analyses, rating trends are adjusted to anticipate future changes in health care cost or utilization. Thus, the managed care segment incorporatedincorporates those trends as part of the development of premium rates in an effort to keep premium rating trends in line with claims trends.
As described above, completion factors and claims trend factors can have a significant impact on determination of our claim liabilities. The following example provides the estimated impact on our December 31, 20082010 claim liabilities, assuming the indicated hypothetical changes in completion and trend factors:

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(Dollar amounts in millions)  
Completion Factor1Completion Factor1 Claims Trend Factor2Completion Factor1 Claims Trend Factor2 
(Decrease) Increase(Decrease) Increase (Decrease) Increase(Decrease) Increase (Decrease) Increase 
 In unpaid claim In claims trend In unpaid claim In unpaid claim In claims trend In unpaid claim 
In completion factor liabilities factor liabilities liabilities factor liabilities 
  
         
(0.6)% $11.2     (0.6)% $6.0    $8.7  (0.75)% $9.4 
(0.4)% 7.5 (0.4)% 4.0 5.8  (0.50)% 6.3 
(0.2)% 3.7 (0.2)% 2.0 2.9  (0.25)% 3.2 
0.2% (3.7) 0.2% (2.0)  (2.9)  0.25%  (3.2)
0.4% (7.4) 0.4% (4.0)  (5.7)  0.50%  (6.3)
0.6% (11.0) 0.6% (6.0)  (8.6)  0.75%  (9.4)
 
1(1) Assumes (decrease) increase in the completion factors for the most recent twelve months.
 
2(2) Assumes (decrease) increase in the claims trend factors for the most recent twelve months.
The segments’ reserving practice is to consistently recognize the actuarial best estimate as the ultimate liability for claims within a level of confidence required by actuarial standards. Management believes that the methodology for determining the best estimate for claim liabilities at each reporting date has been consistently applied.
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are ultimately settled. Liabilities at any year-end are continually reviewed and re-estimated as information regarding actual claims payments, or run-out becomes known. This information is compared to the originally established year-end liability. Negative amounts reported for incurred claims related to prior years result from claims being settled for amounts less than originally estimate.estimated. The reverse is true of reserve shortfalls. Medical claim liabilities are usually described as having a “short tail:tail”: which means that they are generally paid within several months of the member receiving service from the provider. Accordingly, the majority, or approximately 95%, of any redundancy or shortfall relates to claims incurred in the previous calendar year-end, with the remaining 5% related to claims incurred prior to the previous calendar year-end. In 2005, the managed care segment began offering Medicare Advantage products for the first time. There has been a rapid growth in this line of business-from minimal enrollment in 2005 to approximately 75,000 members by the end of 2008. There have been some increases in both completion and trend factors because of the growth of this business. The effect should lessen with the maturity of this business. Management has not noted any significant emerging trends in claim frequency and severity other than as described above, and the normal fluctuations in enrollment and utilization trends from year to year.

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The following table shows the variance between the segment’s incurred claims for current period insured events and the incurred claims for such years had they been determined retrospectively (the “Incurred claims related to current period insured events” for the year shown plus or minus the “Incurred claims related to prior period insured events” for the following year as included in note 810 to the audited consolidated financial statements). This table shows that the segments’ estimates of this liability have approximated the actual development.
                        
(Dollar amounts in millions 2007 2006 2005  2009 2008 2007 
 
Years ended December 31,  
Total incurred claims:  
As reported(1)
 $1,156.8 1,184.3 1,148.2  $1,512.1 $1,348.9 $1,156.8 
On a retrospective basis 1,149.2 1,160.7 1,137.5  1,506.5 1,352.0 1,149.2 
Variance $7.6 23.6 10.7  $5.6 $(3.1) $7.6 
Variance to total incurred claims as reported  0.7%  2.0%  0.9%  0.4%  -0.2%  0.7%
 
(1) Includes total claims incurred less adjustments for prior year reserve development.

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Management expects that substantially all of the development of the 20082010 estimate of medical claims payable will be known during 20092011 and that the variance of the total incurred claims on a retrospective basis when compared to reported incurred claims will be similar to the prior years.
In the event this segment experiences an unexpected increase in health care cost or utilization trends, we have the following options to cover claim payments:
 • Through the management of our cash flows and investment portfolio.
 
 • We have the ability to increase the premium rates throughout the year in the monthly renewal process, when renegotiating the premiums for the following contract year of each group as they become due. We consider the actual claims trend of each group when determining the premium rates for the following contract year.
 
 • We have available short-term borrowing facilities that from time to time address differences between cash receipts and disbursements.
For additional information on our credit facilities, see section “Financing and Financing Capacity” of this Item.
Life Insurance Segment
At December 31, 2008,2010, claim liabilities for the life insurance segment amounted to $39.9$41.2 million and represented 12.3%11.4% of total consolidated claim liabilities and 3.7%3.6% of our total consolidated liabilities.
The claim liabilities related to the life insurance segment are based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. The estimate of claim liabilities for this segment is based on the amount of benefits contractually determined and on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. This estimate relies on actuarial observations of ultimate loss experience for similar historical events. Principal assumptions used in the establishment of claim liabilities for this segment are mortality, morbidity and claim submission patterns, among others.
Claim reserve reviews are generally conducted on a quarterlymonthly basis, in light of continually updated information,information. These reviews incorporate a variety of actuarial methods, judgments and include participation of the segment’s external actuaries. Our actuariesanalysis. We review reserves using the current inventory of policies and claims data. These reviews incorporate a variety of actuarial methods, judgments and analysis.
The key assumption with regard to claim liabilities for our life insurance segment is related to claims includedincurred prior to the end of the year, but not yet reported to our subsidiary. A liability for these claims is estimated based upon experience with regards to amounts reported subsequent to the close of business in prior years. There are uncertainties attendant toin the development of these estimates; however, in recent years our estimates have proved to be slightly conservative.resulted in immaterial redundancies or deficiencies.

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Property and Casualty Insurance Segment
At December 31, 2008,2010, claim liabilities for the property and casualty insurance segment amounted to $81.9$82.8 million and represented 25.3%23.0% of the total consolidated claim liabilities and 7.7%7.2% of our total consolidated liabilities.
Estimates of the ultimate cost of claims and loss-adjustment expenses of this segment are based largely on the assumption that past developments, with appropriate adjustments due to known or unexpected changes, are a reasonable basis on which to predict future events and trends, and involve a variety of actuarial techniques that analyze current experience, trends and other relevant factors. Property and casualty insurance claim liabilities are categorized and tracked by line of business. Medical malpractice policies are written on a claims-made basis. Policies written on a claims-made basis require that claims be reported during the policy period. Other lines of business are written on an occurrence basis.
Individual case estimates for reported claims are established by a claims adjuster and are changed as new information becomes available during the course of handling the claim. Our property and casualty business, other than medical malpractice, is primarily short-tailed business, where losses (e.g. paid losses and case reserves) are generally reported quickly.

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Claim reserve reviews are generally conducted on a quarterly basis, in light of continually updated information. Our actuaries certifyactuary certifies reserves for both current and prior accident years using current claims data. These reviews incorporate a variety of actuarial methods, judgments, and analysis. For each line of business, a variety of actuarial methods are used, with the final selections of ultimate losses that are appropriate for each line of business selected based on the current circumstances affecting that line of business. These selections incorporate input from management, particularly from the claims, underwriting and operations divisions, about reported loss cost trends and other factors that could affect the reserve estimates.
Key assumptions are based on the consideration that past emergence of paid losses and case reserves is credible and likely indicative of future emergence and ultimate losses. A key assumption is the expected loss ratio for the current accident year. This expected loss ratio is generally determined through a review of the loss ratios of prior accident years and expected changes to earned pricing, loss costs, mix of business, and other factors that are expected to impact the loss ratio for the current accident year. Another key assumption is the development patterns for paid and reported losses (also referred to as the loss emergence and settlement patterns). The reserves for unreported claims for each year are determined after reviewing the indications produced by each actuarial projection method, which, in turn, rely on the expected paid and reported development patterns and the expected loss ratio for that year.
At December 31, 2008,2010, the actuarial reserve range determined by the actuaries was from $79.2$81 million to $89.7$91 million. Management reviews the results of the reserve estimates in order to determine any appropriate adjustments in the recording of reserves. Adjustments to reserve estimates are made after management’s consideration of numerous factors, including but not limited to the magnitude of the difference between the actuarial indication and the recorded reserves, improvement or deterioration of actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular line of business. In general, changes are made more quickly to more mature accident years and less volatile lines of business. Varying the net expected loss ratio by +/-1% in all lines of business for the six most recent accident years would increase/decrease the claims incurred by approximately $5.3$5.6 million.
Liability for Future Policy Benefits
Our life insurance segment establishes, and carries as liabilities, actuarially determined amounts that are calculated to meet its policy obligations when a policy matures or surrenders, an insured dies or becomes disabled or upon the occurrence of other covered events. We compute the amounts for actuarial liabilities in conformity with GAAP.
Liabilities for future policy benefits for whole life and term insurance products and active life reserves for accident and health products are computed by the net level premium method, using interest assumptions ranging from 5.0% to 5.4% and withdrawal, mortality, morbidity and morbiditymaintenance expense assumptions appropriate at the time the policies were issued (or when a block of business was purchased, as applicable). Accident and health unpaid claim reserves are stated at amounts determined by estimates on individual claims and estimates of

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unreported claims based on past experience. Liabilities for universal life policies are stated at policyholder account values before surrender charges. Deferred annuity reserves are carried at the account value.
The liabilities for all products, except for universal life and deferred annuities, are based upon a variety of actuarial assumptions that are uncertain. The most significant of these assumptions is the level of anticipated death and health claims. Other assumptions that are less significant to the appropriate level of the liability for future policy benefits are anticipated policy persistency rates, investment yields, and operating expense levels. These are reviewed frequently by our subsidiary’s external actuaries, to assure that the current level of liabilities for future policy benefits is sufficient, in combination with anticipated future cash flows, to provide for all contractual obligations. For all products, except for universal life and deferred annuities, according to Statement of Financial Accounting Standards (SFAS) No. 60,Accounting and Reporting by Insurance Enterprises, the basis for the liability for future policy benefits is established at the time of issuance of each contract and would only change if our experience deteriorates to the point that the level of the liability is not adequate to provide for future policy benefits. We do not currently expect that level of deterioration to occur.

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Deferred Policy Acquisition Costs and Value of Business Acquired
Certain costs for acquiring life and property and casualty insurance business are deferred. Acquisition costs related to the managed care business are expensed as incurred.
The costs of acquiring new life business, principally commissions, and certain variable underwriting, agency and policy issue expenses of our life insurance segment, have been deferred. These costs, including value of business acquired (VOBA) recorded upon our acquisition of GA Life (now TSV), are amortized to income over the premium-paying period of the related whole life and term insurance policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue, and over the anticipated lives of universal life policies in proportion to the ratio of the expected annual gross profits to the expected total gross profits. The expected premiums revenue and gross profits are based upon the same mortality and withdrawal assumptions used in determining the liability for future policy benefits. For universal life and deferred annuity policies, changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on the amortization of deferred policy acquisition costs of revisions to estimated gross profits is reported in earnings in the period such estimated gross profits are revised.
The schedules of amortization of life insurance deferred policy acquisition costs (DPAC) and VOBA are based upon actuarial assumptions regarding future events that are uncertain. For all products, other than universal life and deferred annuities, the most significant of these assumptions is the level of contract persistency and investment yield rates. For these products according to FASB No. 60 the basis for the amortization of DPAC and VOBA is established at the issue of each contract and would only change if our segment’s experience deteriorates to the point that the level of the liability is not adequate. We do not currently expect that level of deterioration to occur. For the universal life and deferred annuity products, amortization schedules are based upon the level of historic and anticipated gross profit margins, from the date of each contract’s issued (or purchase, in the case of VOBA). These schedules are based upon several actuarial assumptions that are uncertain, are reviewed annually and are modified if necessary. The most significant of these assumptions are anticipated universal life claims, investment yield rates and contract persistency. Based upon the most recent actuarial reviews of all of the assumptions, we do not currently anticipate material changes to the level of these amortization schedules.
The managed care and property and casualty business acquisition costs consist of commissions incurred during the production of business and are deferred and amortized ratably over the terms of the policies.
Impairment of Investments
Impairment of an investment exists if a decline in the estimated fair value is below the amortized cost of the security. When this happens, an evaluation of whether that impairment is other than temporary is necessary. This evaluation is subjective and requires a high degree of judgment. Management regularly reviews each investment security for impairment based on criteria that includemonitors and evaluates the difference between the cost and estimated fair value of investments. For investments with a fair value below cost, the process includes evaluating: (1) the length of time and the extent to which cost exceeds estimated fair value, general market conditions (like changes in interest rates), our ability and intent to hold the security until recovery in estimated fair value, the duration of the estimated fair value decline andhas been less than amortized cost for fixed maturity securities, or cost for equity securities, (2) the financial condition, near-term and specificlong-term prospects for the issuer. Management regularly performs market researchissuer, including relevant industry conditions and monitors market conditionstrends, and implications of rating agency actions, (3) the Company’s intent sell or the likelihood of a required sale prior to evaluaterecovery, (4) the recoverability of principal and interest for fixed maturity securities, or cost for equity securities, and (5) other factors, as applicable. 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 estimated fair value solely due to changes in interest rates, other-than temporary impairment risk. Amay not be

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appropriate. Due to the subjective nature of our analysis, along with the judgment that must be applied in the analysis, it is possible that we could reach a different conclusion whether or not to impair a security if it had access to additional information about the investee. Additionally, it is possible that the investee’s ability to meet future contractual obligations may be different than what we determined during its analysis, which may lead to a different impairment conclusion in future periods. If after monitoring and analyzing impaired securities, management determines that a decline in the estimated fair value of any available-for-sale or held-to-maturity security below cost which is deemed to be other than temporary, results in a reduction of the carrying amount of the security is reduced to its fair value.value according to current accounting guidance. The impairment is charged to operations when that determination is made and a new cost basis for theof an impaired security is established.not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.
     Our process for identifying and reviewing invested assets for other-than temporary impairments during any quarter includes the following:
•Identification and evaluation of securities that have possible indications of other-than-temporary impairment, which includes an analysis of all investments with gross unrealized investments losses that represent 20% or more of cost.
•Review and evaluation of any other security based on the investee’s current financial condition, liquidity, near-term recovery prospects, implications of rating agency actions, the outlook for the business sectors in which the investee operates and other factors. This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of cost.
•Consideration of evidential matter, including an evaluation of factors or triggers that may or may not cause individual investments to qualify as having other-than-temporary impairments; and
•Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision.
     Management continues to review the investment portfolios under our impairment review policy. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods.
During the years ended December 31, 2008, 20072010, 2009 and 20062008 we recognized other-than-temporary impairments amounting to $16.5$3.0 million, $1.1$7.1 million and $2.1$16.5 million, respectively, on fixed income, equity securities and perpetual preferred stocks classified as available for sale. As of December 31, 2008,2010, of the total amount of investments in securities of $1,010.3 million, $32.2$1.1 billion, $51.1 million, or 3.2%4.6%, are classified as trading securities, and thus are recorded at fair value with changes in estimated fair value recognized in the statement of operations. The remaining $978.1 million$1.0 billion is classified as either available-for-sale or held-to-maturity and consists of high-quality investments. Of this amount, $805.0$873.1 million, or 82.3%83.2%, are securities in obligations of U.S. government-sponsored enterprises, U.S. Treasury securities, obligations of the Commonwealth of Puerto Rico, municipal securities, obligations of U.S. states and its political subdivisions, mortgage backed and collateralized mortgage obligations that are U.S. agency-backed. The

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remaining $173.1$175.8 million, or 17.7%16.8%, are from corporate fixed, equity securities and mutual funds. GrossThe net unrealized lossesgain as of December 31, 20082010 of the available-for-sale and held-to-maturity portfolios amounted to $7.9$39.4 million.
The impairment analysis as of December 31, 2008 and 20072010 indicated that, other than the equity securitythose securities for which an other-than-temporary impairment was recognized, none of the securities whose carrying amount exceeded its estimated fair value was considered other-than-temporarily impaired as of that date; however, several factors are beyond management’s control, such as the following: financial condition of the issuer, movement of interest rates, specific situations within corporations, among others. Over time, the economic and market environment may provide additional insight regarding the estimated fair value of certain securities, which could change management’s judgment regarding impairment. This could result in realized losses related to other-than-temporary declines being charged against future income.
Our fixed maturity securities are sensitive to interest rate and credit risk fluctuations, which impact the fair value of individual securities. Our equity securities are sensitive to equity price risks, for which potential losses could arise from adverse changes in the value of equity securities. For additional information on the sensitivity of

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our investments, see “Item 7A —7A. Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K.
A detail of the gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 20082010 and 20072009 is included in note 3 to the audited consolidated financial statements.
Allowance for Doubtful Receivables
We estimate the amount of uncollectible receivables in each period and establish an allowance for doubtful receivables. The allowance for doubtful receivables amounted to $14.7$20.0 million and $15.9$25.2 million as of December 31, 20082010 and 2007,2009, respectively. The amount of the allowance is based on the age of unpaid accounts, information about the customer’s creditworthiness and other relevant information. The estimates of uncollectible accounts are revised each period, and changes are recorded in the period they become known. In determining the allowance, we use predetermined percentages applied to aged account balances, as well as individual analysis of large accounts. These percentages are based on our collection experience and are periodically evaluated. A significant change in the level of uncollectible accounts would have a material effect on our results of operations.
In addition to premium-related receivables, we evaluate the risk in the realization of other accounts receivable, including balances due from third parties related to overpayment of medical claims and rebates, among others. These amounts are individually analyzed and the allowance determined based on the specific collectivity assessment and circumstances of each individual case.
We consider this allowance adequate to cover potentialprobable losses that may result from our inability to subsequently collect the amounts reported as accounts receivable. However, such estimates may change significantly in the event that unforeseen economic conditions adversely impact the ability of third parties to repay the amounts due to us.
Other Significant Accounting Policies
We have other accounting policies that are important to an understanding of the financial statements. See note 2 to the audited consolidated financial statements.
Recently Issued Accounting Standards
In September 2006,April 2010, the Financial Accounting Standards Board (FASB)FASB issued Financial Accounting Standard (FAS) No. 157,Fair Value Measurements. FAS 157 defines fair value, establishesguidance to address the classification of an employee share-based payment award with an exercise price denominated in the currency of a frameworkmarket in which the underlying equity security trades. The guidance clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2010. We do not expect the measurementadoption of fair value, and enhances disclosures about fair value measurements. FAS 157 does not require any new fair value measurements. We adopted FAS 157 on January 1, 2008. This adoption did notthis guidance to have an impact on our financial position or results of operations. See Note 8
     In October 2010, the FASB issued guidance to address diversity in practice regarding the interpretation of which costs relating to the audited consolidatedacquisition of new or renewal insurance contracts qualify for deferral. This guidance specifies that the following costs incurred in the acquisition of new and renewal contracts should be capitalized: (1) Incremental direct costs of contract acquisition. Incremental direct costs are those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. (2) Certain costs related directly to the following acquisition activities performed by the insurer for the contract: a. Underwriting, b. Policy issuance and processing, c. Medical and inspection, and d. Sales force contract selling. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the direct-response advertising guidance inSubtopic 340-20, Other Assets and Deferred Costs— Capitalized Advertising Costs, are met. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statementsposition or results of operations.
     In December 2010, the FASB issued guidance to modify Step 1 of the goodwill impairment test for disclosure relatedreporting units with zero or negative carrying amounts. For those reporting units, an entity is required to FAS 157.perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is

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In February 2007, the FASB issued FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities — Includingmore likely than not that a goodwill impairment exists, an Amendment of FASB Statement No. 115. FAS 159 allows entities to measure many financial instruments and certain other assets and liabilities at fair value onentity should consider whether there are any adverse qualitative factors indicating that an instrument-by-instrument basis under the fair value option. We adopted FAS 159 on January 1, 2008. We have chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP. Accordingly, the adoption of FAS 159 did not have an impact on our financial position or operating results.
In March 2008, the FASB issued FAS 161,Disclosures about Derivative Instruments and Hedging Activities. FAS 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133,Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows.impairment may exist. This statement expands the current disclosure framework in FAS 133. FAS 161guidance is effective prospectively for fiscal years, and interim periods within those years, beginning on or after NovemberDecember 15, 2008.2010. We do not expect the adoption of FAS 161this guidance to have a materialsignificant impact on our consolidated financial statements.position or results of operations.
In May 2008,December 2010, the FASB issued FAS 163,Accountingguidance to require a public entity to disclose pro forma information for Financial Guarantee Insurance Contracts — an Interpretation of FASB Statement No. 60. FAS 163 prescribesbusiness combinations that occurred in the accounting for premiumcurrent reporting period. The disclosures include pro forma revenue and claims liabilities by insurersearnings of financial obligations,the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period for all the periods presented. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and requires expanded disclosures about financial guarantee insurance contracts. FAS 163 appliesamount of material, nonrecurring pro forma adjustments directly attributable to financial guarantee insurancethe business combination included in the reported pro forma revenue and reinsurance contracts issued by insurers subject to FAS 60,Accounting and Reporting by Insurance Enterprises. The Statement does not apply to insurance contracts that are similar to financial guarantee insurance contracts such as mortgage guaranty or trade-receivable insurance, financial guarantee contracts issued by noninsurance entities, or financial guarantee contracts that are derivative instruments within the scope of FAS 133. Statement 163earnings. This guidance is effective for financial statements issuedbusiness combinations for fiscal yearswhich the acquisition dates is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those years, except for certain disclosure requirements about the risk-management activities2010. We expect to adopt this guidance during 2011 as part of the insurance enterprise that are effective for the first quarter beginning after the Statement was issued (May 23, 2008). Except for thoseour disclosures early application is prohibited. This standard has no impact onrelated to our consolidated financial statements.business combination.
In December 2008, the FASB issued a FASB Staff Position (FSP) amending FASB 132 (revised 2003),Employers’ Disclosures about Pensions and Other Postretirement Benefits,to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP requires employers to disclose information about fair value measurements of plan assets that would be similar to the disclosures about fair value measurements required by FAS 157,Fair Value Measurements.The disclosures about plan assets required by this FSP are required for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. Earlier application of the provisions of this FSP is permitted.
There were no other new accounting pronouncements issued during the year ended December 31, 2008 that had or are expected to have a material impact on our financial position, operating results or disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk
We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business. We are also subject to additional market risk with respect to certain of our financial instruments. We must effectively manage, measure, and monitor the market risk associated with our invested assets and interest rate sensitive liabilities. We have established and implemented comprehensive policies and procedures to minimize the effects of potential market volatility.
Market Risk Exposure
We have exposure to market risk mostly in our 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. Analytical tools and monitoring systems are in place to assess each one of the elements of market risks.

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As in other insurance companies, investment activities are an integral part of our business. Insurance statutes regulate the type of investments that the insurance segments are permitted to make and limit the amount of funds that may be invested in some types of securities. We have a diversified investment portfolio with a large portion invested in investment-grade, fixed income securities.
Our investment philosophy is to maintain a largely investment-grade fixed income portfolio, provide adequate liquidity for expected liability durations and other requirements, and maximize total return through active investment management.
We evaluate the interest rate risk of our assets and liabilities regularly, as well as the appropriateness of investments relative to our internal investment guidelines. We operate within these guidelines by maintaining a diversified portfolio, both across and within asset classes.
The board of directors monitors and approves investment policies and procedures. Investment decisions are centrally managed by investment professionals based on the guidelines established in our investment policies and procedures. The investment portfolio is managed following those policies and procedures.
Our investment portfolio is predominantly comprised of obligations of U.S. government-sponsored enterprises, U.S. Treasury securities, obligations of state and political subdivisions, obligations of the Commonwealth of Puerto Rico, municipal securities and obligations of U.S. states and its political subdivisions and obligations from U.S. and Puerto Rican government instrumentalities. These investments comprised approximately 82.3%79.3% of the total portfolio value as of December 31, 2008,2010, of which 15.0%33.3% consisted of U. S. agency-backed mortgage backed securities and collateralized mortgage obligations. The remaining balance of the investment portfolio consists of an equity securities portfolio that seeks to replicate the S&P 500 Index, a large-cap growth index, a large-cap value index, mutual funds, investments in local stocks from well-known financial institutions and investments in corporate bonds.

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We use a sensitivity analysis to measure the market risk related to our holdings of invested assets and other financial instruments. This analysis estimates the potential changes in fair value of the instruments subject to market risk. The sensitivity analysis was performed separately for each of our market risk exposures related to our trading and other than trading portfolios. This sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. Our actual losses in any particular year could exceed the amounts indicated in the following paragraphs. Limitations related to this sensitivity analysis include:
 • the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including the impact of prepayment rates on mortgages; and
 
 • the model assumes that the composition of assets and liabilities remains unchanged throughout the year.
Accordingly, we use such models as tools and not as a substitute for the experience and judgment of our management.
Interest Rate Risk
Our exposure to interest rate changes results from our significant holdings of fixed maturity securities. Investments subject to interest rate risk are held in our other-than-trading portfolios. We are also exposed to interest rate risk from our variable interest secured term loan and from our policyholder deposits.
Equity Price Risk
Our investments in equity securities expose us to equity price risks, for which potential losses could arise from adverse changes in the value of equity securities. Financial instruments subject to equity prices risk are held in our trading and other-than-trading portfolios.

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Risk Measurement
Trading Portfolio
Our trading securities are a source of market risk. As of December 31, 2008,2010, our trading portfolio was comprised of investments in publicly-traded common stocks. The securities in the trading portfolio are believed by management to be high quality and are diversified across industries and readily marketable. Trading securities are recorded at fair value, and changes in fair value are included in operations. The fair value of the investments in trading securities is exposed to equity price risk. Assuming an immediate decrease of 10% in the market value of these securities as of December 31, 20082010 and 2007,2009, the hypothetical loss in the fair value of these investments would have been approximately $3.2$5.1 million and $6.7$4.4 million, respectively.
Other than Trading Portfolio
Our available-for-sale and held-to-maturity securities are also a source of market risk. As of December 31, 20082010 approximately 96.8%94.5% and 100.0% of our investments in available-for-sale and held-to-maturity securities, respectively, consisted of fixed income securities. The remaining balance of the available-for-sale portfolio is comprised of equity securities. Available-for-sale securities are recorded at fair value and changes in the fair value of these securities, net of the related tax effect, are excluded from operations and are reported as a separate component of other comprehensive income (loss) until realized. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization or accretion of premiums or discounts. The fair value of the investments in the other-than-trading portfolio is exposed to both interest rate risk and equity price risk.
Interest Rate Risk
We have evaluated the net impact to the fair value of our fixed income investments of a significant one-time change in interest rate risk using a combination of both statistical and fundamental methodologies. From these shocked values a resultant market price appreciation/depreciation can be determined after portfolio cash flows are modeled and evaluated over instantaneous 100, 200 and 300 basis point rate shifts. Techniques used in the evaluation of cash flows include Monte Carlo simulation through a series of probability distributions over 200 interest rate paths. Necessary prepayment speeds are compiled using Salomon Brothers Yield Book, which sources numerous factors in deriving speeds, including but not limited to: historical speeds, economic indicators, street consensus speeds, etc. Securities evaluated by us under these scenarios include mortgage pass-through certificates

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and collateralized mortgage obligations of U.S. agencies, and private label structures, provided that cash flows information is available. The following table sets forth the result of this analysis for the years ended December 31, 20082010 and 2007.

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(Dollar amounts in millions)      
  Expected Amount of %
Change in Interest Rates Fair Value Decrease Change
 
             
December 31, 2008:
            
Base Scenario $910.7         
+100 bp  891.0   (19.7)  (2.2)%
+200 bp  844.9   (65.8)  (7.2)%
+300 bp  787.7   (123.0)  (13.5)%
             
December 31, 2007:
            
Base Scenario $867.5         
+100 bp  819.3   (48.2)  (5.6)%
+200 bp  777.3   (90.2)  (10.4)%
+300 bp  732.6   (134.9)  (15.6)%
2009.
(Dollar amounts in millions)
             
  Expected  Amount of  % 
Change in Interest Rates Fair Value  Decrease  Change 
 
December 31, 2010:
            
Base Scenario $991.6         
 
+100 bp  940.4   (51.2)  (5.2)%
 
+200 bp  886.1   (105.5)  (10.6)%
 
+300 bp  836.5   (155.1)  (15.6)%
 
             
December 31, 2009:
            
 
Base Scenario $935.5         
 
+100 bp  885.4   (50.1)  (5.4)%
 
+200 bp  836.2   (99.3)  (10.6)%
 
+300 bp  786.7   (148.8)  (15.9)%
 
We believe that an interest rate shift in a 12-month period of 100 basis points represents a moderately adverse outcome, while a 200 basis point shift is significantly adverse and a 300 basis point shift is unlikely given historical precedents. Although we classify 97.5%98.4% of our fixed income securities as available-for-sale, our cash flows and the intermediate duration of our investment portfolio should allow us to hold securities until maturity, thereby avoiding the recognition of losses, should interest rates rise significantly.
Equity Price Risk
Our equity securities in the available-for-sale portfolio are comprised primarily of stock of several Puerto Rican financial institutions and mutual funds. Assuming an immediate decrease of 10% in the market value of these securities as of December 31, 20082010 and 2007,2009, the hypothetical loss in the fair value of these investments would have been approximately $6.9$5.7 million and $7.1$6.5 million, respectively.
Other Risk Measurement
We are subject to interest rate risk on our variable interest secured term loan and our policyholder deposits. Shifting interest rates do not have a material effect on the fair value of these instruments. The secured term loan has a variable interest rate structure, which reduces the potential exposure to interest rate risk. The policyholder deposits have short-term interest rate guarantees, which also reduce the accounts’ exposure to interest rate risk.
We have invested in a hybrid instrument, including a derivative instrumentscomponent, with a market value of approximately $11.1$10.6 million and $14.6$11.2 million as of December 31, 20082010 and 20072009 in order to diversify our investment in securities and participate in foreign stock markets.
In 2005, we invested in $5.0 million in each of two structured note agreements, under which the interest income received is linked to the performance of the Dow Jones Euro STOXX 50 and Nikkei 225 Equity Indices (the Indices). Under these agreements the principal invested by us is protected, the only amount that varies according to the performance of the Indices is the interest to be received upon the maturity of the instruments. Should the Indices experience a negative performance during the holding period of the structured notes, no interest will be received and no amount will be paid to the issuer of the structured notes. The contingent interest payment component within the structured note agreements meets the definition of an embedded derivative. In accordance with the provisions of SFAS No. 133,Accounting for Derivative Instruments and Certain Hedging Activities, as amended,current accounting guidance the embedded derivative component of the structured note is separated from the structured notes and accounted for separately as a derivative instrument. The derivative component of the structured notes exposes us to credit risk and market risk. We minimize credit risk by entering into transactions with counterparties that we believe to be high-quality based on their credit ratings. The market risk is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. As of December 31, 20082010 and 2007,2009, the fair value of the derivative component of the structured notes amounted to $1.7$0.7 million and $6.3$1.6 million,

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respectively, and is included within “other assets” in the consolidated balance sheets. Assuming an immediate decrease of 10% in the period-end Indices as of December 31, 20082010 and 2007,

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2009, the hypothetical loss in the estimated fair value of the derivative component of the structured notes would have been approximately $0.2$0.1 million and $0.6,$0.2 million, respectively. The investment component of the structured notes, which had a fair value of $9.4$9.9 million and $8.3$9.6 million as of December 31, 20082010 and 2007,2009, respectively, is accounted for as a held-to-maturity debt security and is included within “investment in securities” in the consolidated balance sheet and its risk measurement is evaluated along the other investments in “— Other Than Trading Portfolio” above.
Item 8. Financial Statements and Supplementary Data.Data
Financial Statements
For our audited consolidated financial statements as of December 31, 20082010 and 20072009 and for each of the three years ended December 31, 20082010 see Index to financial statements in “Item 15—Item 15. Exhibits and Financial StatementStatements Schedules” to this Annual Report on Form 10-K.
Selected Quarterly Financial Data
For the selected unaudited quarterly financial data corresponding to the years 20082010 and 2007,2009, see note 2830 of the audited consolidated financial statements as of December 31, 20082010 and 20072009 and for the three years ended December 31, 2008.2010.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.Disclosures
None.     There have been no changes in or disagreements with our independent registered public accounting firm on accounting or financial disclosures.

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Item 9A. Controls and Procedures.Procedures
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, wemanagement, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)), under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer.. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on this evaluation, our chief executive officer and our chief financial officer have concluded that as of December 31, 2008,2010, which is the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were notare effective due to the material weakness described in a reasonable level of assurance.
Management’s Report on Internal Control Over Financial Reporting below.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of “internal control over financial reporting,” as defined under Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed by, or

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under the supervision of, the Company’s chief executive officer and chief financial officer, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:
 (i)• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
 (ii)• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
 (iii)• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision and with the participation of the chief executive officer and chief financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20082010 based on criteria described in the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment and those criteria, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2008 due2010 to provide reasonable assurance regarding the material weakness described below.
Our processes, procedures,reliability of financial reporting and controls are not designed or operating effectively to ensure that other-than-temporary impairment (“OTTI”) on available for sale investment securities were recorded in accordance with generally accepted accounting principles. Specifically, our policies and procedures were not designed effectively to identify a complete population of available for sale investments that should be analyzed for OTTI. Also, our monitoring controls are not designed to consider factors that may indicate a decline in the value of available for sale investments is other than temporary in accordance with generally accepted accounting principles. These control deficiencies constitute a material weakness that resulted in material errors in net realized investment losses in our preliminary 2008 annual consolidated financial statements which were corrected prior to issuancepreparation of the Company’s consolidated financial statements.statements for external reporting purposes in accordance with GAAP.
KPMG     PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, thathas audited ourthe consolidated financial statements included in this Annual Report on Form 10-K,of the Company as of and for the year ended December 31, 2010, and has also issued an attestation reportopinion dated March 9, 2011, on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.2010, which is included in this Annual Report on Form 10-K.
(c) Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting (as such term is defined in the Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended December 31, 20082010 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(d) Remediation of Material Weakness
We are currently taking steps to enhance our OTTI evaluation and remediate this material weakness in our internal control over financial reporting, including in particular:
1.Improving the governance process over the Company’s investment activities, by including OTTI analysis as a quarterly agenda at the meetings of our Investment Committee and report at least quarterly at the meetings of our Audit Committee.
2.Amending and expanding our OTTI evaluation selection criteria for impaired investments to require an individual OTTI analysis for all impaired investments if such investments are impaired for more than one month over a materiality level to be determined.
3.Preparing more robust supporting documentation and related reports used for the OTTI analysis by including additional information for those impaired investments described in the previous paragraph, addressing the reasons for the decline in value, period for which the decline has been observed, an estimate of the anticipated recovery period and its related probability of recoverability, credit ratings for the issue and issuer (where available) and any changes thereto.
4.Implementing a procedure designed to effectively disseminate the most recent authoritative accounting pronouncements related to OTTI to ensure that our employees involved in the evaluation receive the information on a timely basis.
Management believes that these steps will remediate the material weakness by improving our systems of disclosure controls and procedures and internal control over financial reporting; however, during execution their effectiveness will be subject to testing by us, and there can be no assurance at this time that the plan will effectively remediate the material weakness described above.

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Report of Independent Registered Public Accounting Firm
The Boardeffectiveness of Directors and Stockholders
Triple-S Management Corporation and Subsidiaries:
We have audited Triple-S Management Corporation and Subsidiaries’our internal control over financial reporting as of December 31, 2008, based on criteria established2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Triple-S Management Corporation and Subsidiaries’ management their report which is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sthis Annual Report on Internal Control Over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the other-than-temporary impairment of investment securities has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Triple-S Management Corporation and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated March 18, 2009, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Triple-S Management Corporation and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2008, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
San Juan, Puerto Rico
March 18, 2009

Stamp No. 2376408 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.Form 10-K.
Item 9B. Other Information.Information
None.

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Part III
Item 10. Directors, Executive Officers and Corporate Governance.Governance
The Board has established a code of business conduct and ethics that applies to our employees, agents, independent contractors, consultants, officers and directors. The complete text of the Code of Business Conduct and Ethics is available at the Corporation’s website at www.triplesmanagement.com.
The remaining information required by this item is incorporated by reference to the sections “Nominees for Election”, “Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Standing

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Committees—Corporate Governance and Nominations Committee”, “Standing Committees—Audit Committee”, and “Standing Committees—Audit Committee Financial Experts” included in the Corporation’s definitive Proxy Statement.
Item 11. Executive Compensation.
The information required by this itemItem is incorporated herein by reference to the sections “Compensation Discussion and Analysis” and “Standing Committees—Compensation Committee Interlocks and Insider Participation” included in the Corporation’sfrom our definitive Proxy Statement.Statement for our 2011 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Item 11. Executive Compensation
     The information required by this Item is incorporated herein by reference from our definitive Proxy Statement for our 2011 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Matters
The information required by this itemItem is incorporated herein by reference to the sections “Principal Shareholders”, “Stock Ownership of Directors and Executive Officers” and “Compensation Discussion and Analysis” included in the Corporation’sfrom our definitive Proxy Statement.Statement for our 2011 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.Independence
The information required by this itemItem is incorporated herein by reference to the section “Other Relationships, Transactions and Events” and “Board of Directors Independence” included in the Corporation’sfrom our definitive Proxy Statement.Statement for our 2011 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by this itemItem is incorporated herein by reference to the section “Disclosure of Auditor’s Fees” included in the Corporation’sfrom our definitive Proxy Statement.Statement for our 2011 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Item 15. Exhibits and Financial Statements Schedules.Schedules
Financial Statements and Schedules
   
Financial Statements Description
F-1 ReportReports of Independent Registered Public Accounting FirmFirms
   
F-2 Consolidated Balance Sheets as of December 31, 20082010 and 20072009
   
F-3 Consolidated Statements of Earnings for the years ended December 31, 2008, 20072010, 2009 and 20062008
   
F-4 Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 20072010, 2009 and 20062008
   
F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2008, 20072010, 2009 and 20062008
   
F-7 Notes to Consolidated Financial Statements — December 31, 2008, 20072010, 2009 and 20062008

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Financial Statements
Schedules Description
S-1 Schedule II — Condensed Financial Information of the Registrant
   
S-2 Schedule III — Supplementary Insurance Information

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Financial Statements SchedulesDescription
   
S-3 Schedule IV — Reinsurance
   
S-4 Schedule V — Valuation and Qualifying Accounts
Schedule I — Summary of Investments was omitted because the information is disclosed in the notes to the audited consolidated financial statements. Schedule VI — Supplemental Information Concerning Property Casualty Insurance Operations was omitted because the schedule is not applicable to the Corporation.
Exhibits
   
Exhibits Description
3(i)(a) Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3(i)(d) to TSM’s Annual Report on Form 10-K for the Year Ended December 31, 2007 (File No. 001-33865).
   
3(i)(b) Amendment to Article Tenth of the Amended and Restated Articles of Incorporation of Triple-S Management Corporation, incorporated by reference to Exhibit 3(i)(b) to TSM’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-33865).
   
3(i)(c) Articles of Incorporation of Triple-S Management Corporation, as currently in effect, incorporated by reference to Exhibit 3(i)(c) to TSM’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-33865).
   
3(ii) Amended and Restated Bylaws of Triple-S Management Corporation (incorporated herein by reference to Exhibit 3.1 to TSM’s Current Report on Form 8-K filed on October 23, 2007June 11, 2010 (File No. 001-33865)).
   
10.1 AgreementExtension to the agreement between the Puerto Rico Health Insurance Administration and Triple-S, Inc. for the provision of health insurance coverageTSS to eligible populationact as third party administrator in the North and South-West RegionsMetro-North Region until September 30, 2010 (incorporated herein by reference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Q for the Quarter Ended Septemberquarter ended June 30, 20082010 (File No. 001-33865)).
   
10.2 Extension to the agreement between the Puerto Rico Health Insurance Administration and Triple-S, Inc.TSS for the provision of health insurance coverage to eligible population in the North and South-West regionsRegions until September 30, 2010 (incorporated herein by reference to Exhibit 10.1 ofto TSM’s Quarterly Report on Form 10-Q for the Quarter Endedquarter ended June 30, 20082010 (File No. 001-33865)).
   
10.3Amendment to the Medicare Platino Contract (Medicare Wraparound) between the Puerto Rico Health Insurance Administration and TSS for the provision of wraparound coverage to health insurance dual-eligible population until December 31, 2011 (incorporated herein by reference to Exhibit 10.4 to TSM’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File No. 001-33865)).
10.4 Federal Employees Health Benefits Contract (incorporated herein by reference to Exhibit 10.5 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)).
   
10.410.5 Credit Agreement with FirstBank Puerto Rico in the amount of $41,000,000 (incorporated herein by reference to Exhibit 10.6 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)).

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10.5ExhibitsDescription
10.6 Credit Agreement with FirstBank Puerto Rico in the amount of $20,000,000 (incorporated herein by reference to Exhibit 10.7 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)).
   
10.610.7 Non-Contributory Retirement Program (incorporated herein by reference to Exhibit 10.8 to TSM’s General Form of Registration of

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ExhibitsDescription
Securities on Form 10 (File No. 001-33865)).
10.7BCBSA Licensure Documents (incorporated herein by reference to Exhibit 10.10 to TSM’s General Form of Registration of Securities on Form 10 (File No. 001-33865)).
   
10.8*10.8 Blue Shield License Agreement by and other Agreements with Blue Cross Blue Shield Association.between BCBSA and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting (incorporated herein by reference to Exhibit 10.11 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-33865)).
   
10.9 Stock PurchaseBlue Shield Controlled Affiliate License Agreement by and between Triple-S Management Corporationamong BCBSA, TSS and Great American Financial Resources, Inc. dated December 15, 2005TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting (incorporated herein by reference to Exhibit 10.910.12 to TSM’s Registration StatementAnnual Report on Form S-1 filed on November 16, 200710-K for the year ended December 31, 2009 (File No. 001-33865)).
   
10.10 ReinsuranceBlue Cross License Agreements by and between BCBSA and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting (incorporated herein by reference to Exhibit 10.13 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-33865)).
10.11Blue Cross Controlled Affiliate License Agreement between Great American Life Assurance Company of Puerto Ricoby and Seguros de Vida Triple-S, Inc. dated December 15, 2005among BCBSA, TSS and TSM, including revisions, if any, adopted by Member Plans through the November 19, 2009 meeting (incorporated herein by reference to Exhibit 10.14 to TSM’s Annual Report on Form 10-K for the year ended December 31, 20052009 (File No. 001-33865)).
   
10.1110.12 6.30% Senior Unsecured Notes Due September 2019 Note Purchase Agreement, dated September 30, 2004, between Triple-S Management Corporation, Triple-S, Inc. and various institutional accredited investors (incorporated herein by reference to Exhibit 10.15 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-33865)).
   
10.1210.13 6.60% Senior Unsecured Notes Due December 2020 Note Purchase Agreement, dated December 15, 2005, between Triple-S Management Corporation and various institutional accredited investors (incorporated herein by reference to Exhibit 10.16 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-33865)).
   
10.1310.14 6.70% Senior Unsecured Notes Due December 2021 Note Purchase Agreement, dated January 23, 2006, between Triple-S Management Corporation and various institutional accredited investors (incorporated herein by reference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2006 (File No. 001-33865)).
   
10.1410.15 Triple-S Management CorporationTSM 2007 Incentive Plan, dated October 16, 2007 (incorporated herein by reference to Exhibit C to TSM’s 2007 Proxy Statement (File No. 001-33865)).
   
10.1510.16 Software License and Maintenance Agreement between Quality Care Solutions, Inc, and Triple-S, Inc.TSS dated August 16, 2007 (incorporated herein by reference to Exhibit 10.15 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)).

Page 85

   
10.15(a)ExhibitsDescription
10.17 Addendum Number One to the Software License and Maintenance Agreement between Quality Care Solutions, Inc, and Triple-S, Inc.TSS (incorporated herein by reference to Exhibit 10.15(a) to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)).
   
10.15(b)10.18 Addendum Number Two to the Software License and Maintenance

Page 92

ExhibitsDescription
Agreement between Quality Care Solutions, Inc, and Triple-S, Inc.TSS (incorporated herein by reference to Exhibit 10.15(b) to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)).
   
10.15(c)10.19 Addendum Number Three to the Software License and Maintenance Agreement between Quality Care Solutions, Inc, and Triple-S, Inc.TSS (incorporated herein by reference to Exhibit 10.15(c) to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)).
   
10.1610.20 Work Order Agreement between Quality Care Solutions, Inc. and Triple-S, Inc.TSS (incorporated herein by reference to Exhibit 10.16 to TSM’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-33865)).
   
10.17*10.21 AgreementEmployment Contract between the Puerto Rico Health Insurance AdministrationRamón M. Ruiz Comas and Triple-S, Inc.TSM (incorporated herein by reference to Exhibit 10.24 to TSM’s Annual Report on Form 10-K for the provision of act as Third Party Administrator in the Metro-North Region.year ended December 31, 2009 (File No. 001-33865)).
   
11.1 Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share 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 II of this Annual Report on Form 10-K.
   
12.1 Statement re computation of ratios; an exhibit describing the computation of the loss ratio, expense ratio and combined ratio has been omitted as the detail necessary to determine the computation of the loss ratio, operating expense ratio and combined ratio can be clearly determined from the material contained in Part II of this Annual Report on Form 10-K.
   
21.121* List of Subsidiaries of Triple-S Management Corporation (incorporated herein by reference to Exhibit 21 to TSM’s General FormTSM.
23.1*Consent of RegistrationIndependent Registered Public Accounting Firm (PricewaterhouseCoopers LLP).
23.2*Consent of Securities on Form 10 (File No. 001-33865))Independent Registered Public Accounting Firm (KPMG LLP).
   
31.1* Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).
   
31.2* Certification of the Vice President of Finance and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).
   
32.1* Certification of the President and Chief Executive Officer required pursuant to 18 U.S. Section 1350.
   
32.2* Certification of the Vice President of Finance and Chief Financial Officer required pursuant to 18 U.S. Section 1350.
99.1*Incentive Compensation Recoupment Policy
All other exhibits for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable, and therefore have been omitted.
* Filed herein.
*Filed herein.

Page 9386

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Triple-S Management Corporation
Registrant
         
Triple-S Management Corporation
Registrant
By: /s/ Ramón M. Ruiz-Comas Date: March 18, 20099, 2011  
         
  Ramón M. Ruiz-Comas
President and Chief Executive Officer		      
         
By: /s/ Juan J. Román Date: March 18, 20099, 2011  
         
  Juan J. Román
Vice President of Finance and Chief Financial Officer
Principal Accounting Officer		 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
By: /s/ Luis A. Clavell-Rodríguez Date: March 18, 20099, 2011  
         
  Luis A. Clavell-Rodríguez MD
Director and Chairman of the Board		      
         
By: /s/ Vicente J. León-Irizarry Date: March 18, 20099, 2011  
         
  Vicente J. León-Irizarry CPA
Director and Vice-Chairman of the Board		      
         
By: /s/ Jesús R. Sánchez-Colón Date: March 18, 20099, 2011  
         
  Jesús R. Sánchez-Colón DMD
Director and Assistant Secretary of the Board		      
         
By: /s/ Adamina Soto-Martínez Date: March 18, 20099, 2011  
         
  Adamina Soto-Martínez CPA
Director		      
         
By: /s/ Ms. Carmen Ana Culpeper-Ramírez Date: March 18, 20099, 2011  
         
  Ms. Carmen Ana Culpeper-Ramírez
Director		      

Page 9487

         
By:/s/ Jorge L. Fuentes-BenejamDate:March 9, 2011
Jorge L. Fuentes-Benejam
Director		      
         
By: /s/ Valeriano Alicea-CruzAntonio F. Faría-Soto Date: March 18, 20099, 2011  
         
  Valeriano Alicea-Cruz, MDAntonio F. Faría-Soto
Director		      
         
By: /s/ Mr. José Arturo Álvarez-GallardoManuel Figueroa-Collazo Date: March 18, 20099, 2011  
         
  Mr. José Arturo Álvarez-GallardoManuel Figueroa-Collazo
Director		      
         
By: /s/ Porfirio E. Díaz-TorresJosé Hawayek-Alemañy Date: March 18, 20099, 2011  
         
  Porfirio E. Díaz-Torres, MDJosé Hawayek-Alemañy
Director		      
         
By: /s/ Mr. Antonio F. Faría-SotoJaime Morgan-Stubbe Date: March 18, 20099, 2011  
         
  Mr. Antonio F. Faría-SotoJaime Morgan-Stubbe
Director		      
         
By:/s/ Manuel Figueroa-CollazoDate:March 18, 2009
Manuel Figueroa-Collazo, PE, Ph.D.
Director
By:/s/ José Hawayek-AlemañyDate:March 18, 2009
José Hawayek-Alemañy, MD
Director
By:/s/ Jaime Morgan-StubbeDate:March 18, 2009
Jaime Morgan-Stubbe, Esq.
Director
By: /s/ Roberto Muñoz-Zayas Date: March 18, 20099, 2011  
         
  Roberto Muñoz-Zayas MD
Director		      
         
By: /s/ Juan E. Rodríguez-Díaz Date: March 18, 20099, 2011  
         
  Juan E. Rodríguez-Díaz Esq.
Director		      

Page 9588

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIESTriple-S Management Corporation
Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009, and 2006
(With Independent Auditors’ Report Thereon)2008

 

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Table of Contents
     
Page(s)
  Page 
     
ReportReports of Independent Registered Public Accounting FirmFirms
  1 
     
Consolidated Balance SheetsFinancial Statements
  2 
     
Consolidated Statements of Earnings
Balance Sheets		  3 
     
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Earnings		  4 
     
Consolidated Statements of Cash Flows
Stockholders’ Equity and Comprehensive Income		  5 
     
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements  78—63 

 

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Triple-S Management Corporation
In our opinion, the consolidated balance sheets and the related consolidated financial statements of earnings, stockholders’ equity and comprehensive income, and cash flows present fairly, in all material respects, the financial position of Triple-S Management Corporation and its subsidiaries (the Company) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules as of and for the years ended December 31, 2010 and 2009 listed in the index appearing under Item 15 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

1.1

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Juan, Puerto Rico
March 9, 2010
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216   Expires Dec. 1, 2013
Stamp 2493533 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

1.2

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Triple-S Management Corporation:
We have audited the accompanying consolidated balance sheets of Triple-S Management Corporation and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows of Triple-S Management Corporation and Subsidiaries (the Company) for each of the years in the three-year periodyear ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.audit.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial positionresults of operations and the cash flows of Triple-S Management Corporation and Subsidiaries at December 31, 2008 and 2007, andfor the results of their operations and their cash flows for each of the years in the three-year periodyear ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in note 16 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Triple-S Management Corporation and Subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2009 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
March 18, 2009

Stamp No.  23764022530990 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.

2

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation
Consolidated Balance Sheets

December 31, 20082010 and 2007
2009
(Dollardollar amounts in thousands, except per share data)
                
 2008 2007  2010 2009 
Assets
Assets
 
Investments and cash: 
Equity securities held for trading, at fair value (cost of $40,847 in 2008 and $54,757 in 2007) $32,184 67,158 
Investments and cash 
Equity securities held for trading, at fair value (cost of $43,832 in 2010 and $42,075 in 2009) $51,099 $43,909 
Securities available for sale, at fair value:  
Fixed maturities (amortized cost of $879,663 in 2008 and $816,536 in 2007) 887,684 823,629 
Equity securities (cost of $70,060 in 2008 and $66,747 in 2007) 68,629 71,050 
Fixed maturities (amortized cost of $947,957 in 2010 and $911,362 in 2009) 977,586 918,977 
Equity securities (cost of $47,750 in 2010 and $61,531 in 2009) 56,739 64,689 
Securities held to maturity, at amortized cost:  
Fixed maturities (fair value of $23,063 in 2008 and $43,849 in 2007) 21,753 43,691 
Fixed maturities (fair value of $15,424 in 2010 and $16,490 in 2009) 14,615 15,794 
Policy loans 5,451 5,481  5,887 5,940 
Cash and cash equivalents 46,095 240,153  45,021 40,376 
          
Total investments and cash 1,061,796 1,251,162  1,150,947 1,089,685 
 
Premium and other receivables, net 237,158 202,268  325,780 272,932 
Deferred policy acquisition costs and value of business acquired 126,347 117,239  146,086 139,917 
Property and equipment, net 58,448 43,415  76,745 68,803 
Net deferred tax asset 25,195 6,783 
Deferred tax asset 29,445 37,551 
Other assets 39,515 38,675  30,367 39,816 
          
Total assets $1,548,459 1,659,542  $1,759,370 $1,648,704 
          
Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ Equity
 
Claim liabilities: 
Claims processed and incomplete $156,137 186,065 
Unreported losses 150,079 149,996 
Unpaid loss-adjustment expenses 17,494 17,769 
     
Total claim liabilities 323,710 353,830 
 
Claim liabilities 360,210 360,446 
Liability for future policy benefits 207,545 194,131  236,523 222,619 
Unearned premiums 110,141 132,599  98,341 108,342 
Policyholder deposits 48,684 45,959  49,936 47,563 
Liability to Federal Employees’ Health Benefits Program 11,157 21,338  15,018 13,002 
Accounts payable and accrued liabilities 148,713 228,980  136,567 139,161 
Borrowings 169,307 170,946 
Deferred tax liability 12,655 11,088 
Short term borrowings 15,575 — 
Long term borrowings 166,027 167,667 
Liability for pension benefits 44,103 29,221  51,246 41,044 
          
Total liabilities 1,063,360 1,177,004  1,142,098 1,110,932 
          
  
Stockholders’ equity: 
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 9,042,809 and 16,042,809 at December 31, 2008 and 2007, respectively 9,043 16,043 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 22,104,989 and 16,266,554 shares at December 31, 2008 and 2007, respectively 22,105 16,266 
Commitments and contingencies 
 
Stockholders’ equity 
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 9,042,809 at December 31, 2010 and 2009 9,043 9,043 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 19,772,614 and 20,110,391 shares at December 31, 2010 and 2009, respectively 19,773 20,110 
Additional paid-in capital 179,504 188,935  155,299 159,303 
Retained earnings 292,112 267,336  427,693 360,892 
Accumulated other comprehensive loss, net  (17,665)  (6,042)
Accumulated other comprehensive income (loss), net 5,464  (11,576)
          
 485,099 482,538 
 
Commitments and contingencies 
Total stockholders’ equity 617,272 537,772 
          
Total liabilities and stockholders’ equity $1,548,459 1,659,542  $1,759,370 $1,648,704 
          
SeeThe accompanying notes to consolidated financial statements.

2

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statementsare an integral part of Earnings
Years ended December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
             
  2008  2007  2006 
Revenues:            
Premiums earned, net $1,695,457   1,483,548   1,511,626 
Administrative service fees  19,187   14,018   14,089 
Net investment income  56,253   47,194   42,657 
          
Total operating revenues  1,770,897   1,544,760   1,568,372 
             
Net realized investment (losses) gains  (13,940)  5,931   837 
Net unrealized investment (loss) gain on trading securities  (21,064)  (4,116)  7,699 
Other income (loss), net  (2,467)  3,217   2,323 
          
Total revenues  1,733,426   1,549,792   1,579,231 
          
             
Benefits and expenses:            
Claims incurred  1,434,914   1,223,775   1,258,981 
Operating expenses  251,887   237,533   236,065 
          
             
Total operating costs  1,686,801   1,461,308   1,495,046 
Interest expense  14,681   15,839   16,626 
          
Total benefits and expenses  1,701,482   1,477,147   1,511,672 
          
Income before taxes  31,944   72,645   67,559 
          
Income tax expense (benefit):            
Current  11,542   15,906   15,407 
Deferred  (4,388)  (1,779)  (2,381)
          
Total income taxes  7,154   14,127   13,026 
          
Net income $24,790   58,518   54,533 
          
Basic net income per share $0.77   2.15   2.04 
Diluted net income per share  0.77   2.15   2.04 
See accompanying notes to consolidatedthese financial statements.

3

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation
Consolidated Statements of Stockholders’ EquityEarnings
and Comprehensive Income
Years endedEnded December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
                         
               Accumulated    
  Class A  Class B  Additional      other  Total 
  common  common  paid-in  Retained  comprehensive  stockholders’ 
  stock  stock  capital  earnings  income (loss)  equity 
Balance, December 31, 2005 $26,712   —   124,052   162,964   (5,025)  308,703 
 
Dividends declared  —   —   —   (6,231)  —   (6,231)
Adjustment to initially apply SFAS No. 158, net of tax  —   —   —   —   (16,081)  (16,081)
Other  21   —   (21)  —   —   — 
Comprehensive income:                        
Net income  —   —   —   54,533   —   54,533 
Net unrealized change in fair value of available for sale securities  —   —   —   —   (3,212)  (3,212)
Net change in minimum pension liability  —   —   —   —   4,952   4,952 
Net change in fair value of cash flow hedges  —   —   —   —   (65)  (65)
                        
Total comprehensive income                      56,208 
                   
Balance, December 31, 2006  26,733   —   124,031   211,266   (19,431)  342,599 
Dividends declared  —   —   —   (2,448)  —   (2,448)
Sale of stock in public offering  (10,813)  16,100   64,992   —   —   70,279 
Grant of restricted Class B common stock  —   166   —   —   —   166 
Share-based compensation          34           34 
Other  123   —   (122)  —   —   1 
Comprehensive income:                        
Net income  —   —   —   58,518   —   58,518 
Net unrealized change in fair value of available for sale securities  —   —   —   —   9,549   9,549 
Defined benefit pension plan:                        
Prior service cost, net  —   —   —   —   3,935   3,935 
Actuarial loss  —   —   —   —   155   155 
Net change in fair value of cash flow hedges  —   —   —   —   (250)  (250)
                        
Total comprehensive income                      71,907 
                   
Balance, December 31, 2007  16,043   16,266   188,935   267,336   (6,042)  482,538 
                         
Conversion of Class A common stock to Class B common stock  (7,000)  7,000   —   —   —   — 
Share-based compensation  —   —   3,268   —   —   3,268 
Grant of restricted Class B common stock  —   20   —   —   —   20 
Repurchase and retirement of common stock  —   (1,181)  (12,699)  —   —   (13,880)
Other  —   —   —   (14)  —   (14)
Comprehensive income:                        
Net income  —   —   —   24,790   —   24,790 
Net unrealized change in fair value of available for sale securities  —   —   —   —   (3,952)  (3,952)
Defined benefit pension plan:                        
Prior service credit, net  —   —   —   —   (266)  (266)
Actuarial loss  —   —   —   —   (7,349)  (7,349)
Net change in fair value of cash flow hedges  —   —   —   —   (56)  (56)
                        
Total comprehensive income                      13,167 
                   
Balance, December 31, 2008 $9,043   22,105   179,504   292,112   (17,665)  485,099 
                   
             
  2010  2009  2008 
Revenues
            
Premiums earned, net $1,901,100  $1,869,084  $1,692,344 
Administrative service fees  39,546   48,643   19,187 
Net investment income  49,145   52,136   56,253 
          
Total operating revenues  1,989,791   1,969,863   1,767,784 
          
Net realized investment gains (losses):            
Total other-than-temporary impairment losses on securities  (2,997)  (7,118)  (16,494)
Net realized gains, excluding other-than-temporary impairment losses on securities  5,529   7,732   2,554 
          
Total net realized investment gains (losses)  2,532   614   (13,940)
          
Net unrealized investment gains (losses) on trading securities  5,433   10,497   (21,064)
Other income (expense), net  889   1,237   (2,467)
          
Total revenues  1,998,645   1,982,211   1,730,313 
          
 
Benefits and expenses
            
Claims incurred  1,596,789   1,605,872   1,431,801 
Operating expenses  304,995   279,418   251,887 
          
Total operating costs  1,901,784   1,885,290   1,683,688 
Interest expense  12,658   13,270   14,681 
          
Total benefits and expenses  1,914,442   1,898,560   1,698,369 
          
Income before taxes  84,203   83,651   31,944 
          
Income tax expense (benefit)            
Current  14,348   19,197   11,542 
Deferred  3,054   (4,326)  (4,388)
          
Total income taxes  17,402   14,871   7,154 
          
Net income $66,801  $68,780  $24,790 
          
Basic net income per share $2.30  $2.33  $0.77 
Diluted net income per share $2.28  $2.33  $0.77 
SeeThe accompanying notes to consolidatedare an integral part of these financial statements.

4

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation
Consolidated Statements of Cash Flows
Earnings
Years endedEnded December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
             
  2008  2007  2006 
Cash flows from operating activities:            
Net income $24,790   58,518   54,533 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  7,367   7,562   6,443 
Net amortization of investments  953   354   511 
Provision for doubtful receivables  (1,180)  (2,305)  5,125 
Deferred tax benefit  (12,725)  (1,779)  (2,381)
Net loss (gain) on sale of securities  13,940   (5,931)  (837)
Net unrealized (gain) loss on trading securities  21,063   4,116   (7,699)
Share-based compensation  3,268   200   — 
Proceeds from trading securities sold or matured:            
Equity securities  24,640   43,614   27,919 
Acquisition of securities in trading portfolio:            
Equity securities  (10,737)  (23,921)  (22,409)
Gain on sale of property and equipment  11   28   22 
(Increase) decrease in assets:            
Premiums receivable  (39,788)  (8,458)  (27,951)
Agent balances  (5,617)  (4,061)  395 
Accrued interest receivable  (3,439)  (309)  588 
Other receivables  58   (3,637)  (4,521)
Funds withheld reinsurance receivable  —   —   118,635 
Reinsurance recoverable on paid losses  16,576   (17,872)  (6,147)
Deferred policy acquisition costs and value of business acquired  (9,108)  (5,822)  (7,026)
Other assets  4,785   (3,179)  (4,031)
Increase (decrease) in liabilities:            
Claims processed and incomplete  (29,928)  38,854   2,803 
Unreported losses  83   (739)  3,342 
Loss-adjustment expenses  (275)  1,033   1,791 
Liability for future policy benefits  13,414   13,711   14,022 
Liability for future policy benefits related to funds withheld reinsurance  —   —   (118,635)
Unearned premiums  (22,458)  19,017   15,579 
Policyholder deposits  1,902   1,800   1,810 
Liability to FEHBP  (10,181)  7,775   9,207 
Accounts payable and accrued liabilities  15,322   7,359   1,903 
Income tax payable  (5,718)  (10,034)  12,595 
          
             
Net cash (used in) provided by operating activities  (2,982)  115,894   75,586 
          
                         
                  Accumulated    
  Class A  Class B  Additional      Other  Total 
  Common  Common  Paid-in  Retained  Comprehensive  Stockholders’ 
  Stock  Stock  Capital  Earnings  Income (Loss)  Equity 
Balance, December 31, 2007
 $16,043  $16,266  $188,935  $267,336  $(6,042) $482,538 
Conversion of Class A common stock to Class B common stock  (7,000)  7,000   —   —   —   — 
Share-based compensation  —   —   3,268   —   —   3,268 
Grant of restricted Class B common stock  —   20   —   —   —   20 
Repurchase and retirement of common stock  —   (1,181)  (12,699)  —   —   (13,880)
Other  —   —   —   (14)  —   (14)
Comprehensive income                        
Net income  —   —   —   24,790   —   24,790 
Net unrealized change in fair value of available for sale securities  —   —   —   —   (3,952)  (3,952)
Defined benefit pension plan                        
Prior service credit, net  —   —   —   —   (266)  (266)
Actuarial loss  —   —   —   —   (7,349)  (7,349)
Net change in fair value of cash flow hedges  —   —   —   —   (56)  (56)
                        
Total comprehensive income                      13,167 
                   
Balance, December 31, 2008
  9,043   22,105   179,504   292,112   (17,665)  485,099 
Share-based compensation  —   —   3,897   —   —   3,897 
Grant of restricted Class B common stock  —   27   —   —   —   27 
Repurchase and retirement of common stock  —   (2,022)  (24,098)  —   —   (26,120)
Comprehensive income                        
Net income  —   —   —   68,780   —   68,780 
Net unrealized change in fair value of available for sale securities  —   —   —   —   3,539   3,539 
Defined benefit pension plan                        
Prior service credit, net  —   —   —   —   (273)  (273)
Actuarial gain  —   —   —   —   2,823   2,823 
                        
Total comprehensive income                      74,869 
                   
Balance, December 31, 2009
  9,043   20,110   159,303   360,892   (11,576)  537,772 
Share-based compensation  —   —   1,878   —   —   1,878 
Grant of restricted Class B common stock  —   16   —   —   —   16 
Repurchase and retirement of common stock  —   (353)  (5,882)  —   —   (6,235)
Comprehensive income                        
Net income  —   —   —   66,801   —   66,801 
Net unrealized change in fair value of available for sale securities  —   —   —   —   23,602   23,602 
Defined benefit pension plan                        
Prior service credit, net  —   —   —   —   (265)  (265)
Actuarial loss  —   —   —   —   (6,297)  (6,297)
                        
Total comprehensive income                      83,841 
                   
Balance, December 31, 2010
 $9,043  $19,773  $155,299  $427,693  $5,464  $617,272 
                   
The accompanying notes are an integral part of these financial statements

5

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation
Consolidated Statements of Cash Flows
Earnings
Years endedEnded December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
             
  2008  2007  2006 
             
Cash flows from investing activities:            
Proceeds from investments sold or matured:            
Securities available for sale:            
Fixed maturities sold $228,436   299,561   51,519 
Fixed maturities matured  91,732   41,248   32,826 
Equity securities  4,450   1,000   1,209 
Securities held to maturity:            
Fixed maturities matured  22,875   13,246   492 
Acquisition of investments:            
Securities available for sale:            
Fixed maturities  (505,896)  (327,409)  (81,496)
Equity securities  (19,636)  (18,379)  (11,620)
Securities held to maturity:            
Fixed maturities  (554)  (8,244)  (2,197)
Acquisition of business, net of $10,403 of cash acquired  —   —   (27,793)
Net repayment (disbursements) for policy loans  30   (287)  (415)
Capital expenditures  (22,411)  (9,390)  (11,871)
          
Net cash used in investing activities  (200,974)  (8,654)  (49,346)
          
             
Cash flows from financing activities:            
Net proceeds from initial public offering  —   70,279   — 
Repurchase and retirement of common stock  (7,645)  —   — 
Change in outstanding checks in excess of bank balances  18,353   (3,076)  (8,224)
Change in short-term borrowings  —   —   (1,740)
Repayments of long-term borrowings  (1,639)  (12,141)  (2,503)
Proceeds from long-term borrowings  —   —   35,000 
Dividends  —   (2,448)  (6,231)
Proceeds from annuity contracts  8,018   6,150   6,008 
Surrenders of annuity contracts  (7,195)  (7,416)  (16,036)
Other  6   1   — 
          
Net cash provided by financing activities  9,898   51,349   6,274 
          
Net (decrease) increase in cash and cash equivalents  (194,058)  158,589   32,514 
Cash and cash equivalents, beginning of year  240,153   81,564   49,050 
          
Cash and cash equivalents, end of year $46,095   240,153   81,564 
          
             
  2010  2009  2008 
Cash flows from operating activities
            
Net income $66,801  $68,780  $24,790 
Adjustments to reconcile net income to net cash provided by (used in) operating activities            
Depreciation and amortization  15,500   9,643   7,367 
Net amortization of investments  4,511   744   952 
Provision (reversal of provision) for doubtful receivables  (5,200)  10,489   (1,180)
Deferred tax expense (benefit)  3,054   (4,326)  (4,388)
Net realized investment (gains) losses  (2,532)  (614)  13,940 
Net unrealized (gains) losses on trading securities  (5,433)  (10,497)  21,064 
Share-based compensation  1,894   3,924   3,268 
Proceeds from trading securities sold            
Equity securities  4,871   4,240   24,640 
Acquisition of securities in trading portfolio            
Equity securities  (6,506)  (6,132)  (10,737)
Gain on sale of property and equipment (Increase) decrease in assets  6   —   11 
Premium and other receivables, net  (47,648)  (46,263)  (32,210)
Deferred policy acquisition costs and value of business acquired  (6,169)  (13,570)  (9,108)
Other deferred taxes  6,658   900   (8,337)
Other assets  5,223   (1,593)  (933)
Increase (decrease) in liabilities            
Claim liabilities  (236)  36,736   (30,120)
Liability for future policy benefits  13,904   15,074   13,414 
Unearned premiums  (10,001)  (1,799)  (22,458)
Policyholder deposits  733   1,665   1,902 
Liability to FEHBP  2,016   1,845   (10,181)
Accounts payable and accrued liabilities  (3,790)  3,339   15,322 
          
Net cash provided by (used in) operating activities  37,656   72,585   (2,982)
          
SeeThe accompanying notes to consolidatedare an integral part of these financial statements.statements

6

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Triple-S Management Corporation
Consolidated Financial Statements
of Earnings
Years Ended December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
             
  2010  2009  2008 
Cash flows from investing activities
            
Proceeds from investments sold or matured            
Securities available for sale            
Fixed maturities sold $121,968  $241,368  $228,436 
Fixed maturities matured  175,483   189,144   91,732 
Equity securities sold  41,802   9,877   4,450 
Securities held to maturity            
Fixed maturities matured  2,587   7,819   22,875 
Acquisition of investments            
Securities available for sale            
Fixed maturities  (337,569)  (459,705)  (505,896)
Equity securities  (26,957)  (3,684)  (19,636)
Securities held to maturity            
Fixed maturities  (1,050)  (1,502)  (554)
Net (disbursements) repayment for policy loans  53   (489)  30 
Capital expenditures  (19,222)  (18,706)  (22,411)
          
Net cash used in investing activities  (42,905)  (35,878)  (200,974)
          
Cash flows from financing activities
            
Repurchase and retirement of common stock  (6,235)  (32,355)  (7,645)
Change in outstanding checks in excess of bank balances  281   (5,645)  18,353 
Repayments of long-term borrowings  (26,367)  (1,640)  (1,639)
Net proceeds from short-term borrowings  15,575   —   — 
Proceeds from long-term borrowings  25,000   —   — 
Proceeds from annuity contracts  10,691   4,307   8,018 
Surrenders of annuity contracts  (9,051)  (7,093)  (7,195)
Other  —   —   6 
          
Net cash provided by (used in) financing activities  9,894   (42,426)  9,898 
          
Net increase (decrease) in cash and cash equivalents  4,645   (5,719)  (194,058)
Cash and cash equivalents
            
Beginning of year  40,376   46,095   240,153 
          
End of year $45,021  $40,376  $46,095 
          
The accompanying notes are an integral part of these financial statements

7

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
(1)1. Nature of Business
  Triple-S Management Corporation (the Company or TSM) was incorporated under the laws of the Commonwealth of Puerto Rico on January 17, 1997 to engage, among other things, as the holding company of entities primarily involved in the insurance industry.
  The Company has the following wholly owned subsidiaries that are subject to the regulations of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance): (1) Triple-S Salud, Inc. (TSI)(TSS) a managed care organization that provides health benefits services to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations located mainly in Puerto Rico;organizations; (2) Triple-S Vida, Inc. (TSV), which is engaged in the underwriting of life and accident and health insurance policies and the administration of annuity contracts; and (3) Seguros Triple-S Propiedad, Inc. (STS)(TSP), which is engaged in the underwriting of property and casualty insurance policies. Effective February 16, 2009, TSI and STS change their name to Triple-S Salud, Inc. and Triple-S Propiedad, Inc., respectively. The Company and TSITSS are members of the Blue Cross and Blue Shield Association (BCBSA).
Effective January 31, 2006, the Company completed the acquisition of 100% of the common stock of Great American Life Assurance Company of Puerto Rico (GA Life) (now Triple-S Vida, Inc.) and, effective June 30, 2006, the Company merged the operations of its former life and accident and health insurance subsidiary, Seguros de Vida Triple-S, Inc. (SVTS), into GA Life. The results of operations and financial position of GA Life are included in the Company’s consolidated financial statements for the period following January 31, 2006. Prior to completing the acquisition of GA Life, the operations of SVTS were the sole component of the Company’s life insurance segment. Effective November 1, 2007, GA Life changed its name to Triple-S Vida, Inc.
  The Company also has two other wholly owned subsidiaries, Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TC). ISI is mainly engaged in providing data processing services to the Company and its subsidiaries. TC is mainly engaged as a third-party administrator for TSITSS in the administration of the Commonwealth of Puerto Rico Health Care Reform’s (the Reform)Insurance Plan (Similar to Medicaid)(Medicaid) business. Also, TC provides healthcare advisory services to TSITSS and other health insurance-related services to the health insurance industry.
 The contract with the Commonwealth of Puerto Rico (the government of Puerto Rico) that allowed us to provide services to Medicaid enrollees, expired by its own terms on September 30, 2010, thus effective October 1st, 2010 we no longer provide services to these enrollees. As a result, TC will cease to exist during 2011.
  A substantial majority of the Company’s business activity is with insurers located throughout Puerto Rico, and as such, the Company is subject to the risks associated with the Puerto Rico economy.
(2)2. Significant Accounting Policies
  The following are the significant accounting policies followed by the Company and its subsidiaries:
 (a) Basis of Presentation
  The accompanying consolidated financial statements have been prepared in conformity with U.S.accounting principles generally accepted accounting principlesin the United States of America (GAAP).
7(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
  The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
(b) Use of Estimates
  The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The most significant items on the consolidated balance sheets that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the near future are the assessment of other-than-temporary

8

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
impairments, allowance for doubtful receivables, deferred policy acquisition costs and value of business acquired, claim liabilities, the liability for future policy benefits, and liability for pension benefits. As additional information becomes available (or actual amounts are determinable), the recorded estimates will beare revised and reflected in operating results of the period they are determined. Although some variability is inherent in these estimates, the Company believes the amounts provided are adequate.
 
(c) Reclassifications
  Certain amounts in the 20072009 and 20062008 consolidated financial statements were reclassified to conform to the 20082010 presentation.
 
(d) Cash Equivalents
  The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents of $2,564$626 and $192,534$920 at December 31, 20082010 and 2007,2009, respectively, consist principally of obligations of government-sponsored enterprises and certificates of deposit with an initial term of less than three months.
 
(e) Investments
  Investment in securities at December 31, 20082010 and 20072009 consists mainly of obligations of government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, obligations of the Commonwealth of Puerto Rico and its instrumentalities, municipal securities, obligations of states of the United States and political subdivisions of the states, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, and equity securities. The Company classifies its debt and equity securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Securities classified as held to maturity are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held to maturity are classified as available for sale.
  Trading and available-for-sale securities are recorded at fair value. The fair values of debt securities (both available for sale and held to maturity investments) and equity securities are based on quoted
8(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
market prices at the reporting date for those or similar investments.investments at the reporting date. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts.discounts, respectively. Unrealized holding gains and losses on trading securities are included in operations.earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are included in earnings and are determined on a specific-identification basis.
  Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in operationsearnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of other comprehensive income. The unrealized holding gains or losses included in the separate component of other comprehensive income for securities transferred from available for sale to held to maturity, are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.
 If a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed

9

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
 maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that such securities will not have to be sold, but the Company expects not to fully recover the amortized cost basis, the credit component of the other-than temporary impairment is recognized in other-than-temporary impairment losses recognized in earnings in the Company’s consolidated statements of earnings and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income. Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition.
The unrealized gains or losses on the Company’s equity securities classified as available-for-sale are included in accumulated other comprehensive income as a separate component of stockholders’ equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such equity securities until their full cost can be recovered, in which case such equity securities are written down to fair value and the loss is charged to other-than-temporary impairment losses recognized in earnings.
  A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporaryother-than-temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary,other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, market conditions, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
  Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
  The Company regularly invests in mortgaged-backed securities and other securities subject to prepayment and call risk. Significant changes in prevailing interest rates may adversely affect the timing and amount of cash flows on such securities. In addition, the amortization of market premium and accretion of market discount for mortgaged-backed securities is based on historical experience and estimates of future payment speeds on the underlying mortgage loans. Actual prepayment speeds will differ from original estimates and may result in material adjustments to amortization or accretion recorded in future periods.

10

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
(f) Revenue Recognition
 (i)a. Managed Care
 
   Subscriber premiums on the managed care business are billed in advance of their respective coverage period and the related revenue is recorded as earned during the coverage period.
9(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
Managed care premiums are billed in the month prior to the effective date of the policy with a grace period of up to two months. If the insured fails to pay, the policy can be canceled at the end of the grace period at the option of the Company. Managed care premiums are reported as earned when due.
 
   Premiums for the Medicare Advantage (MA) business are based on a bid contract with the Centers for Medicare and Medicaid Services (CMS) and billed in advance of the coverage period. MA contracts provide for a risk factor to adjust premiums paid for members that represent a higher or lower risk to the Company. Retroactive rate adjustments are made periodically based on the aggregate health status and risk scores of the Company’s MA membership. These risk adjustments are evaluated quarterly based on actuarial estimates. Actual results could differ from these estimates. As additional information becomes available, the recorded estimate will beis revised and reflected in operating results.
 
   TSITSS offers prescription drug coverage to Medicare eligible beneficiaries as part of its MA plans (MA-PD) and on a stand-alone basis (stand-alone PDP). Premiums are based on a bid contract with CMS that considers the estimated costs of providing prescription drug benefits to enrolled participants. MA-PD and stand-alone PDP premiums are subject to adjustment, positive or negative, based upon the application of risk corridors that compare the estimated prescription drug costs included in the bids to CMS to actual prescription drug costs. Variances exceeding certain thresholds may result in CMS making additional payments to the TSITSS or in TSITSS refunding CMS a portion of the premiums collected. TSITSS estimates and records adjustments to earned premiums related to estimated risk corridor payments based upon actual prescription drug costs for each reporting period as if the annual contract were to end at the end of each reporting period.
 
   Administrative service fees include revenue from certain groups which havehas managed care contracts that provide for the group to be at risk for all or a portion of their claims experience. For these groups, the Company is not at risk and only handles the administration of the insurance coverage for an administrative service fee. The Company pays claims under self-funded arrangements from its own funds, and subsequently receives reimbursement from these groups. Claims paid under self-funded arrangements are excluded from the claims incurred in the accompanying consolidated financial statements. Administrative service fees under the self-funded arrangements are recognized based on the group’s membership or incurred claims for the period multiplied by an administrative fee rate plus other fees. In addition, some of these self-funded groups purchase aggregate and/or specific stop-loss coverage. In exchange for a premium, the group’s aggregate liability or the group’s liability on any one episode of care is capped for the year. Premiums for the stop-loss coverage are actuarially determined based on experience and other factors and are recorded as earned over the period of the contract in proportion to the coverage provided. This fully insured portion of premiums is included within the premiums earned, net in the accompanying consolidated statements of earnings.
10(Continued) The Medicaid contract with the Government of Puerto Rico contained a savings-sharing provision whereby the Government of Puerto Rico shares with TSS a portion of the medical cost savings obtained with the administration of the region served on an administrative service basis. Any savings-sharing amount is recorded when

11

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
   The Company also handlesearned as administrative service fees in the administrationaccompanying consolidated statements of the insurance coverage for the Reform Metro-North region for an administrative fee per member. The Company is not at risk and pays claims from such region from the Commonwealth of Puerto Rico funds.earnings.
 (ii)b. Life and Accident and Health Insurance
 
   Premiums on life insurance policies are billed in advance of their respective coverage period and the related revenue is recorded as earned when due. Premiums on accident and health and other short-term policies are recognized as earned primarily on a pro rata basis over the contract period. Premiums on credit life policies are recognized as earned in proportion to the amounts of insurance in-force. Revenues from universal life and interest sensitive policies represent amounts assessed against policyholders, including mortality charges, surrender charges actually paid, and earned policy service fees. The revenues for limited payment contracts are recognized over the period that benefits are provided rather than on collection of premiums.
 (iii)c. Property and Casualty Insurance
 
   Premiums on property and casualty contracts are billed in advance of their respective coverage period and they are recognized as earned on a pro rata basis over the policy term. The portion of premiums related to the period prior to the end of coverage is recorded in the consolidated balance sheets as unearned premiums and is transferred to premium revenue as earned.
 (g) Allowance for Doubtful Receivables
 
  The allowance for doubtful receivables is based on management’s evaluation of the aging of accounts and such other factors, which deserve current recognition. Actual results could differ from these estimates. Receivables are charged against their respective allowance accounts when deemed to be uncollectible.
 
 (h) Deferred Policy Acquisition Costs and Value of Business Acquired
 
  Certain direct costs for acquiring life and accident and health, and property and casualty insurance business are deferred by the Company. AcquisitionSubstantially all acquisition costs related to the managed care business are expensed as incurred.
  In the life and accident and health business deferred acquisition costs consist of commissions and certain expenses related to the production of life, annuity, accident and health, and credit business. In the event that future premiums, in combination with policyholder reserves and anticipated investment income, could not provide for all future maintenance and settlement expenses, the amount of deferred policy acquisition costs would be reduced to provide for such amount. The related amortization is provided over the anticipated premium-paying period of the related policies in proportion to the ratio of annual premium revenue to expected total premium revenue to be received over the life of the policies. Interest is considered in the amortization of deferred policy acquisition cost and value of business acquired. For these contracts accounted for under SFAS No. 60,Accounting and Reporting by Insurance Enterprises, interest is considered at a level rate set at the time of issue
11(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
of each contract, 5.4% for 2010 and 2009, and, in the case of the value of business acquired, at the time of any acquisition. For SFAS No. 60 contract interest is currently set as 5.4%. Forcertain other long-duration contracts, accounted for under SFAS No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, deferred amounts are amortized at historical and forecasted credited interest rates, in accordance with the requirements set forth in that statement.rates. Expected premium revenue is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated net realizable value. In determining estimated net realizable value, the computations give effect to the premiums to be earned, related investment income, losses and loss-adjustment expenses, and certain other

12

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
costs expected to be incurred as the premium is earned. Costs deferred on universal life and interest sensitive products are amortized as a level percentage of the present value of anticipated gross profits from investment yields, mortality, expenses and surrender charges. Estimates used are based on the Company’s experience as adjusted to provide for possible adverse deviations. These estimates are periodically reviewed and compared with actual experience. When it is determined that future expected experience differs significantly from that assumed, the estimates are revised for current and future issues.
  The value assigned to the insurance in-force of TSV at the date of the acquisition is amortized using methods similar to those used to amortize the deferred policy acquisition costs of the life and accident and health business.
  In the property and casualty business, acquisition costs consist of commissions incurred during the production of business and are deferred and amortized ratably over the terms of the policies.
 (i)Property and Equipment
  Property and equipment are stated at cost. Maintenance and repairs are expensed as incurred. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Costs of computer equipment, programs, systems, installations, and enhancements are capitalized and amortized straight-line over their estimated useful lives. The following is a summary of the estimated useful lives of the Company’s property and equipment:
   
  Estimated
Asset categoryCategory useful lifeUseful Life
Buildings
Building improvements
Leasehold improvements

Office furniture
Computer software
Computer equipment, equipment, and automobiles		 20 to 50 years
Building improvements
3 to 5 years
Leasehold improvements
Shorter of estimated useful
life or lease term
Office furniture
5 years
Computer software
3 to 10 years
Computer equipment, equipment,
and automobiles
3 years
Software Development Costs
  
12(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(j)Software Development Costs
In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1,Accounting related to software developed or obtained for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidance on accounting for such costs. SOP 98-1 requires computer software costsinternal use that areis incurred in the preliminary project stage to beare expensed as incurred. Once the capitalization criteria of SOP 98-1 have beenare met, directly attributable development costs should be capitalized. It also provides that upgradeare capitalized and maintenance costs should be expensed. The Company treatment of such costs is consistent with SOP 98-1, with the costs capitalized being amortized over the expected useful life of the software. Upgrade and maintenance costs are expensed as incurred. During the year ended December 31, 20082010 and 2009 the Company capitalized approximately $16,408$11,647 and $10,993 associated with the implementation of new software. No software development costs were capitalized during the year ended December 31, 2007.
(k)Long-Lived Assets
  Long-Lived Assets
 In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-lived Assets, long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be

13

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
disposed of would be separately presented in the balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheets.
  Goodwill and intangible assets that have indefinite useful lives are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. For goodwill, the impairment determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141,Business Combinations.allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
(l)Claim Liabilities
  Claim Liabilities
 Claims processed and incomplete and unreported lossesClaim liabilities for managed care policies represent the estimated amounts to be paid to providers based on experience and accumulated statistical data. Loss-adjustment expenses related to such claims are currently accrued based on estimated future expenses necessary to process such claims.
  
13(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
TSITSS contracts with various independent practice associations (IPAs) for certain medical care services provided to some policies subscribers. The IPAs are compensated on a capitation basis. In the ReformMedicaid business and one of the MA policies, TSITSS retains a portion of the capitation payments to provide for incurred but not reported losses. At December 31, 20082010 and 2007,2009, total withholdings and capitation payable amounted to $24,462$22,428 and $29,119,$25,568, respectively, which are recorded as part of the liability for claims processed and incompleteclaim liabilities in the accompanying consolidated balance sheets.
  UnpaidClaim liabilities include unpaid claims and loss-adjustment expenses of the life and accident and health business are based on a case-basis estimatesestimate for reported claims, and on estimates, based on experience, for unreported claims and loss-adjustment expenses. The liability for policy and contract claims and claims expenses has been established to cover the estimated net cost of insured claims.
  TheAlso included within the claim liabilities is the liability for losses and loss-adjustment expenses for the property and casualty business which represents individual case estimates for reported claims and estimates for unreported losses, net of any salvage and subrogation based on past experience modified for current trends and estimates of expenses for investigating and settling claims.
  The aboveClaim liabilities are necessarily based on estimates and, while management believes that the amounts are adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in the consolidated statements of earnings in the period determined.
 (m)Future Policy Benefits
  The liability for future policy benefits has been computed using the level-premium method based on estimated future investment yield, mortality, morbidity and withdrawal experience. The interest rate assumption isranges between 5.0% and 5.40% for all years in issue. Mortality has been calculated

14

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
principally on select and ultimate tables in common usage in the industry. Withdrawals have been determined principally based on industry tables, modified by Company’s experience.
 (n)Policyholder Deposits
  Amounts received for annuity contracts are considered deposits and recorded as a liability.liability along with the accrued interest and reduced for charges and withdrawals. Interest incurred on such deposits, which amounted to $1,902, $1,800,$1,688, $1,665, and $1,810,$1,902, during the years ended December 31, 2008, 2007,2010, 2009, and 2006,2008, respectively, is recorded as interest expense in the accompanying consolidated statements of earnings.
 (o)Reinsurance
  In the normal course of business, the insurance-related subsidiaries seek to limit their exposure that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.
  Reinsurance premiums, commissions, and expense reimbursements, related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and
14(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
the terms of the reinsurance contracts. Accordingly, reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of insurance protection provided.
  Premiums ceded and recoveries of losses and loss-adjustment expenses have been reported as a reduction of premiums earned and losses and loss-adjustment expenses incurred, respectively. Commission and expense allowances received by STSTSP in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy.
 (p)Derivative Instruments and Hedging Activities
  The Company accounts forrecognizes all derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities in accordance with the provisions of Statement of SFAS No. 133,Accounting for Derivative Instruments and Certain Hedging Activities, as amended, which requires entities to recognize all derivative instruments, whether or not designated in hedging relationships, as either assets or liabilities in the balance sheet at their respective fair values. Changes in the fair value of derivative instruments are recorded in earnings, unless specific hedge accounting criteria are met in which case the change in fair value of the instrument is recorded within other comprehensive income.income for cash flow hedges.
  On the date the derivative contract designated as a hedging instrument is entered into, the Company designates the instrument as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair-value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge), a foreign currency fair-value or cash-flow hedge (foreign-currency hedge), or a hedge of a net investment in a foreign operation. For all hedging relationships the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that are designated as fair-value, cash-flow, or foreign-currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in

15

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
offsetting changes in fair values or cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income to the extent that the derivative is effective as hedge, until earnings are affected by the variability in cash flows of the designated hedged item. Changes in the fair value of derivatives that are highly effective as hedges and that are designated and qualify as foreign-currency hedges are recorded in either earnings or other comprehensive income, depending on whether the hedge transaction is a fair-value
15(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
hedge or a cash-flow hedge. However, if a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within other comprehensive income. The ineffective portion of the change in fair value of a derivative instrument that qualifies as either a fair-value hedge or a cash-flow hedge is reported in earnings. Changes in the fair value of derivative trading instruments are reported in current period earnings.
  The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is de-designated as a hedging instrument, because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
  In all situations in which hedge accounting is discontinued and the derivative is retained, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Company no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Company removes any asset or liability that was recorded pursuant to recognition of the firm commitment from the balance sheet, and recognizes any gain or loss in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting if not already done and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income.
 (q)Income Taxes
  Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of earnings in the period that includes the enactment date. Beginning with the adoption of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48) as of January 1, 2007, theThe Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained.
16(Continued)

16

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
  The Company records any interest and penalties related to unrecognized tax benefits within the operating expenses in ourthe consolidated statement of earnings.
 (r)Insurance-Related Assessments
  The Company accountsrecords a liability for insurance-related assessments in accordance with the provisions of SOP No. 97-3,Accounting by Insurance and Other Enterprises for Insurance-related Assessments. This SOP prescribes liability recognition when the following three conditions are met: (1) the assessment has been imposed or the information available prior to the issuance of the financial statements indicates it is probable that an assessment will be imposed; (2) the event obligating an entity to pay (underlying cause of) an imposed or probable assessment has occurred on or before the date of the financial statements; and (3) the amount of the assessment can be reasonably estimated. Also, this SOP provides for the recognition of anA related asset is recognized when the paid or accrued assessment is recoverable through either premium taxes or policy surcharges.
 (s)Commitments and Contingencies
  Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related liability.
(t)Share-Based Compensation
  Share-Based Compensation
 The Company accounts for share-basedShare-based compensation in accordance withis measured at the provisionsfair value of SFAS No. 123 (R),Share-Based Payment. This statement requires that all share-based compensation bethe award and recognized as an expense in the financial statements and that such cost be measured atover the fair value of the award.vesting period. The Company recognizes compensation expense for its stock options based on estimated grant date fair value using the Black-Scholes option-pricing model.
(u)Earnings Per Share
  Earnings Per Share
 The Company calculates and presents earnings per share in accordance with SFAS No. 128,Earnings per Share. Basic earnings per share excludes dilution and is computed by dividing net income available to all classes of common stockholders by the weighted average number of all classes of common shares outstanding for the period, excluding nonvestednon-vested restricted stocks. Diluted earnings per share is computed in the same manner as basic earnings per share except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. Dilutive common shares are included in the diluted earnings per share calculation using the treasury stock method. See note 22 for additional earnings per share information. As disclosed in note 19, the accompanying consolidated financial statements gave retroactive effect to the 3,000-for-one stock split of shares of common stock effected on May 1, 2007.
  
17(Continued)Fair Value

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(v)Fair Value
We adopted FAS 157,Fair Value Measurements,on January 1, 2008. This adoption did not have an impact on the Company’s financial position or results of operations. Additional information pertinent to the fair value measurement is included in note 8.
In February 2008, the FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157, or FSP 157-2. FSP 157-2 defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008 for certain nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Therefore, disclosures related to the nonfinancial assets and nonfinancial liabilities that are measured at fair value on a nonrecurring basis have not been included.
In February 2007, the FASB issued FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115. FAS 159 allows entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under the fair value option. We adopted FAS 159 on January 1, 2008. The Corporation has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP. Accordingly, the adoption of FAS 159 did not have an impact on the Company’s financial position or operating results.
  The fair value information of financial instruments in the accompanying consolidated financial statements was determined as follows:
 (i)a. Cash and Cash Equivalents
 
   The carrying amount approximates fair value because of the short-term nature of such instruments.
 
 (ii)b. Investment in Securities
 
   The fair value of investment securities is estimated based on quoted market prices for those or similar investments. Additional information pertinent to the estimated fair value of investment in securities is included in note 3.3 and note 9.

17

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
 (iii)c. Policy Loans
 
   Policy loans have no stated maturity dates and are part of the related insurance contract. The carrying amount of policy loans approximates fair value because their interest rate is reset periodically in accordance with current market rates.
 
 (iv)d. Receivables, Accounts Payable, and Accrued Liabilities
 
   The carrying amount of receivables, accounts payable, and accrued liabilities approximates fair value because they mature and should be collected or paid within 12 months after December 31.
 
 18(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(v)e. Policyholder Deposits
 
   The fair value of policyholder deposits is the amount payable on demand at the reporting date, and accordingly, the carrying value amount approximates fair value.
 
 (vi)f. Short-term Borrowings
The carrying amount of securities sold under agreements to repurchase approximates fair value due to its short-term nature.
g.Long-term Borrowings
 
   The carrying amounts and fair value of the Company’s long-term borrowings are as follows:
                
 2008 2007                 
 Carrying Fair Carrying Fair  2010 2009 
 amount value amount value  Carrying Fair Carrying Fair 
 Amount Value Amount Value 
Loans payable to bank $24,307 24,307 25,946 25,946  21,027 21,027 22,667 22,667 
6.3% senior unsecured notes payable 50,000 46,250 50,000 47,625  50,000 49,625 50,000 48,000 
6.6% senior unsecured notes payable 60,000 55,800 60,000 57,825  35,000 34,388 60,000 57,420 
6.7% senior unsecured notes payable 35,000 34,059 35,000 33,950  35,000 35,000 35,000 33,320 
1.96% repurchase agreement 25,000 24,575 — — 
                  
 $166,027 $164,615 $167,667 $161,407 
Totals $169,307 160,416 170,946 165,346 
                  
  The carrying amount of the loans payable to bank approximates fair value due to its floating interest-rate structure. The fair value of the senior unsecured notes payable and the repurchase agreement was determined using market quotations. Additional information pertinent to long-term borrowings is included in note 11.Note 13.
 (vii)h. Derivative Instruments
  Current market pricing models were used to estimate fair value of interest-rate swap agreement and structured notes agreements. Fair values were determined using market quotations provided by outside securities consultants or prices provided by market makers. Additional information pertinent to the estimated fair value of derivative instruments is included in note 12.14.

18

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
 (w)Recently Issued Accounting Standards
 
  In December 2007,April 2010, the FASB issued SFAS No. 141R,Business Combinations(Statement 141R) and SFAS No. 160,Noncontrolling Interestsguidance to address the classification of an employee share-based payment award with an exercise price denominated in Consolidated Financial Statements —the currency of a market in which the underlying equity security trades. The guidance clarifies that a share-based payment award with an amendmentexercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to ARB No. 51(Statement 160). Statements 141R and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired incontain a business combination tocondition that is not a market, performance, or service condition. Therefore, such an award should not be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reportedclassified as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements areliability if it otherwise qualifies as equity. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date. Statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company currently does not expect the adoption of Statement 141R and Statement 160 to have an impact on its results of operations and financial position.
19(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
In March 2008, the FASB issued FAS 161,Disclosures about Derivative Instruments and Hedging Activities. FAS 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133,Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. This statement expands the current disclosure framework in FAS 133. FAS 161 is effective prospectively for periods beginning on or after November 15, 2008.2010. We do not expect the adoption of FAS 161this guidance to have an impact on our financial position or results of operations.
In October 2010, the FASB issued guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This guidance specifies that the following costs incurred in the acquisition of new and renewal contracts should be capitalized: (1) Incremental direct costs of contract acquisition. Incremental direct costs are those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. (2) Certain costs related directly to the following acquisition activities performed by the insurer for the contract: a. Underwriting, b. Policy issuance and processing, c. Medical and inspection, and d. Sales force contract selling. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the direct-response advertising guidance inSubtopic 340-20, Other Assets and Deferred Costs— Capitalized Advertising Costs, are met. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011. The Company is currently evaluating the impact the adoption of this guidance will have on its financial position or results of operations.
In December 2010, the FASB issued guidance to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We do not expect the adoption of this guidance to have a significant impact on our financial position or results of operations.
In December 2010, the FASB issued guidance to require a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period for all the periods presented. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations for which the acquisition dates is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We expect to adopt this guidance during 2011 as part of our disclosures related to our business combination. Additional information pertinent to the business combination is included in note 28.
There were no other new accounting pronouncements issued that had or are expected to have a material impact on the Company’s consolidatedour financial statements.
In May 2008, the FASB issued FAS 163,Accounting for Financial Guarantee Insurance Contracts — an Interpretation of FASB Statement No. 60. FAS 163 prescribes the accounting for premium revenue and claims liabilities by insurers of financial obligations, and requires expanded disclosures about financial guarantee insurance contracts. FAS 163 applies to financial guarantee insurance and reinsurance contracts issued by insurers subject to FAS 60,Accounting and Reporting by Insurance Enterprises. The Statement does not apply to insurance contracts that are similar to financial guarantee insurance contracts such as mortgage guarantyposition, operating results or trade-receivable insurance, financial guarantee contracts issued by noninsurance entities, or financial guarantee contracts that are derivative instruments within the scope of FAS 133. Statement 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, except for certain disclosure requirements about the risk-management activities of the insurance enterprise that are effective for the first quarter beginning after the Statement was issued. Except for those disclosures, early application is prohibited. This standard has no impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued a FASB Staff Position (FSP) amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007),Business Combinations,and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of the FSP did not have a material impact on the Company’s consolidated financial statements.
In December 2008, the FASB issued a FSP amending FASB 132 (revised 2003),Employers’ Disclosures about Pensions and Other Postretirement Benefits,to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP requires employers to disclose information about fair value measurements of plan assets that would be similar to the disclosures about fair value measurements required by FAS 157,Fair Value Measurements.The disclosures about plan assets required by this FSP are required for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. Earlier application of the
20(Continued)disclosures.

19

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
provisions of this FSP is permitted. The adoption of the FSP did not have a material impact on the Company’s consolidated financial statements.
(3)3. Investment in Securities
  The amortized cost for debt and equity securities, gross unrealized gains, 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 December 31, 20082010 and 20072009 were as follows:
                 
  2008
      Gross Gross  
  Amortized unrealized unrealized Estimated
  cost gains losses fair value
                 
Trading securities:                
Equity securities $40,847   2,781   (11,444)  32,184 
                 
  2010 
      Gross  Gross  Estimated 
      Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Trading securities
Equity securities		 $43,832  $10,738  $(3,471) $51,099 
                 
  2007
      Gross Gross  
  Amortized unrealized unrealized Estimated
  cost gains losses fair value
                 
Trading securities:                
Equity securities $54,757   15,170   (2,769)  67,158 
21(Continued)
                 
  2009 
      Gross  Gross  Estimated 
      Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Trading securities
Equity securities		 $42,075  $7,064  $(5,230) $43,909 

20

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
                 
  2008 
      Gross  Gross    
  Amortized  unrealized  unrealized  Estimated 
  cost  gains  losses  fair value 
                 
Securities available for sale:                
Obligations of government-sponsored enterprises $422,038   7,991   (220)  429,809 
U.S. Treasury securities and obligations of U.S. government instrumentalities  78,024   11,961   —   89,985 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities  121,934   448   (6,077)  116,305 
Municipal securities  31,415   390   (6)  31,799 
Obligations of states of the United States and political subdivisions of the states  4,196   36   (110)  4,122 
Corporate bonds  100,745   1,625   (7,399)  94,971 
Mortgage-backed securities  17,420   425   (3)  17,842 
Collateralized mortgage obligations  103,891   1,287   (2,327)  102,851 
             
                 
Total fixed maturities  879,663   24,163   (16,142)  887,684 
                 
Equity securities  70,060   1,752   (3,183)  68,629 
             
                 
Total $949,723   25,915   (19,325)  956,313 
             
22(Continued)
                 
  2010 
      Gross  Gross  Estimated 
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Securities available for sale                
Fixed maturities                
Obligations of government-sponsored enterprises $124,735  $6,650  $—  $131,385 
U.S. Treasury securities and obligations of U.S. government instrumentalities  47,427   5,451   —   52,878 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities  117,519   3,115   (10)  120,624 
Municipal securities  272,383   3,979   (2,798)  273,564 
Corporate bonds  102,184   7,698   (250)  109,632 
Residential mortgage-backed securities  12,560   801   (1)  13,360 
Collateralized mortgage obligations  271,149   6,158   (1,164)  276,143 
             
Total fixed maturities  947,957   33,852   (4,223)  977,586 
Equity securities                
Common stocks  901   3,430   —   4,331 
Preferred stocks  4,298   68   (737)  3,629 
Perpetual preferred stocks  1,000   —   (94)  906 
Mutual funds  41,551   6,632   (310)  47,873 
             
Total equity securities  47,750   10,130   (1,141)  56,739 
             
Total $995,707  $43,982  $(5,364) $1,034,325 
             

21

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
                                
 2007  2009 
 Gross Gross    Gross Gross Estimated 
 Amortized unrealized unrealized Estimated  Amortized Unrealized Unrealized Fair 
 cost gains losses fair value  Cost Gains Losses Value 
 
Securities available for sale: 
Securities available for sale 
Fixed maturities 
Obligations of government-sponsored enterprises $479,525 7,311  (238) 486,598  $252,513 $2,240 $(3,325) $251,428 
U.S. Treasury securities and obligations of U.S. government instrumentalities 85,396 3,034 — 88,430  48,190 3,148 — 51,338 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities 75,951 254  (1,176) 75,029  154,754 3,113  (1,919) 155,948 
Municipal securities 15,223 228  (16) 15,435  107,441 1,117  (1,851) 106,707 
Obligations of states of the United States and political subdivisions of the states 2,116 19  (2) 2,133 
Corporate bonds 86,061 246  (2,717) 83,590  102,547 3,546  (728) 105,365 
Mortgage-backed securities 14,138 75  (85) 14,128 
Residential mortgage-backed securities 16,605 677  (1) 17,281 
Collateralized mortgage obligations 58,126 416  (256) 58,286  229,312 4,237  (2,639) 230,910 
                  
Total fixed maturities 911,362 18,078  (10,463) 918,977 
Equity securities 
Common stocks 4,074 3,435 — 7,509 
Preferred stocks 4,000 —  (1,325) 2,675 
Perpetual preferred stocks 2,849 —  (270) 2,579 
Mutual funds 50,608 4,150  (2,832) 51,926 
          
Total fixed maturities 816,536 11,583  (4,490) 823,629 
 
Equity securities 66,747 7,354  (3,051) 71,050 
         
Total equity securities 61,531 7,585  (4,427) 64,689 
          
Total $883,283 18,937  (7,541) 894,679  $972,893 $25,663 $(14,890) $983,666 
                  
                 
  2008 
      Gross  Gross    
  Amortized  unrealized  unrealized  Estimated 
  cost  gains  losses  fair value 
                 
Securities held to maturity:                
Obligations of government-sponsored enterprises $9,082   240   —   9,322 
Mortgage-backed securities  1,749   —   (7)  1,742 
U.S. Treasury securities and obligations of U.S. government instrumentalities  1,488   379   —   1,867 
Corporate bonds  8,698   698   —   9,396 
Certificates of deposit  736   —   —   736 
             
                 
Total $21,753   1,317   (7)  23,063 
             
23(Continued)
                 
  2010 
      Gross  Gross  Estimated 
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Securities held to maturity                
Obligations of government-sponsored enterprises $1,793  $151  $—  $1,944 
U.S. Treasury securities and obligations of U.S. government instrumentalties  1,478   203   —   1,681 
Corporate bonds  9,443   414   —   9,857 
Residential mortgage-backed securities  660   41   —   701 
Certificates of deposits  1,241   —   —   1,241 
             
  $14,615  $809  $—   15,424 
             

22

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
                 
  2007 
      Gross  Gross    
  Amortized  unrealized  unrealized  Estimated 
  cost  gains  losses  fair value 
                 
Securities held to maturity:                
Obligations of government-sponsored enterprises $31,507   227   (20)  31,714 
Mortgage-backed securities  3,134   —   (48)  3,086 
Corporate bonds  8,348   —   (1)  8,347 
Certificates of deposit  702   —   —   702 
             
                 
Total $43,691   227   (69)  43,849 
             
Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2008 and 2007 were as follows:
                         
  2008 
  Less than 12 months  12 months or longer  Total 
      Gross      Gross      Gross 
  Estimated  unrealized  Estimated  unrealized  Estimated  Unrealized 
  fair value  losses  fair value  losses  fair value  losses 
                         
Securities available for sale:                        
Obligations of government-sponsored enterprises $16,550   (191)  2,956   (29)  19,506   (220)
Obligations of the Commonwealth of Puerto Rico and its instrumentalities  79,045   (5,230)  8,932   (847)  87,977   (6,077)
Municipal securities  —   —   1,276   (6)  1,276   (6)
Obligations of states of the United States and political subdivisions of the states  2,223   (75)  183   (35)  2,406   (110)
Corporate bonds  31,324   (2,688)  29,044   (4,711)  60,368   (7,399)
Mortgage-backed securities  1,374   (2)  36   (1)  1,410   (3)
Collateralized mortgage obligations  5,797   (2,327)  —   —   5,797   (2,327)
                   
                         
Total fixed maturities  136,313   (10,513)  42,427   (5,629)  178,740   (16,142)
                         
Equity securities  18,571   (2,190)  9,651   (993)  28,222   (3,183)
                   
                         
Total for securities available for sale $154,884   (12,703)  52,078   (6,622)  206,962   (19,325)
                   
                         
Securities held to maturity:                        
Mortgage-backed securities $—   —   1,741   (7)  1,741   (7)
                   
                 
  2009 
      Gross  Gross  Estimated 
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Securities held to maturity                
Obligations of government-sponsored enterprises $925  $6  $—  $931 
U.S. Treasury securities and obligations of U.S. government instrumentalties  3,786   132   —   3,918 
Corporate bonds  9,063   534   —   9,597 
Residential mortgage-backed securities  1,256   25   (1)  1,280 
Certificates of deposits  764   —   —   764 
             
  $15,794  $697  $(1)  16,490 
             
  
24(Continued)Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2010 and 2009 were as follows:
                                     
  2010 
  Less than 12 months  12 months or longer  Total 
      Gross          Gross          Gross    
  Estimated  Unrealized  Number of  Estimated  Unrealized  Number of  Estimated  Unrealized  Number of 
  Fair Value  Loss  Securities  Fair Value  Loss  Securities  Fair Value  Loss  Securities 
Securites available for sale                                    
Fixed maturities                                    
Obligations of the Commonwealth of Puerto Rico and its instrumentalities $2,483  $(10)  5  $—  $—   —  $2,483  $(10)  5 
Municipal securities  105,280   (2,652)  53   692   (146)  1   105,972   (2,798)  54 
Corporate bonds  5,828   (250)  3   —   —   —   5,828   (250)  3 
Residential mortgage-backed securities  —   —   —   36   (1)  1   36   (1)  1 
Collateralized mortgage obligations  77,417   (1,144)  12   1,953   (20)  1   79,370   (1,164)  13 
                            
Total fixed maturities  191,008   (4,056)  73   2,681   (167)  3   193,689   (4,223)  76 
Equity securities                                    
Preferred stocks  —   —   —   3,263   (737)  1   3,263   (737)  1 
Perpetual preferred stocks  —   —   —   906   (94)  1   906   (94)  1 
Mutual funds  2,337   (310)  2   —   —   —   2,337   (310)  2 
                            
Total equity securities  2,337   (310)  2   4,169   (831)  2   6,506   (1,141)  4 
                            
Total for securities available for sale $193,345  $(4,366)  75  $6,850  $(998)  5  $200,195  $(5,364)  80 
                            

23

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
                                                            
 2007  2009 
 Less than 12 months 12 months or longer Total  Less than 12 months 12 months or longer Total 
 Gross Gross Gross  Gross Gross Gross   
 Estimated unrealized Estimated unrealized Estimated unrealized  Estimated Unrealized Number of Estimated Unrealized Number of Estimated Unrealized Number of 
 fair value losses fair value losses fair value losses  Fair Value Loss Securities Fair Value Loss Securities Fair Value Loss Securities 
 
Securities available for sale: 
Securites available for sale 
Fixed maturities 
Obligations of government- sponsored enterprises $12,875  (134) 34,957  (104) 47,832  (238) $110,602 $(2,264) 21 $25,468 $(1,061) 5 $136,070 $(3,325) 26 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities — — 28,841  (1,176) 28,841  (1,176) 12,944  (201) 10 58,866  (1,718) 22 71,810  (1,919) 32 
Municipal securities 1,259  (16) — — 1,259  (16) 62,292  (1,841) 39 173  (10) 1 62,465  (1,851) 40 
Obligations of states of the United States and political subdivisions of the states 1,214  (2) — — 1,214  (2)
Corporate bonds 56,185  (1,398) 10,654  (1,319) 66,839  (2,717) 10,997  (215) 4 7,975  (513) 6 18,972  (728) 10 
Mortgage-backed securities — — 8,265  (85) 8,265  (85)
Residential mortgage-backed securities — — — 36  (1) 1 36  (1) 1 
Collateralized mortgage obligations 6,718  (104) 16,528  (152) 23,246  (256) 101,265  (1,732) 21 7,171  (907) 10 108,436  (2,639) 31 
                                
Total fixed maturities 298,100  (6,253) 95 99,689  (4,210) 45 397,789  (10,463) 140 
Equity securities 
Preferred stocks — — — 2,675  (1,325) 1 2,675  (1,325) 1 
Perpetual preferred stocks — — — 730  (270) 1 730  (270) 1 
Mutual funds 9,994  (907) 4 21,667  (1,925) 15 31,661  (2,832) 19 
                    
Total fixed maturities 78,251  (1,654) 99,245  (2,836) 177,496  (4,490)
 
Equity securities 14,454  (1,408) 17,911  (1,643) 32,365  (3,051)
             
Total equity securities 9,994  (907) 4 25,072  (3,520) 17 35,066  (4,427) 21 
                    
Total for securities available for sale $92,705  (3,062) 117,156  (4,479) 209,861  (7,541) $308,094 $(7,160) 99 $124,761 $(7,730) 62 $432,855 $(14,890) 161 
                                
Securities held to maturity 
Residential mortgage-backed securities — — — $55 $(1) 1 $55 $(1) 1 
                    
Securities held to maturity: 
Obligations of government- sponsored enterprises $— — 10,831  (20) 10,831  (20)
Mortgage-backed securities — — 3,086  (48) 3,086  (48)
Corporate bonds — — 8,347  (1) 8,347  (1)
             
 
Total for securities held to maturity $— — 22,264  (69) 22,264  (69)
             
  The Company regularly monitors and evaluates the difference between the cost and estimated fair value of investments. For investments with a fair value below cost, the process includes evaluatingevaluating: (1) the length of time and the extent to which cost exceedsthe estimated fair value has been less than amortized cost for fixed maturity securities, or cost for equity securities, (2) the prospects and financial condition, ofnear-term and long-term prospects for the issuer, including relevant industry conditions and trends, and implications of rating agency actions, (3) the Company’s intent to sell or the likelihood of a required sale prior to recovery, (4) the recoverability of principal and ability to retain the investment to allowinterest for recovery in fair value, amongfixed maturity securities, or cost for equity securities, and (5) other factors.factors, as applicable. 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 estimated fair value solely due to changes in interest rates, other-than temporary impairment may not be appropriate. Due to the subjective nature of the Company’s analysis, along with the judgment that must be applied in the analysis, it is possible that the Company could reach a different conclusion whether or not to impair a security if it had access to additional information about the investee. Additionally, it is possible that the investee’s ability to meet future contractual obligations may be different than what the Company determined during its analysis, which may lead to a different impairment conclusion in future periods. If after monitoring and analyzing impaired securities, the Company 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,other-than-temporary, the carrying amount of the security is reduced to its fair value.value in accordance with current accounting guidance. The impairment is charged to operations and a new cost basis for theof an impaired security is established. Duringnot adjusted for subsequent increases in estimated fair value. In periods subsequent to the three year-period ended December 31, 2008, 2007, and 2006,recognition of an other-than-temporary impairment, the Company recognized other-than-temporary impairments amountingimpaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to $16,522, $1,087, and $2,098, respectively, on some of its fixed maturities and equity securities classified as available for sale.
reflect adjustments to the effective yield.
 
  25(Continued)The Company’s process for identifying and reviewing invested assets for other-than temporary impairments during any quarter includes the following:

24

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
•Identification and evaluation of securities that have possible indications of other-than- temporary impairment, which includes an analysis of all investments with gross unrealized investments losses that represent 20% or more of their cost and all investments with an unrealized loss greater than $50.
•Review and evaluation of any other security based on the investee’s current financial condition, liquidity, near-term recovery prospects, implications of rating agency actions, the outlook for the business sectors in which the investee operates and other factors. This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of cost.
•Consideration of evidential matter, including an evaluation of factors or triggers that may or may not cause individual investments to qualify as having other-than-temporary impairments; and
•Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision.
  We continueThe Company continues to review the investment portfolios under the Company’s impairment review policy. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods.
 
  Obligations of Government-sponsored Enterprises, U.S. Treasury Securities and Obligations of U.S. Government Instrumentalities, Obligations of States of the United States and Political Subdivisions of the States, and Obligations of the Commonwealth of Puerto Rico and its InstrumentalitiesInstrumentalities:: The unrealized losses on the Company’s investments in obligations of government-sponsored enterprises, U.S. Treasury securities and obligations of U.S. government instrumentalities, obligations of states of the United States and political subdivisions of the states, and in obligations of the Commonwealth of Puerto Rico and its instrumentalities were mainly caused by fluctuations in interest rate increases.and general market conditions. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. In addition, most of these investments have investment grade ratings. Because the decline in fair value is attributable to changes in interest rates and not credit quality,quality; because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company has the ability and intentexpects to hold these investments until a market price recovery or maturity,collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
 
  Corporate BondsBonds:: The Company’s unrealized losses on investments in corporate bonds are comprised of small unrealized losses in most of the corporate bonds. Unrealized losses of these bonds were principally caused by fluctuations in interest rate increases.rates and general market conditions. All corporate bonds included in this table have investment grade ratings and have been in an unrealized position for less than three months. Because the decline in estimated fair value is principally attributable to changes in interest ratesrate; the Company does not intend to sell the investments and its is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company has the ability and intentexpects to hold these investments until a market price recovery or maturity,collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
 
  Residential Mortgage-Backed Securities and Collateralized Mortgage ObligationsObligations:: The unrealized losses on investments in residential mortgage-backed securities and collateralized mortgage obligations (CMO’s) were caused by fluctuations in interest rate increases.rates. The contractual cash flows of these securities, other than private CMOs, are guaranteed by a U.S. government-sponsored enterprise. The Company also has investments in private CMOs with amortized cost amounting to $5,785 and $7,608 in 2010 and 2009, respectively (fair value of $6,106 and $6,701, respectively). Any loss in these securities is determined according to the seniority level of each tranche, with the

25

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Company owns. Because the decline in fair value is attributable to changes in interest rates and not credit quality,quality; the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Company has the ability and intentexpects to hold these investments until a market price recovery or maturity,collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
 
  Equity SecuritiesPreferred Stocks:: TheBecause the estimated fair value of this investment has experienced a significant improvement in market value during the past year, the issuer’s capital ratios are above regulatory levels, this particular instrument has a specified maturity, the issuer has continued dividend payments on this instrument and in all of its outstanding debt instruments, the issuer does not have the ability to call the security at a price lower than its stated value, the Company expects to collect all contractual cash flows, the Company does not have the intent to sell the investment, and it is not more likely than not that the Company will be required to sell the investment before market price recovery or maturity and because the Company expects to collect all contractual cash flows, this investments is not considered other-than-temporarily impaired.
Perpetual Preferred Stocks:Because this security has experienced a significant improvement during the past year, the issuers’ capital ratios are above regulatory levels, the Company does not have the intent to sell the investment, and the Company has the intent and ability to hold the investments until a market price recovery, this investment is not considered other-than-temporarily impaired.
Mutual Funds:Most of the unrealized losses in the Company’s investment in equity securities classified as available for sale consist mainly of investmentsone fund that has been in common and preferred stock of domestic banking institutions and investments in several mutual funds. Thean unrealized loss experiencedposition less than nine months. Because these funds have been in the investment in common stocks of domestic banking institutions is mainly due to the general economic conditions in the past three years. Thean unrealized loss relatedposition for less than nine months, the Company does not have the intent to the Company’s investments in preferred stock of domestic banking institutionssell these investment, and in investments in several mutual funds investing in fixed income securities is mainly caused by interest rate increases. Because the unrealized losses on equity securities were mainly caused by interest rate increases and not credit quality, and because the Company has the ability and intent to hold thesethe investments until a market price recovery, these investments are not considered other-than-temporarily impaired.

26

(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
  Maturities of investment securities classified as available for sale and held to maturity were as follows at December 31, 2008:2010:
                
 Amortized Estimated  Amortized Estimated 
 cost fair value  Cost Fair Value 
Securities available for sale: 
Securities available for sale
 
Due in one year or less $5,423 5,423  $10,288 $10,466 
Due after one year through five years 74,981 70,489  92,110 95,731 
Due after five years through ten years 245,224 252,822  203,723 213,045 
Due after ten years 432,724 438,257  358,127 368,841 
Residential mortgage-backed securities 12,560 13,360 
Collateralized mortgage obligations 103,891 102,851  271,149 276,143 
Mortgage-backed securities 17,420 17,842 
          
  $947,957 $977,586 
 $879,663 887,684      
      
Securities held to maturity: 
Securities held to maturity
 
Due in one year or less $1,601 1,606  $1,241 $1,241 
Due after one year through five years 11,322 12,058  9,443 9,857 
Due after five years through ten years 3,799 3,850 
Due after ten years 3,282 3,807  3,271 3,625 
Mortgage-backed securities 1,749 1,742 
Residential mortgage-backed securities 660 701 
          
  $14,615 $15,424 
 $21,753 23,063      
     
  Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.
 
  Investments with an amortized cost of $5,356$4,493 and $5,249$4,642 (fair value of $5,602$4,702 and $5,220)4,758) at December 31, 20082010 and 2007,2009, respectively, were deposited with the Commissioner of Insurance to comply with the deposit requirements of the Insurance Code of the Commonwealth of Puerto Rico (the Insurance Code). Investment with an amortized cost of $554$500 and $527$577 (fair value of $554$500 and $527)$577) at December 31, 20082010 and 2007,2009, respectively, were deposited with the Commissioner of Insurance of the Government of the U.S. Virgin Islands.
Investments with a face value of $510 (fair value of $508) at December 31, 2007, were held by a financial institution as collateral for the Company’s interest-rate swap agreement (see note 12).
27(Continued)

27

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
  Information regarding realized and unrealized gains and losses from investments for the years ended December 31, 2008, 2007,2010, 2009, and 20062008 is as follows:
                        
 2008 2007 2006  2010 2009 2008 
Realized gains (losses): 
Fixed maturity securities: 
Securities available for sale: 
Realized gains (losses)
 
Fixed maturity securities 
Securities available for sale 
Gross gains from sales $1,876 1,208 —  $1,947 $5,323 $1,876 
Gross losses from sales  (225)  (1,797)  (687)  (505)  (4)  (225)
Gross losses from other-than-temporary impairments  (3,872) — —   (95)  (1,711)  (3,872)
              
Total fixed maturity securities 1,347 3,608  (2,221)
        
Total debt securities  (2,221)  (589)  (687)
       
 
Equity securities: 
Equity securities 
Trading securities:  
Gross gains from sales 3,358 8,873 4,318  1,083 717 3,358 
Gross losses from sales  (3,132)  (1,558)  (1,488)  (961)  (1,381)  (3,160)
Gross losses from other-than-temporary impairments  (28) — — 
              
 198 7,315 2,830  122  (664) 198 
              
 
Securities available for sale: 
Securities available for sale 
Gross gains from sales 881 292 792  5,051 3,468 881 
Gross losses from sales  (176) — —   (1,086)  (391)  (176)
Gross losses from other-than-temporary impairments  (12,622)  (1,087)  (2,098)  (2,902)  (5,407)  (12,622)
              
  (11,917)  (795)  (1,306) 1,063  (2,330)  (11,917)
              
Total equity securities  (11,719) 6,520 1,524  1,185  (2,994)  (11,719)
              
 
Net realized gains (losses) on securities $(13,940) 5,931 837  $2,532 $614 $(13,940)
              
  
28(Continued)The other-than-temporary impairments on fixed maturity securities are attributable to credit losses.

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
                        
 2008 2007 2006 
 
Changes in unrealized gains (losses): 
Recognized in income: 
Changes in unrealized gains (losses)
 
Recognized in income 
Equity securities — trading $(21,064)  (4,116) 7,699  $5,433 $10,497 $(21,064)
              
 
Recognized in accumulated other comprehensive loss: 
Recognized in accumulated other comprehensive loss 
Fixed maturities — available for sale $928 18,640  (2,434) 22,014  (406) 928 
Equity securities — available for sale  (5,734)  (7,251)  (1,581) 5,831 4,583  (5,734)
              
 $(4,806) 11,389  (4,015) $27,845 $4,177 $(4,806)
              
 
Not recognized in the consolidated financial statements: 
Not recognized in the consolidated financial statements 
Fixed maturities — held to maturity $1,152 1,266  (114) $113 $(614) $1,152 
  The deferred tax liability (asset) on unrealized gains and losses(losses) recognized in accumulated other comprehensive income during the years 2010, 2009, and 2008 2007,aggregated $(4,243), $(638), and 2006 aggregated $854, $1,840, and $803, respectively.

28

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
  As of December 31, 2007, investments in obligations that are payable from2010 and secured by the same source of revenue or taxing authority, other than investment instruments of the U.S. and the Commonwealth of Puerto Rico governments, did not exceed 10% of stockholders’ equity. As of December 31, 2008 and 2007,2009 no individual investment in equity securities individually exceeded 10% of stockholders’ equity.
(4)4. Net Investment Income
 
  Components of net investment income were as follows:
            
 Years ended December 31             
 2008 2007 2006  Years ended December 31 
  2010 2009 2008 
Fixed maturities $48,197 37,205 35,217  $44,371 $46,285 $48,197 
Equity securities 5,451 5,271 3,821  3,452 4,077 5,451 
Policy loans 387 394 336  441 411 387 
Cash equivalents and interest-bearing deposits 1,003 2,187 1,903  197 577 1,003 
Other 1,215 2,137 1,380  684 786 1,215 
              
 
Total $56,253 47,194 42,657  $49,145 $52,136 $56,253 
              
29(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(5)5. Premium and Other Receivables, Net
 
  Premium and other receivables, net as of December 31 were as follows:
         
  2008  2007 
         
Premium $90,315   54,330 
Self-funded group receivables  35,749   31,344 
FEHBP  9,600   10,202 
Agent balances  38,491   34,164 
Accrued interest  11,802   8,363 
Reinsurance recoverable on paid losses  42,181   58,757 
 
Other  23,765   21,033 
       
   251,903   218,193 
       
         
Less allowance for doubtful receivables:        
Premium  10,467   11,753 
Other  4,278   4,172 
       
   14,745   15,925 
       
 
Premium and other receivables, net $237,158   202,268 
       
30(Continued)
         
  2010  2009 
Premium $144,501  $98,429 
Self-funded group receivables  73,750   70,315 
FEHBP  11,001   10,297 
Agent balances  37,262   37,888 
Accrued interest  9,781   9,287 
Reinsurance recoverable  47,342   43,951 
Other  22,177   27,999 
       
   345,814   298,166 
       
         
Less allowance for doubtful receivables:        
Premium  13,106   20,280 
Other  6,928   4,954 
       
   20,034   25,234 
       
Premium and other receivables, net $325,780  $272,932 
       

29

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
(6)6. Deferred Policy Acquisition Costs and Value of Business Acquired
 
  The movement of deferred policy acquisition costs (DPAC) and value of business acquired (VOBA) for the years ended December 31, 2008, 2007,2010, 2009, and 20062008 is summarized as follows:
                        
 DPAC VOBA Total 
 
Balance, December 31, 2005 $81,568 — 81,568 
       
Capitalization upon acquisition of GA Life — 22,823 22,823 
Termination of coinsurance funds withheld agreement  (60,000) —  (60,000)
Acquisition of business ceded in coinsurance funds withheld agreement — 60,000 60,000 
Additions 44,056 — 44,056 
VOBA interest at an average rate of 5.29% — 4,427 4,427 
Amortization  (26,799)  (14,658)  (41,457)
       
Net change  (42,743) 72,592 29,849 
       
Balance, December 31, 2006 38,825 72,592 111,417 
       
Additions 46,898 — 46,898 
VOBA interest at an average rate of 5.27% — 3,874 3,874 
Amortization  (32,508)  (12,442)  (44,950)
       
Net change 14,390  (8,568) 5,822 
        DPAC VOBA Total 
Balance, December 31, 2007 53,215 64,024 117,239  $53,215 $64,024 $117,239 
              
Additions 49,470 — 49,470  49,470 — 49,470 
VOBA interest at an average rate of 5.40% — 3,425 3,425  — 3,425 3,425 
Amortization  (33,442)  (10,345)  (43,787)  (33,442)  (10,345)  (43,787)
              
Net change 16,028  (6,920) 9,108  16,028  (6,920) 9,108 
              
Balance, December 31, 2008 $69,243 57,104 126,347  69,243 57,104 126,347 
              
Additions 55,632 — 55,632 
VOBA interest at an average rate of 5.29% — 3,066 3,066 
Amortization  (35,923)  (9,205)  (45,128)
       
Net change 19,709  (6,139) 13,570 
       
Balance, December 31, 2009
 88,952 50,965 139,917 
       
Additions 54,247 — 54,247 
VOBA interest at an average rate of 5.24% — 2,752 2,752 
Amortization  (42,324)  (8,506)  (50,830)
       
Net change 11,923  (5,754) 6,169 
       
Balance, December 31, 2010
 $100,875 $45,211 $146,086 
       
  The amortization expense of the deferred policy acquisition costs and value of business acquired is included within the operating expenses in the accompanying consolidated statement of earnings.
31(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
  The estimated amount of the year-end VOBA balance expected to be amortized during the next five years is as follows:
        
Year ending December 31:  
2009 $9,428 
2010 8,116 
2011 7,273  $7,404 
2012 6,493  6,602 
2013 5,805  5,895 
2014 5,184 
2015 4,561 

30

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
(7)7. Property and Equipment, Net
 
  Property and equipment, net as of December 31 are composed of the following:
        
 2008 2007         
  2010 2009 
Land $6,531 6,531  $7,309 $7,309 
Buildings and leasehold improvements 44,791 43,664  45,472 45,034 
Office furniture and equipment 16,208 15,868  14,401 16,821 
Computer equipment and software 56,482 36,361  89,266 69,652 
Automobiles 461 539  525 513 
          
 124,473 102,963  156,973 139,329 
  
Less accumulated depreciation and amortization 66,025 59,548  80,228 70,526 
          
Property and equipment, net $58,448 43,415  $76,745 $68,803 
          
(8)8. Fair Value MeasurementsAcquired Intangible Asset
 
  On July 1, 2009, the Company, through TSS, entered into an Asset Purchase Agreement (the Agreement) to acquire certain managed care assets of La Cruz Azúl de Puerto Rico, Inc. (LCA) in Puerto Rico and the U.S. Virgin Islands on such date, generating an intangible asset. Such intangible asset, net as of December 31, 2010 and 2009 amounted to $3.9 and $5.6 million, respectively, and is included within other assets in the accompanying consolidated balance sheets. Amortization expense recorded during 2010 and 2009 amounted to $3.6 and $1.3 million. The Corporation adopted FAS 157 on Januaryintangible asset is amortized over the expected life of the acquired assets, which is estimated between 1 2008. Beginning on this date, assetsand 6 years. The Company may be required to make additional payments depending upon certain conditions as defined in the Agreement, which would have the effect of increasing the intangible asset.
9.Fair Value Measurements
Assets recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs as defined by FAS 157, are as follows:
 
Level Input:Input Definition:
 
 
Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
 
 
Level 2 Inputs other than quoted prices included in Level I1 that are observable for the asset or liability through corroboration with market data at the measurement date.
 
 
Level 3 Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
  
32(Continued)The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Company employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. The Company limits valuation adjustments to those

31

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
  deemed necessary to ensure that the security or derivative’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment. The following table summarizes fair value measurements by level at December 31, 20082010 and 2009 for assets measured at fair value on a recurring basis:
                                
 Level 1 Level 2 Level 3 Total  2010 
 Level 1 Level 2 Level 3 Total 
Equity securities held for trading $32,184 — — 32,184  $51,099 $— $— $51,099 
Securities available for sale: 
Securities available for sale 
Fixed maturity securities 89,985 796,418 1,281 887,684  
Obligations of government-sponsored enterprises — 131,385 — 131,385 
U.S. Treasury securities and obligations of U.S. government instrumentalities 52,878 — — 52,878 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities — 120,624 — 120,624 
Municipal securities — 273,564 — 273,564 
Corporate Bonds — 109,632 — 109,632 
Residential agency mortgage-backed securities — 13,360 — 13,360 
Collaterized mortgage obligations — 276,143 — 276,143 
         
Total fixed maturities 52,878 924,708 — 977,586 
 
Equity securities 31,506 36,037 1,086 68,629  
Common stocks 4,331 — — 4,331 
Preferred stocks 3,629 — — 3,629 
Perpetual preferred stocks 906 — — 906 
Mutual funds 27,858 18,971 1,044 47,873 
         
Total equity securities 36,724 18,971 1,044 56,739 
 
Derivatives (reported within other assets in the consolidated balance sheets) — 1,674 — 1,674  — 748 — 748 
         
Total $153,675 834,129 2,367 990,171 
 $140,701 $944,427 $1,044 $1,086,172 
         

32

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
                 
  2009 
  Level 1  Level 2  Level 3  Total 
Equity securities held for trading $43,909  $—  $—  $43,909 
Securities available for sale                
Fixed maturity securities                
Obligations of government-sponsored enterprises  —   251,428   —   251,428 
U.S. Treasury securities and obligations of U.S. government instrumentalities  51,338   —   —   51,338 
Obligations of the Commonwealth of Puerto Rico and its instrumentalities  —   155,948   —   155,948 
Municipal securities  —   106,707   —   106,707 
Corporate Bonds  —   105,365   —   105,365 
Residential agency mortgage-backed securities  —   17,281   —   17,281 
Collaterized mortgage obligations  —   230,910   —   230,910 
             
Total fixed maturities  51,338   867,639   —   918,977 
                 
Equity securities                
Common stocks  7,509   —   —   7,509 
Preferred stocks  2,675   —   —   2,675 
Perpetual preferred stocks  2,579   —   —   2,579 
Mutual funds  6,961   44,190   775   51,926 
             
Total equity securities  19,724   44,190   775   64,689 
                 
Derivatives (reported within other assets in the consolidated balance sheets)  —   1,608   —   1,608 
             
  $114,971  $913,437  $775  $1,029,183 
             

33

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
  A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the yearyears ended December 31, 20082010 and 2009 is as follows:
                        
 Fixed      Fixed     
 Maturity Equity    Maturity Equity   
 Securities Securities Total  Securities Securities Total 
Beginning balance $4,280 989 5,269 
Begining balance December 31, 2008
 $1,281 $1,086 $2,367 
Total gains or losses:  
Realized in earnings  (3,883) —  (3,883)  (1,281) —  (1,281)
Unrealized in other accumulated comprehensive income 884 97 981  — — — 
Purchases and sales — — —  —  (1,086)  (1,086)
Transfers in and/or out of Level 3 — — —  775 775 
       
Ending balance $1,281 1,086 2,367 
Ending balance December 31, 2009
 $— $775 $775 
       
Total gains or losses: 
Realized in earnings — — — 
Unrealized in other accumulated comprehensive income —  (299)  (299)
Purchases and sales — 568 568 
Transfers in and/or out of Level 3 — — 
       
Ending balance December 31, 2010
 $— $1,044 $1,044 
       
  During the year ended December 31, 2008, certain debt securities were thinly traded due to issuer liquidity concerns. Consequently, broker quotesRealized gains or other observable inputs were not always available and the fair value of these securities was estimated using internal estimates for inputs including, but not limited to, credit spreads, default rates and benchmark yields. Anlosses on Level 3 investments are included within net realized gains, excluding other-than-temporary impairment was recordedlosses on these securities duringin the year ended December 31, 2008.
33(Continued)consolidated statements of earnings.

34

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
(9)10. Claim Liabilities
 
  The activity in claim liabilities during 2008, 2007,2010, 2009, and 20062008 is as follows:
                        
 2008 2007 2006  2010 2009 2008 
Claim liabilities at beginning of year $353,830 314,682 297,563  $360,446 $323,710 $353,830 
Reinsurance recoverable on claim liabilities  (54,834)  (32,066)  (28,720)  (30,712)  (30,432)  (54,834)
              
Net claim liabilities at beginning of year 298,996 282,616 268,843  329,734 293,278 298,996 
              
Claim liabilities acquired from GA Life — — 8,771 
        
Claims incurred: 
Claims incurred 
Current period insured events 1,432,843 1,241,866 1,264,871  1,594,977 1,594,814 1,429,730 
Prior period insured events  (9,918)  (31,007)  (19,669)  (10,067)  (1,887)  (9,918)
              
Total 1,422,925 1,210,859 1,245,202  1,584,910 1,592,927 1,419,812 
              
Payments of losses and loss-adjustment expenses: 
 
Payments of losses and loss-adjustment expenses 
Current period insured events 1,195,414 1,004,346 1,045,771  1,316,321 1,309,304 1,192,301 
Prior period insured events 233,229 190,133 194,429  269,562 247,167 233,229 
              
Total 1,428,643 1,194,479 1,240,200  1,585,883 1,556,471 1,425,530 
              
Net claim liabilities at end of year 293,278 298,996 282,616  328,761 329,734 293,278 
Reinsurance recoverable on claim liabilities 30,432 54,834 32,066  31,449 30,712 30,432 
              
Claim liabilities at end of year $323,710 353,830 314,682  $360,210 $360,446 $323,710 
              
  As a result of differences between actual amounts and estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.
 
  The credits in the claims incurred and loss-adjustment expenses for prior period insured events for 2008, 20072010, 2009 and 2008 are due primarily to better than expected utilization trends. Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements.
 
  The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits amounting to $11,879, $12,945, and $11,989 $12,916 and $13,779that is included within the consolidated claims incurred during the years ended December 31, 2008, 20072010, 2009 and 2006,2008, respectively.
(10)
11. Federal Employees’ Health Benefits Program (FEHBP)
 
  TSITSS entered into a contract, renewable annually, with OPMthe Office of Personnel Management (OPM) as authorized by the Federal Employees’ Health Benefits Act of 1959, as amended, to provide health benefits under the FEHBP. The FEHBP covers postal and federal employees residentresiding in the Commonwealth of Puerto Rico and the United States Virgin
34(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
Islands as well as retirees and eligible dependents. The FEHBP is financed through a negotiated contribution made by the federal government and employees’ payroll deductions.
 
  The accounting policies for the FEHBP are the same as those described in the Company’s summary of significant accounting policies. Premium rates are determined annually by TSITSS and approved by the federal government. Claims are paid to providers based on the guidelines

35

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
determined by the federal government. Operating expenses are allocated from TSI’sTSS’s operations to the FEHBP based on applicable allocation guidelines (such as, the number of claims processed for each program).
 
  The operations of the FEHBP do not result in any excess or deficiency of revenue or expense as this program has a special account available to compensate any excess or deficiency on its operations to the benefit or detriment of the federal government. Any transfer to/from the special account necessary to cover any excess or deficiency in the operations of the FEHBP is recorded as a reduction/increment to the premiums earned. The contract with OPM provides that the cumulative excess of the FEHBP earned income over health benefits charges and expenses represents a restricted fund balance denoted as the special account. Upon termination of the contract and satisfaction of all the FEHBP’s obligations, any unused remainder of the special reserve would revert to the Federal Employees Health Benefit Fund. In the event that the contract terminates and the special reserve is not sufficient to meet the FEHBP’s obligations, the FEHBP contingency reserve will be used to meet such obligations. If the contingency reserve is not sufficient to meet such obligations, the Company is at risk for the amount not covered by the contingency reserve.
 
  The contract with OPM allows for the payment to the Company of service fees as negotiated between TSITSS and OPM. Service fees, which are included within the other income (expense), net in the accompanying consolidated statements of earnings, amounted to $931, $895, and $861, respectively, for each of the years in the three-year period ended December 31, 2008.2010 amounted to $998, $988, and $931, respectively.
The Company also has funds available related to the FEHBP amounting to $28,093 and $22,797 as of December 31, 2010 and 2009, respectively and are included within the cash and cash equivalents in the accompanying consolidated balance sheets. Such funds must only be used to cover health benefits charges, administrative expenses and service charges required by the FEHBP.
 
  A contingency reserve is maintained by the OPM at the U.S. Treasury, and is available to the Company under certain conditions as specified in government regulations. Accordingly, such reserve is not reflected in the accompanying consolidated balance sheets. The balance of such reserve as of December 31, 20082010 and 20072009 was $23,365$28,092 and $18,004,$20,483, respectively. The Company received $2,540, $5,512,$5,161, $6,343, and $4,850,$2,540, of payments made from the contingency reserve fund of OPM during 2008, 2007,2010, 2009, and 2006,2008, respectively.
 
  The claim payments and operating expenses charged to the FEHBP are subject to audit by the U.S. government. Management is of the opinion that an adjustment, if any, resulting from such audits will not have a significant effect on the accompanying financial statements. The claim payments and operating expenses reimbursed in connection with the FEHBP have been audited through 2004 by OPM.
 
12. Short-Term Borrowings
 
  35Short-term borrowings of $15,575 at December 31, 2010 represent securities sold under agreements to repurchase. The agreement outstanding at December 31, 2010 matured in January 3, 2011 and accrued interest at fixed rate of 0.50%. The weighted average interest rate for short-term borrowings in 2010 amounted to 0.38%.
 (Continued)The investment securities underlying such agreements were delivered to the dealers with whom the agreements were transacted. The dealers may have sold, loaned, or otherwise disposed of such

36

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
(11) securities in the normal course of business operations, but have agreed to resell to the Company substantially the same securities on the maturity dates of the agreements.
At December 31, 2010 investment securities available for sale with fair value of $16,199 (face value of $14,630) were pledged as collateral under these agreements.
13.Long-Term Borrowings
 
  A summary of the borrowings entered by the Company at December 31, 20082010 and 20072009 is as follows:
         
  2008  2007 
Senior unsecured notes payable of $50,000 issued on September 2004; due September 2019. Interest is payable semiannually at a fixed rate of 6.30% $50,000   50,000 
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%  60,000   60,000 
Senior unsecured notes payable of $35,000 issued on January 2006; due January 2021. Interest is payable monthly at a fixed rate of 6.70%  35,000   35,000 
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 2.43% and 6.24% at December 31, 2008 and 2007, respectively)  24,307   25,946 
       
         
Total borrowings $169,307   170,946 
       
         
  2010  2009 
Senior unsecured notes payable of $50,000 issued on September 2004; due September 2019. Interest is payable semiannually at a fixed rate of 6.30%. $50,000  $50,000 
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%.  35,000   60,000 
Senior unsecured notes payable of $35,000 issued on January 2006; due January 2021. Interest is payable monthly at a fixed rate of 6.70%.  35,000   35,000 
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.29% and 1.28% at December 31, 2010, and 2009, respectively).  21,027   22,667 
Repurchase agreement of $25.0 million entered on November 2010, due November 2015. Interest is payable quarterly at a fixed rate of 1.96%.  25,000   — 
       
Total borrowings $166,027  $167,667 
       
  Aggregate maturities of the Company’s borrowings as of December 31, 20082010 are summarized as follows:
        
Year ending December 31: 
2009 $1,640 
2010 1,640 
Year ending December 31 
2011 1,640  $1,640 
2012 1,640  1,640 
2013 1,640  1,640 
2014 1,640 
2015 26,640 
Thereafter 161,107  132,827 
      
 $166,027 
 $169,307    
   
  All of the Company’s senior notes canmay be prepaid at par, in total or partially, five years after issuance as determined by the Company. The Company’s senior unsecured notes contain certain

37

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
non- financial covenants with which TSITSS and the Company have complied with at December 31, 2008.2010. On October 1, 2010 we repaid $25.0 million of the principal of 6.60% senior unsecured note.
 
  Debt issuance costs related to each of the Company’s senior unsecured notes were deferred and are being amortized over the term of its respective senior note. Unamortized debt issuance costs related to these senior unsecured notes as of December 31, 20082010 and 20072009 amounted to $1,140$781 and $1,239,$1,041, respectively and are included within the other assets in the accompanying consolidated balance sheets.
 
  The secured loan payable previously described is guaranteed by a first position held by the bank on the Company’s land, building, and substantially all leasehold improvements, as collateral for the term of the
36(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
loan under a continuing general security agreement. This secured loan contains certain non-financial covenants, which are customary for this type of facility, including but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control.
The Companyrepurchase agreement has pledged as collateral investment securities available for sale with fair value of $28,453 (face value of $23,918). The investment securities underlying such agreements were delivered to the financial institution with whom the agreement was also a partytransacted. The dealers may have loaned, or used as collateral securities in the normal course of business operations. We maintain effective control over the investment securities pledged as collateral and accordingly, such securities continue to another secured loan whose outstandingbe carried on the accompanying consolidated balance of $10,500 was repaid upon its maturity on August 1, 2007.sheets.
 
  Interest expense on the above borrowings amounted to $10,451, $11,565,$9,210, $9,870, and $11,695,$10,451, for the years ended December 31, 2008, 2007,2010, 2009, and 2006,2008, respectively.
(12)
14. Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage the risks associated with changes in interest rates and to diversify the composition of its investment in securities.
 
  By using derivative financial instruments the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty is obligated to the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.
 
  Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, commodity prices, or market indexes. The market risk associated with derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
(a)Cash Flow Hedge
 
The Company had invested in an interest-rate related derivative hedging instrument to manage its exposure on its debt instruments.
The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques to estimate the expected impact of changes in interest rates on the Company’s future cash flows.
The Company had a variable-rate debt that was used to finance the acquisition of real estate from subsidiaries (see note 11). The debt obligations expose the Company to variability in interest payments due to changes in interest rates. On December 6, 2002, management entered into an interest-rate swap agreement, with an effective date of April 1, 2003, to manage fluctuations in cash flows resulting from interest rate risk. The interest-rate swap agreement matured on March 30, 2008. Changes in the fair value of the interest-rate swap, designated as a hedging instrument that effectively offsets the variability of cash flows associated with the variable-rate of the long-term debt
37(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
obligation, was reported in accumulated other comprehensive income, net of the related tax effect. This amount was subsequently reclassified into interest expense as a yield adjustment of the hedged debt obligation in the same period in which the related interest affects earnings. During the year ended December 31, 2008, the Company recorded $2 of interest expense related to this agreement. During the years ended December 31, 2007 and 2006 the Company’s interest expense was reduced by $419 and $379, respectively, of interest received related to this agreement. No amount representing cash-flow hedge ineffectiveness was recorded since the terms of the swap agreement allow the Company to assume no ineffectiveness in the agreement.
As of December 31, 2007, the fair value of the interest rate swap amounted to $93 and was included within the other assets in the accompanying consolidated balance sheets.
(b)Other Derivative Instruments
  The Company has invested in othercertain derivative instruments in order to diversify its investment in securities and participate in the foreign stock market.
 
  During 2005 the Company invested in two structured note agreements amounting to $5,000 each, maturing in May 25, 2012, where the interest income received is linked to the performance of the Dow Jones Euro STOXX 50 and Nikkei 225 Equity Indexes (the Indexes). Under these agreements the principal invested by the Company is protected, the only amount that varies according to the performance of the Indexes is the interest to be received upon the maturity of the instruments. Should the Indexes experience a negative performance during the holding period of

38

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
the structured notes, no interest will be received and no amount will be paid to the issuer of the structured notes.received. The contingent interest payment component within the structured note agreements meets the definition of an embedded derivative. In accordance with the provisions of SFAS No. 133, as amended,current accounting guidance, the embedded derivative component of the structured notes is separated from the structured notes and accounted for separately as a derivative instrument.
 
  The changes in the fair value of the embedded derivative component are recorded as gains or losses in earnings in the period of change. During the years ended December 31, 20082010, 2009 and 20072008 the Company recorded a loss associated with the change in the fair value of this derivative component of $859, $66, and $4,658, and $45, respectively. During the year ended December 31, 2006 the Company recorded a gain associated with the change in the fair value of this derivative component of $1,046. The change in the fair value of the embedded derivative component is included within the other income, net in the accompanying consolidated statement of earnings.
 
  As of December 31, 20082010 and 2007,2009, the fair value of the derivative component of the structured notes amounted to $1,674$748, and $6,332,$1,608, respectively, and is included within the Company’s other assets in the accompanying consolidated balance sheets. The investment component of the structured notes is accounted for as held-to-maturity debt securities and is included within the investment in securities in the accompanying consolidated balance sheets. As of December 31, 20082010 the fair value and amortized cost of the investment component of both structured notes amounted to $9,396$9,857, and $8,698,$9,443, respectively. As of December 31, 20072009 the fair value and amortized cost of the investment component of both structured notes amounted to $8,347$9,597 and $8,348,$9,063, respectively.
 
38(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(13)15. Agency Contract and Expense Reimbursement
 
  TSI processesTSS processed and payspaid claims as fiscal intermediary for the Medicare — Part B Program. Claims from this program, which are excluded fromProgram until February 2009, the accompanying consolidated statements of earnings, amounted to $312,358, $322,930, and $413,806, for each of the years in the three-year period ended December 31, 2008.
TSI iscontract termination date. TSS was reimbursed for administrative expenses incurred in performing this service. For the years ended December 31, 2010, 2009, and 2008, 2007,TSS billed $21, $1,842, and 2006, TSI was reimbursed by $8,678, $10,783, and $13,073, respectively, for such services, which are deducted from operating expenses in the accompanying consolidated statements of earnings.
 
  The operating expense reimbursements in connection with processing Medicare claims have been audited through 20022005 by federal government representatives. Management is of the opinion that no significant adjustments will be made affecting cost reimbursements through December 31, 2008.2010.
 
  On September 12, 2008, the Centers for Medicare and Medicaid Services (CMS) announced that First Coast Service Options (FCSO), a non-affiliated third party organization based in Jacksonville, Florida, was awarded the Medicare Administrative Contract (MAC) for Jurisdiction 9 (Florida, Puerto Rico and the U.S. Virgin Islands). FCSO proposed TSM subsidiary, TSITSS as a subcontractor in MAC Jurisdiction 9 to perform certain provider customer service functions, among others, in Puerto Rico, effective March 1, 2009.subject to terms and conditions negotiated between FSCO and TSS. Pursuant to this, TSS billed $2,829 and $2,650 for performing the customer service functions during the years ended December 31, 2010 and 2009, respectively.

39

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
(14)16. Reinsurance Activity
 
  The effect of reinsurance on premiums earned and claims incurred is as follows:
                        
 Premiums earned Claims incurred(1)                         
 2008 2007 2006 2008 2007 2006  Premiums Earned Claims Incurred(1) 
  2010 2009 2008 2010 2009 2008 
Gross $1,780,765 1,564,873 1,584,857 1,443,046 1,249,554 1,266,610  $1,981,700 $1,950,097 $1,777,652 $1,611,289 $1,611,675 $1,439,933 
Ceded  (85,308)  (81,325)  (77,644)  (20,121)  (38,695)  (22,869)  (80,600)  (81,013)  (85,308)  (26,379)  (18,748)  (20,121)
Assumed — 4,413 — 1,461 
             
 
Net $1,695,457 1,483,548 1,511,626 1,422,925 1,210,859 1,245,202  $1,901,100 $1,869,084 $1,692,344 $1,584,910 $1,592,927 $1,419,812 
             
 
(1) The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits amounting to $11,879, $12,945, and $11,989 $12,916 and $13,779that is included within the consolidated claims incurred during the years ended December 31, 2008, 20072010, 2009 and 2006,2008, respectively.
 (a)Reinsurance Ceded Activity
TSI, STSTSS, TSP and TSV, in accordance with general industry practices, annually purchase reinsurance to protect them from the impact of large unforeseen losses and prevent sudden and unpredictable changes in net income and stockholders’ equity of the Company. Reinsurance contracts do not relieve any of the subsidiaries from their obligations to policyholders. In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance
agreements, the subsidiaries would be liable for such defaulted amounts. During 2010, 2009 and 2008 TSP placed 14.37%, 13.53%, and 11.84% of its reinsurance business with one reinsurance company.
 
  39(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,TSS has two excess of loss reinsurance treaties whereby it cedes a portion of its premiums to third parties. Reinsurance contracts are primarily for periods of one year, and are subject to modifications and negotiations in each renewal date. Premiums ceded under these contracts amounted to $11,206, $7,341, and $5,623 in 2010, 2009 and 2008, respectively. Claims ceded amounted to $9,519, $3,870, and $8,407 in 2010, 2009 and 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
agreements, the subsidiaries would be liable for such defaulted amounts. During 2008, STS placed 12% of its reinsurance business with one reinsurance company. During 2007, and 2006, STS placed 9% of its reinsurance business with one reinsurance company.
TSI has two excess of loss reinsurance treaties whereby it cedes a portion of its premiums to third parties. Reinsurance contracts are primarily for periods of one year, and are subject to modifications and negotiations in each renewal date. Premiums ceded under these contracts amounted to $5,623, $3,349 and $2,249 in 2008, 2007 and 2006, respectively. Claims ceded amounted to $8,407, $2,957 and $3,766 in 2008, 2007 and 2006, respectively. Principal reinsurance agreements are as follows:
 • Organ transplant excess of loss treaty covering 100% of the claims up to a maximum of $1,000 per person, per life.
 
 • Routine medical care excess of loss treaty covering 100% of claims from the amount of $100 and up to a maximum of $900 per covered person, per contract year.
STS has a number of pro rata and excess of loss reinsurance treaties whereby the subsidiary retains for its own account all loss payments for each occurrence that does not exceed the stated amount in the agreements and a catastrophe cover, whereby it protects itself from a loss or disaster of a catastrophic nature. Under these treaties, STS ceded premiums of $72,115, $69,137, and $65,723, in 2008, 2007, and 2006, respectively.
TSP has a number of pro rata and excess of loss reinsurance treaties whereby the subsidiary retains for its own account all loss payments for each occurrence that does not exceed the stated amount in the agreements and a catastrophe cover, whereby it protects itself from a loss or disaster of a catastrophic nature. Under these treaties, TSP ceded premiums of $63,746, $67,541, and $72,115, in 2010, 2009, and 2008, respectively.
Reinsurance cessions are made on excess of loss and on a proportional basis. Principal reinsurance agreements are as follows:
Property quota share treaty covering for a maximum of $20,000 for any one risk. Under this treaty 32% of the risk is ceded to reinsurers. The remaining exposure is covered by a

40

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
 •Property quota share treaty covering for a maximum of $20,000 for any one risk. Under this treaty 40% of the risk is ceded to reinsurers. The remaining exposure is covered by a property per risk excess of loss treaty that provides reinsurance in excess of $500 up to a maximum of $12,000,$10,000, or the remaining 60%68% for any one risk. In addition, STSTSP has an additional property catastrophe excess of loss contract that provides protection for losses in excess of $5,000$8,000 resulting from any catastrophe, subject to a maximum loss of $10,000.
 
• Personal property catastrophe excess of loss. This treaty provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $70,000.$80,000.
 
• Commercial property catastrophe excess of loss. This treaty provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $195,000.$205,000.
 
• Property catastrophe excess of loss. This treaty provides protection for losses$185,000 in excess of $70,000$80,000 and $195,000$205,000 with respect to personal and commercial lines, respectively, resulting from any catastrophe, subject to a maximum loss of $175,000.$160,000 in respect of the ceded portion of the Commercial Lines Quota Share.
 
• Personal lines quota share. This treaty provides protection of 11.75%2.3% on all ground-up losses, subject to a limit of $1,000 for any one risk.
 
40(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
• Reinstatement premium protection. This treaty provides a maximum limit of approximately $4,700$5,000 for personal lines and $13,700$13,800 in commercial lines to cover the necessity of reinstating the catastrophe program in the event it is activated.
 
• Casualty excess of loss treaty. This treaty provides reinsurance for losses in excess of $225 up to a maximum of $12,000.
 
• Medical malpractice excess of loss. This treaty provides reinsurance in excess of $150 up to a maximum of $1,500 per incident.
 
• Builders’ risk quota share and first surplus covering contractors’ risk. This treaty provides protection on a 20/80 quota share basis for the initial $2,500 and a first surplus of $10,000 for a maximum of $12,000 for any one risk.
 
• Surety quota share treaty covering contract and miscellaneous surety bond business. This treaty provides reinsurance of up to $5,000 for contract surety bonds, subject to an aggregate of $10,000 per contractor and $3,000 per miscellaneous surety bond.
Facultative reinsurance is obtained when coverage per risk is required. During the year 2007 the ceded claims incurred of STS include approximately $23.4 million related to one policy ceded under a facultative reinsurance treaty. No individually significant policies were ceded during the years 2008 and 2006. All principal reinsurance contracts are for a period of one year, on a calendar basis, and are subject to modifications and negotiations in each renewal.
The ceded unearned reinsurance premiums on STSTSP arising from these reinsurance transactions amounted to $20,357$13,264, and $22,963$16,746 at December 31, 20082010 and 2007,2009, respectively, and are reported as other assets in the accompanying consolidated balance sheets.
TSV also cedes insurance with various reinsurance companies under a number of pro rata, excess of loss and catastrophe treaties. Under these treaties, TSV ceded premiums of $5,648, $6,131, and $7,570, $8,839,in 2010, 2009, and $9,672, in 2008, 2007, and 2006, respectively. Principal reinsurance agreements are as follows:

41

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
 • Group life pro rata agreement, reinsuring 50% of the risk up to $250 on the life of any participating individual of certain groups insured. This contract was cancelled on June 30, 2009.
 
 • Group life insurance facultative agreement, reinsuring risk in excess of $25 of certain group life policies and a combined pro rata and excess of loss agreement effective July 1, 2008, reinsuring 50% of the risk up to $200 and ceding the excess.
 
 • Group life insurance facultative excess of loss agreements in which TSV retains a portion of the losses on the life of any participating individual of certain groups insured. Any excess will be recovered from the reinsurer. This agreement provides for various retentions ($25, $50 and $75) of the losses. The contract was cancelled during December 2009.
 
 • Facultative pro rata agreements for the long-term disability insurance, reinsuring 65% of the risk.
 
41(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
 • Accidental death catastrophic reinsurance covering each and every accident arising out of one event or occurrence resulting in the death or dismemberment of five or more persons. The retention for each event is $250 with a maximum of $1,000 for each event and $2,000 per year.
 
 • Several reinsurance agreements, mostly on an excess of loss basis up to a maximum retention of $50. For certain new life products that have been issued after 1999, the retention limit is $175.
•TSV assumes 100% of the organ transplant risk, since January 31, 2007. Based on the experience of relatively low claims for this risk, the Company believes any single event of this nature will not have a significant adverse effect on the consolidated financial statements.
(b)Reinsurance Assumed Activity
On December 22, 2005, the Company’s former life insurance subsidiary SVTS entered into a coinsurance funds withheld agreement with GA Life. Under the terms of this agreement SVTS assumed 69% of all the business written as of and after the effective date of the agreement. On the effective date of the agreement, SVTS paid an initial ceding commission of $60,000 for its participation in the business written by GA Life as of and after the effective date of the agreement. This amount was considered a policy acquisition cost and was included within the deferred policy acquisition costs as of December 31, 2005. This amount, upon the acquisition of GA Life, was transferred to the value of business acquired when the agreement was canceled.
As in other coinsurance funds withheld agreements, GA Life invests the premiums received from policyholders, pays commissions, processes claims and engages in other administrative activities. GA Life also carries the reserves for the policies written as well as the underlying investments purchased with the premiums received from policyholders.
On January 31, 2006 the Company completed the acquisition of 100% of the common stock of GA Life. The results of operations and financial position of GA Life are included in the Company’s consolidated financial statements for the period following January 31, 2006. Effective June 30, 2006, the Company merged the operations of its former life insurance subsidiary, SVTS, into GA Life after receiving required regulatory approvals. The coinsurance funds withheld agreement was canceled effective February 1, 2006, subsequent to the acquisition of GA Life. Premiums earned and claims incurred assumed during the month ended January 31, 2006 amounted to $4,413 and $1,461, respectively.
(15)17. Income Taxes
 
  Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries. The Company and its subsidiaries are subject to Puerto Rico income taxes. The Company’s insurance subsidiaries are also subject to U.S. federal income taxes for foreign source dividend income. As of December 31, 2008,2010, tax years 20042005 through 20072010 of the Company and its subsidiaries are subject to examination by Puerto Rico taxing authorities.
42(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
On January 1, 2007, the Company adopted the provisions of FIN 48, no adjustment was required upon the adoption of this accounting pronouncement.
 
  TSITSS and STSTSP are taxed essentially the same as other corporations, with taxable income primarily determined on the basis of the statutory annual statements filed with the insurance regulatory authorities. Also, operations are subject to an alternative minimum income tax, which is calculated based on the formula established by existing tax laws. Any alternative minimum income tax paid may be used as a credit against the excess, if any, of regular income tax over the alternative minimum income tax in future years.
 
  TSV operates as a qualified domestic life insurance company and is subject to the alternative minimum tax and taxes on its capital gains. After the merger of GA Life and SVTS, SVTS ceased to exist and its tax responsibilities are now assumed by TSV.
 
  Federal income taxes were recognized by the Company’s insurance subsidiaries amounted to approximately $97, $125, and $112, $164,in 2010, 2009, and $148, in 2008, 2007, and 2006, respectively.
 
  TSM, TCI,TC, and ISI are subject to Puerto Rico income taxes as a regular corporation, as defined in the P.R. Internal Revenue Code, as amended.
43(Continued)

42

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
On July 10, 2009 the Governor of Puerto Rico signed into law Puerto Rico’s Act No. 37, which requires certain corporations to pay a 5% additional special tax over the tax obligation through December 31, 2011. The effective tax rate includes the additional special tax, as enacted.
Recently, the Government of Puerto Rico adopted a comprehensive tax reform in two phases. The first phase of the tax reform was enacted in the last quarter of 2010 and was mostly related to reducing the income tax burden to individuals. In 2010 only, corporations received an income tax credit amounting to 7% of the tax determined, defined as the tax liability less certain credits. The second phase of the reform, which was approved on January 31, 2011, provides for the reduction of the maximum corporate income tax rate from 40.95% to approximately 30%, including the elimination of the above mentioned 5% additional special tax for corporations, as well as adding several tax credits and deductions, among other tax reliefs and changes.
  The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following:
             
  2008  2007  2006 
Income before taxes $31,944   72,645   67,559 
Statutory tax rate  39.0%  39.0%  39.0%
          
Income tax expense at statutory rate of 39%  12,458   28,332   26,348 
Increase (decrease) in taxes resulting from:            
Exempt interest income  (13,561)  (9,990)  (9,196)
Effect of taxing life insurance operations as a qualified domestic life insurance company instead of as a regular corporation  (1,336)  (1,115)  (1,674)
Effect of using earnings under statutory accounting principles instead of            
GAAP for TSI and STS  6,406   371   (1,718)
Effect of taxing capital gains at a preferential rate  (237)  (1,406)  (541)
Dividends received deduction  (810)  (821)  (325)
Other permanent disallowances, net  5,564   2,308   2,626 
Adjustment to deferred tax assets and liabilities for changes in effective tax rates  —   (2,131)  (2,009)
Other adjustments to deferred tax assets and liabilities  (300)  (423)  (399)
Tax credit benefit  (1,286)  —   — 
Other  256   (998)  (86)
          
Total income tax expense $7,154   14,127   13,026 
          
44(Continued)

43

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
             
  2010  2009  2008 
Income before taxes $84,203  $83,651  $31,944 
Statutory tax rate  40.95%  40.95%  39.0%
          
             
Income tax expense at statutory rate  34,481   34,255   12,458 
             
Increase (decrease) in taxes resulting from            
Exempt interest income  (11,955)  (13,201)  (13,561)
Effect of taxing life insurance operations as a qualified domestic life insurance company instead of as a regular corporation  (5,336)  (4,759)  (1,336)
Effect of using earnings under statutory accounting principles instead of GAAP for TSS and TSP  (1,430)  (3,089)  6,406 
Effect of taxing capital gains at a preferential rate  907   446   (237)
Dividends received deduction  (221)  (262)  (810)
Adjustment to deferred tax assets and liabilities for changes in effective tax rates  —   (239)  — 
Other adjustments to deferred tax assets and liabilities  (132)  (771)  (300)
Tax credit benefit  (1,569)  (2,386)  (1,286)
Other permanent disallowances, net:            
Effect of capital gains preferential rate on impairments  —   1,385   2,916 
Disallowance of expenses related to exempt interest income  1,115   871   1,792 
Disallowed interest expense  597   730   1,014 
Other  423   1,404   (158)
          
Total other permanent differences  2,135   4,390   5,564 
          
Other adjustments  522   487   256 
          
Total Income Tax Expense $17,402  $14,871  $7,154 
          

44

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
  Deferred income taxes reflect the tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The net deferred tax asset at December 31, 20082010 and 20072009 of the Company and its subsidiaries is composed of the following:
                
 2008 2007  2010 2009 
 
Deferred tax assets: 
Deferred tax assets
 
Allowance for doubtful receivables $5,325 5,422  $7,679 $9,869 
Liability for pension benefits 14,681 9,885  17,443 13,161 
Employee benefits plan 4,214 4,856  2,509 3,142 
Postretirement benefits 1,454 1,789  1,434 1,668 
Deferred compensation 1,661 1,519  2,185 1,952 
Accumulated depreciation 334 356  289 312 
Impairment loss on investments 2,816 565  2,891 3,654 
Contingency reserves — 50  214 214 
Unrealized loss on trading securities 1,300 — 
Share-based compensation 10 592 
Unrealized loss on derivative instruments 82 —  175 89 
Alternative minimum income tax credit 940 830  955 955 
Purchased tax credits 8,337 —  42 7,388 
Other 767 544  1,135 754 
          
Gross deferred tax assets 41,911 25,816  36,961 43,750 
          
 
Deferred tax liabilities: 
Deferred tax liabilities
 
Deferred policy acquisition costs  (7,531)  (7,102)  (7,359)  (8,103)
Catastrophe loss reserve trust fund  (5,495)  (5,035)  (6,247)  (5,935)
Unrealized gain upon acquisition of GA Life  (1,753)  (2,092)  (539)  (982)
Unrealized gain on trading securities —  (1,859)  (1,135)  (285)
Unrealized gain on securities available for sale  (988)  (1,842)  (4,658)  (1,626)
Unrealized gain on derivative instruments —  (383)
Unamortized bond issue costs  (347)  (383)  (224)  (318)
Cash-flow hedges —  (37)
Contingency reserves  (302) — 
Other  (300)  (300)  (9)  (38)
          
Gross deferred tax liabilities  (16,716)  (19,033)  (20,171)  (17,287)
          
Net deferred tax asset $25,195 6,783  $16,790 $26,463 
          
The net deferred tax asset shown in the table above at December 31, 2010 and 2009 is reflected in the consolidated balance sheets as $29,445 and $37,551, respectively, in deferred tax assets and $12,655 and $11,088, in deferred tax liabilities, respectively, reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Company.
  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes that it is more likely than not that the Company will realize the benefits of these deductible differences.

45

(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
(16)18. Pension Plans
On December 31, 2006, the Company adopted the recognition and disclosures provisions of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans.
  Noncontributory Defined-Benefit Pension Plan
 
  The Company sponsors a noncontributory defined-benefit pension plan for all of its employees and for the employees for certain of its subsidiaries who are age 21 or older and have completed one year of service.subsidiaries. Pension benefits begin to vest after five years of vesting service, as defined, and are based on years of service and final average salary, as defined. The funding policy is to contribute to the plan as necessary to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts as the Company may determine to be appropriate from time to time. The measurement date used to determine pension benefit measures for the pension plan is December 31.
 
  46(Continued)The following table sets forth the plan’s benefit obligations, fair value of plan assets, and funded status as of December 31, 2010 and 2009, accordingly:

46

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
The following table sets forth the plan’s benefit obligations, fair value of plan assets, and funded status as of December 31, 2008 and 2007, accordingly:
                
 2008 2007  2010 2009 
Change in benefit obligation: 
Change in benefit obligation
 
Projected benefit obligation at beginning of year $89,598 88,774  $90,888 $84,776 
Service cost 5,287 5,489  4,975 4,912 
Interest cost 5,458 5,072  6,033 5,712 
Benefit payments  (7,926)  (5,141)  (3,963)  (7,004)
Actuarial losses (gains)  (7,641) 1,774 
Plan amendments —  (6,370)
Actuarial losses 15,979 2,492 
          
Projected benefit obligation at end of year $84,776 89,598  $113,912 $90,888 
          
Accumulated benefit obligation at end of year $62,371 66,042  $85,858 $67,825 
  
Change in fair value of plan assets: 
Change in fair value of plan assets
 
Fair value of plan assets at beginning of year $63,614 59,520  $53,433 $44,100 
Actual return on assets (net of expenses)  (16,588) 4,234  8,260 8,337 
Employer contributions 5,000 5,000  9,800 8,000 
Benefit payments  (7,926)  (5,140)  (3,963)  (7,004)
          
Fair value of plan assets at end of year $44,100 63,614  $67,530 $53,433 
          
Funded status at end of year $(40,677)  (25,984) $(46,382) $(37,455)
  
Amounts in accumulated other comprehensive income not yet recognized as a component of net periodic pension cost: 
Development of prior service cost (credit): 
Amounts in accumulated other comprehensive income not yet recognized as a component of net periodic pension cost 
Development of prior service credit 
Balance at beginning of year $(5,822) 606  $(4,922) $(5,372)
Amortization 450  (58) 449 450 
Prior service cost (credit) arising during the year —  (6,370)
          
Unrecognized net prior service cost (credit)  (5,372)  (5,822)
Net prior service credit  (4,473)  (4,922)
      
 
Development of actuarial loss: 
Development of actuarial loss 
Balance at beginning of year 30,373 30,409  38,245 42,559 
Amortization  (1,788)  (1,959)  (2,400)  (2,487)
Loss arising during the year 13,975 1,923 
(Gain)/Loss arising during the year 11,980  (1,827)
          
Unrecognized actuarial loss 42,560 30,373 
Actuarial net loss 47,825 38,245 
          
Sum of deferrals $37,188 24,551  $43,352 $33,323 
          
Net amount recognized $(3,489)  (1,433) $(3,029) $(4,132)
  The amounts recognized in the balance sheets as of December 31, 2010 and 2009 consist of the following:
         
  2010  2009 
Pension liability $46,382  $37,455 
Accumulated other comprehensive loss, net of a deferred tax of $16,373 and $12,944 in 2010 and 2009, respectively  27,821   20,379 
  47(Continued)The components of net periodic benefit cost income for 2010, 2009, and 2008 were as follows:

47

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
The amounts recognized in the balance sheets as of December 31, 2008 and 2007 consist of the following:
             
  2010  2009  2008 
Components of net periodic benefit cost
            
Service cost $4,976  $4,912  $5,287 
Interest cost  6,033   5,712   5,458 
Expected return on assets  (4,262)  (4,018)  (5,027)
Amortization of prior service (benefit) cost  (450)  (450)  (450)
Amortization of actuarial loss  2,400   2,487   1,788 
          
Net periodic benefit cost $8,697  $8,643  $7,056 
          
         
  2008  2007 
Pension liability $40,676   25,984 
Accumulated other comprehensive loss, net of a deferred tax of $14,383 and $9,501 in 2008 and 2007, respectively  22,805   15,050 
The components of net periodic benefit cost and other amounts recognized in other comprehensive income for 2008, 2007, and 2006 were as follows:
             
  2008  2007  2006 
Components of net periodic benefit cost:            
Service cost $5,287   5,489   5,459 
Interest cost  5,458   5,072   4,655 
Expected return on assets  (5,027)  (4,383)  (3,858)
Amortization of prior service cost (benefit)  (450)  58   48 
Amortization of actuarial loss  1,788   1,959   2,435 
          
Net periodic benefit cost $7,056   8,195   8,739 
          
Net periodic pension expense may include settlement charges as a result of retirees selecting lump-sum distributions. Settlement charges may increase in the future if the number of eligible participants deciding to receive distributions and the amount of their benefits increases.
The estimated net loss and prior service benefit that will be amortized from accumulated other comprehensive loss into net periodic pension benefits cost during the next twelve months is as follows:
     
Prior service cost $(449)
Actuarial loss  2,291 
The following assumptions were used on a weighted average basis to determine benefit obligations of the plan and in computing the periodic benefit cost as of and for the years ended December 31, 2008, 2007, and 2006:
             
  2008 2007 2006
Discount rate  6.75%  6.25%  5.75%
Expected return on plan assets  8.00   8.00   8.00 
Rate of compensation increase Graded; 3.50% Graded; 3.50% Graded; 3.50%
  to 8.00% to 8.00% to 8.00%
48(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
The basis used to determine the overall expected long-term rate of return on assets assumption was an analysis of the historical rate of return for a portfolio with a similar asset allocation. The assumed long-term asset allocation for the plan is as follows: 53% — 67% equity securities; 26% — 36% debt securities; 4% — 12% real estate; and 0% — 3% cash. It is common on December 31 to have an increased cash position due to incoming cash contributions as well as outgoing cash disbursements.
Using historical investment returns, the plan’s expected asset mix, and adjusting for the difference between expected inflation and historical inflation, the 25th to 75th percentile range of annual rates of return is 6.4% — 9.0%.
The assumed discount rate of 6.75% at December 31, 2008 reflects the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants on that date. The Company determined the discount rate based on a range of factors, including a yield curve comprised of the rates of return on high-quality, fixed-income corporate bonds available at the measurement date and the related expected duration for the obligations.
The Company selected a rate from within this range of 8.00%, which reflects the Company’s best estimate for this assumption based on the historical data described above, information on the historical returns on assets invested in the pension trust, and expected future conditions. This rate is net of both investment related expenses and a 0.25% reduction for other administrative expenses charged to the trust.
(a)Plan Assets
 
  The Company’s weighted average asset allocations at December 31, 2008estimated net loss and 2007 wereprior service benefit that will be amortized from accumulated other comprehensive loss into net periodic pension benefits cost during the next twelve months is as follows:
         
Asset category 2008 2007
Equity securities  58%  59%
Debt securities  31   31 
Real estate  9   9 
Other  2   1 
    
Total  100%  100%
    
     
Prior service cost $(450)
Actuarial loss  3,129 
 The following assumptions were used on a weighted average basis to determine benefit obligations of the plan and in computing the periodic benefit cost as of and for the years ended December 31, 2010, 2009, and 2008:
             
  2010  2009  2008 
Discount rate  6.00%  6.75%  6.75%
Expected return on plan assets  7.75%  7.75%  8.00%
Rate of compensation increase Graded; 3.50% Graded; 3.50% Graded; 3.50%
  to 8.00% to 8.00% to 8.00%
As of December 31, 2010, the basis of the overall expected long-term rate of return on assets assumption is a forward-looking approach based on the current long-term capital market outlook assumptions of the assets categories the trust invests in and the trust’s target asset allocation. At December 31, 2010, the assumed target asset allocation for the program is: 44%-56% equity securities, 35%-45% debt securities, and 6%-14% other securities. Using a mean-variance model to project return over 15-years horizon under the target asset allocation, the 35% to 65% percentile range of annual rates of return is 6.4%-8.4%. The Company selected a rate from within this range of 7.75%, which reflects the Company’s best estimate for this assumption based on the data described above, information on the historical returns on assets invested in the pension trust, and expected future conditions. This rate is net of both investment related expenses and a 0.10% reduction for other administrative expenses charged to the trust.
The assumed discount rate of 6.00% at December 31, 2010 reflects the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants on that date. The Company determined the discount rate based on a range of factors, including a yield curve comprised of the rates of return on high-quality, fixed-income corporate bonds available at the measurement date and the related expected duration for the obligations.

48

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
Plan Assets
Plan assets recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For level inputs and input definition, see note 9.
The following table summarizes fair value measurements by level at December 31, 2010 for assets measured at fair value on a recurring basis.
                 
  Level 1  Level 2  Level 3  Total 
Equity Investments                
Domestic Large Cap $203  $12,934  $1,241  $14,378 
Domestic Small Cap  —   3,760   —   3,760 
Global equities  2,364   2,562   —   4,926 
International Large Cap  2   8,194   —   8,196 
International Small Cap  2,700   —   —   2,700 
Emerging Markets  —   2,871   —   2,871 
Fixed Income Investments                
High Yield  176   2,608   346   3,130 
Core  (19)  13,786   28   13,795 
Long Duration  51   7,865   —   7,916 
Real Estate Investments                
REIT  (2)  957   2,575   3,530 
Real Estate Assets  21   2,307   —   2,328 
             
  $5,496  $57,844  $4,190  $67,530 
             
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010 is as follows:
                     
  Domestic      Fixed       
  Large  Fixed Income  Income  Real    
  Cap  High Yield  Core  Estate  Total 
Beginning Balance at December 31, 2009 $961  $277  $28  $2,290  $3,556 
Actual return on program assets:                    
Relating to assets still held at the reporting date  180   (7)  —   275   448 
Relating to assets sold during the period  —   (66)  —   (112)  (178)
Purchases  100   147   —   122   369 
Transfer in and/or out  —   (5)  —   —   (5)
                
Ending balance at December 31, 2010 $1,241  $346  $28  $2,575  $4,190 
                
  The Company’s plan assets are invested in the National Retirement Trust. The National Retirement Trust was formed to provide financial and legal resources to help members of the BCBSA offer retirement benefits to their employees.
 
  The investment program for the National Retirement Trust is based on the precepts of capital market theory that are generally followed by institutional investors, who by definition are long-term oriented investors. This philosophy holds that:
Increasing risk is rewarded with compensating returns over time, and therefore, prudent risk taking is justifiable for long-term investors.

49

(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
Risk can be controlled through diversification of asset classes and investment approaches, as well as diversification of individual securities.
Risk is reduced by time, and over time the relative performance of different asset classes is reasonably consistent. Over the long-term, equity investments have provided and should continue to provide superior returns over other security types. Fixed-income securities can dampen volatility and provide liquidity in periods of depressed economic activity.
The strategic or long-term allocation of assets among various asset classes is an important driver of long-term returns.
Relative performance of various asset classes is unpredictable in the short-term and attempts to shift tactically between asset classes are unlikely to be rewarded.
 •Risk can be controlled through diversification of asset classes and investment approaches, as well as diversification of individual securities.
•Risk is reduced by time, and over time the relative performance of different asset classes is reasonably consistent. Over the long-term, equity investments have provided and should continue to provide superior returns over other security types. Fixed-income securities can dampen volatility and provide liquidity in periods of depressed economic activity. Lengthening duration of fixed income securities may reduce surplus volatility.
•The strategic or long-term allocation of assets among various asset classes is an important driver of long-term returns.
•Relative performance of various asset classes is unpredictable in the short-term and attempts to shift tactically between asset classes are unlikely to be rewarded.
  Investments will be made for the sole interest of the participants and beneficiaries of the programs participating in the National Retirement Trust. Accordingly, the assets of the National Retirement Trust shall be invested in accordance with these objectives:
•Ensure assets are available to meet current and future obligations of the participating programs when due.
Earn a minimum rate of return no less than the actuarial interest rate.
Earn the maximum return that can be realistically achieved in the markets over the long-term at a specified and controlled level of risk in order to minimize future contributions.
Invest the assets with the care, skill, and diligence that a prudent person acting in a like capacity would undertake. In the process, the Administration of the Trust has the objective of controlling the costs involved with administering and managing the investments of the National Retirement Trust.
(b)Cash Flows
 
 •Invest assets with consideration of the liability characteristics in order to better align assets and liabilities.
•Earn the maximum return that can be realistically achieved in the markets over the long-term at a specified and controlled level of risk in order to minimize future contributions.
•Invest the assets with the care, skill, and diligence that a prudent person acting in a like capacity would undertake. In the process, the Administration of the Trust has the objective of controlling the costs involved with administering and managing the investments of the National Retirement Trust.

50

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
Cash Flows
  The Company expects to contribute $7,000$10,000 to its pension program in 2009.2011.
 
  The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
     
Year ending December 31:    
2009 $3,726 
2010  4,143 
2011  4,408 
2012  5,008 
2013  6,244 
2014 — 2018  42,060 
50(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
     
Year ending December 31    
2011 $4,333 
2012  4,791 
2013  5,795 
2014  6,393 
2015  7,212 
2016 — 2020  53,965 
  Noncontributory Supplemental Pension Plan
 
  In addition, the Company sponsors a noncontributory supplemental pension plan. This plan covers employees with qualified defined benefit retirement plan benefits limited by the U.S. Internal Revenue Code maximum compensation and benefit limits. At December 31, 20082010 and 2007,2009, the Company has recorded a pension liability of $3,426$4,865 and $3,237,$3,589, respectively. The charge to accumulated other comprehensive loss related to the noncontributory pension plan at December 31, 20082010 and 20072009 amounted to $464$498 and $602,339, respectively, net of a deferred tax asset of $296$318 and $384,$217, respectively.
 
(17)19. Catastrophe Loss Reserve and Trust Fund
 
  In accordance with Chapter 25 of the Insurance Code, as amended, STSTSP is required to record a catastrophe loss reserve. This catastrophe loss reserve is supported by a trust fund for the payment of catastrophe losses. The reserve increases by amounts determined by applying a contribution rate, not in excess of 5%, to catastrophe written premiums as instructed annually by the Commissioner of Insurance, unless the level of the reserve exceeds 8% of catastrophe exposure, as defined. The reserve also increases by an amount equal to the resulting return in the supporting trust fund and decreases by payments on catastrophe losses or authorized withdrawals from the trust fund. Additions to the catastrophe loss reserve are deductible for income tax purposes.
 
  This trust may invest its funds in securities authorized by the Insurance Code, but not in investments whose value may be affected by hazards covered by the catastrophic insurance losses. The interest earned on these investments and any realized gains (loss) on investment transactions are part of the trust fund and are recorded as income (expense) of the Company. An amount equal to the investment returns is recorded as an addition to the catastrophe loss reserve.trust fund.
 
  The interest earning assets in this fund, which amounted to $31,349$35,721 and $29,096$33,489 as of December 31, 20082010 and 2007,2009, respectively, are to be used solely and exclusively to pay catastrophe losses covered under policies written in Puerto Rico.
 
  STSTSP is required to make depositscontribute to the trust fund, if any, on or before January 3031 of the following year. Contributions are determined by a rate imposed by the Commissioner of Insurance for the

51

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
catastrophe policies written in that year. Additions in 20082010 and 2007,2009, amounting to $850$761 and $822,$810, respectively, were determined by applying a rate of 1% to catastrophe premiums written.
 
  The amount in the trust fund may be withdrawn or released in the case that STSTSP ceases to underwrite risks subject to catastrophe losses. Also, authorized withdrawals are allowed when the catastrophe loss reserve exceeds 8% of the catastrophe exposure, as defined.
 
  Retained earnings are restricted in the accompanying consolidated balance sheets by the total catastrophe loss reserve balance, which as of December 31, 20082010 and 20072009 amounted to $32,200$35,975 and $29,918,$34,411, respectively.
51(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(18)Business Combinations
 
Effective January 31, 2006, the Company acquired 100% of the common stock of GA Life. As a result of this acquisition, the Corporation became one of the leading providers of life insurance policies in Puerto Rico. The acquisition was accounted by the Company in accordance with the provisions of SFAS No. 141,Business Combinations. The results of operations and financial condition of GA Life are included in the accompanying consolidated financial statements for the period following the effective date of the acquisition. The aggregate purchase price of the acquired entity amounted to $38,196; of this amount $37,500 was paid in cash on January 31, 2006 and $696 was direct costs related to the acquisition.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.
     
Current assets $219,747 
Property and equipment  1,500 
Value of business acquired  22,823 
    
Total assets acquired  244,070 
     
Total liabilities assumed  (205,874)
    
     
Net assets acquired $38,196 
    
The estimated fair value of the value of business acquired was actuarially determined by discounting after-tax profits at a risk rate of return equal to approximately 12%. After-tax profits were forecasted based upon models of the insurance in-force, actual invested assets as of acquisition date and best-estimate actuarial assumptions regarding premium income, claims, persistency, expenses and investment income accruing from invested assets plus reinvestment of positive cash flows. The best-estimate actuarial assumptions were based upon GA Life’s recent experience in each of its major life and health insurance product lines. The amount of value of business acquired is to be amortized, considering interest, over the anticipated premium-paying period of the related policies in proportion to the ratio of annual premium revenue to the expected total premium revenue to be received over the life of the policies.
The following unaudited pro forma financial information presents the combined results of operations of the Company and GA Life as if the acquisition had occurred at the beginning of 2006. The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the acquisition been completed as of the beginning of the 2006 period presented and should not be taken as indicative of the Company’s future consolidated results of operations.
     
Operating revenues $1,576,492 
Net income  54,850 
Basic net income per share  2.05 
52(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(19)20. Stockholders’ Equity
 (a)a. Common Stock
On April 24, 2007, the Company’s board of directors (the Board) authorized a 3,000-for-one stock split of its Class A common stock effected in the form of a dividend of 2,999 shares for every one share outstanding. This stock split was effective on May 1, 2007 to all stockholders of record at the close of business on April 24, 2007. The total number of authorized shares and par value per share were unchanged by this action. The par value of the additional shares resulting from the stock split was reclassified from additional paid in capital to common stock. All references to the number of shares and per share amounts in this consolidated financial statements are presented after giving retroactive effect to the stock split.
In May 2007, the Company cancelled 24,000 director qualifying shares. Since February 2007, Board members are no longer required to hold qualifying shares to participate in the board of directors of the Company.
In December 7, 2007, the Company completed the initial public offering (IPO) of its Class B common stock. In this public offering the Company sold 16,100,000 shares, 10,813,191 of which were shares previously owned by selling shareholders. Proceeds received under this public offering amounted to $70,279, net of $6,380 of expenses directly related to the offering.
For a period of five years after the completion of the IPO, subject to the extension or shortening under certain circumstances, each holder of Class B common stock will benefit from anti-dilution protections provided in the Company’s amended and restated certificate of incorporation.
 
   On December 8, 2008, the Company converted 7 million issued and outstanding Class A shares into Class B shares, in conjunction with the expiration of the lockup agreements signed by holders of Class A shares at the time of the Company’s initial public offering.
 
 (b) For a period of five years after the completion of the IPO on December 7, 2007, subject to the extension or shortening under certain circumstances, each holder of Class B common stock will benefit from anti-dilution protections provided in the Company’s amended and restated certificate of incorporation.
b.Stock Repurchase Program
 
   The Company may repurchaserepurchased shares of its common stock under a $40,000 share repurchase program authorized by the Company’s Board of Directors in October 2008. Repurchases may bewere conducted through open-market purchases and privately-negotiated transactions of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During 2008,2009 the Company repurchased and retired approximately 1,181,5002,021,960 shares at an average per share price of $11.75,$12.92, for an aggregate cost of $13,880. Therefore, as of December 31, 2008, $26,120 remained authorized by the Company’s Board of Directors for future repurchases. At December 31, 2008, the Company had unsettled shares repurchases amounting to $6,235. Such amount is included in the accompanying consolidated balance sheet as account payable and accrued liabilities. The timing and extent of any purchases under the$26,120. This repurchase program will depend on market conditions, the trading price of the shares and other considerations, and the program may be suspended or terminated at any time.was completed during 2009.
   On September 2010, the Company’s Board approved another repurchase program of its common stock amounting to $30,000. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During 2010, the Company repurchased and retired 352,791 shares at an average per share price of $17.80, for an aggregate cost of $6,235.
 
 53c. (Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(c)Preferred Stock
 
   Authorized capital stock includes 100,000,000 of preferred stock with a par value of $1.00 per share. As of December 31, 20082010 and 2007,2009, there are no issued and outstanding preferred shares.
 
 (d)d. Dividends
On March 12, 2007, the Board declared a cash dividend of $2,448 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding those shares issued to the representatives of the community that are members of the Board (the qualifying shares). All stockholders of record as of the close of business on March 23, 2007, except those who only hold qualifying shares, received a dividend per share of $0.09 for each share held on that date.
On January 13, 2006, the Board declared a cash dividend of $6,231 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding qualifying shares. All stockholders of record as of the close of business on January 16, 2006, except those who only hold qualifying shares, received a dividend per share of $0.23 for each share held on that date.
(e)Liquidity Requirements
 
   As members of the BCBSA, the Company and TSITSS are required by membership standards of the association to maintain liquidity as defined by BCBSA. That is, to maintain net worth exceeding the Company Action Level as defined in the National Association of Insurance Commissioners’ (NAIC) Risk-Based Capital for Insurers Model Act. The companies are in compliance with this requirement.

52

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
(20)21. Comprehensive Income
 
  The accumulated balances for each classification of other comprehensive income (loss) are as follows:
                 
              Accumulated 
  Unrealized  Liability      other 
  gains (losess) on  for pension  Cash-flow  comprehensive 
  securities  benefits  hedges  loss 
                 
Beginning balance $9,554   (15,652)  56   (6,042)
Net current period change  (16,856)  (7,615)  (56)  (24,527)
Reclassification adjustments for gains and losses reclassified in income  12,904   —   —   12,904 
             
                 
Ending balance $5,602   (23,267)  —   (17,665)
             
54(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
             
          Accumulated 
  Unrealized  Liability  Other 
  Gains on  for Pension  Comprehensive 
  securities  Benefits  Income 
Beginning balance at December 31, 2009
 $9,141  $(20,717) $(11,576)
Net current period change  25,717   (6,562)  19,155 
Reclassification adjustments for gains and losses reclassified in income  (2,115)  —   (2,115)
          
Ending balance at December 31, 2010
 $32,743  $(27,279) $5,464 
          
  The related deferred tax effects allocated to each component of other comprehensive income in the accompanying consolidated statements of stockholders’ equity and comprehensive income in 20082010, 2009 and 20072008 are as follows:
                        
 2008  2010 
 Deferred tax    Deferred Tax   
 Before-tax (expense) Net-of-tax  Before-Tax (Expense) Net-of-Tax 
 amount benefit amount  Amount Benefit Amount 
 
Unrealized holding losses on securities arising during the period $(18,944) 2,088  (16,856)
Unrealized holding gains on securities arising during the period $30,255 $(5,749) $24,506 
Less reclassification adjustment for gains and losses realized in income 14,138  (1,234) 12,904   (2,410) 1,506  (904)
              
 
Net change in unrealized loss  (4,806) 854  (3,952)
 
Net change in unrealized gain 27,845  (4,243) 23,602 
Liability for pension benefits  (12,411) 4,796  (7,615)  (10,844) 4,282  (6,562)
Cash-flow hedges  (93) 37  (56)
       
        
Net current period change $(17,310) 5,687  (11,623) $17,001 $39 $17,040 
              
             
  2007 
      Deferred tax    
  Before-tax  (expense)  Net-of-tax 
  amount  benefit  amount 
Unrealized holding gains on securities arising during the period $10,005   (1,622)  8,383 
Less reclassification adjustment for gains and losses realized in income  1,384   (218)  1,166 
          
             
Net change in unrealized gain  11,389   (1,840)  9,549 
             
Liability for pension benefits  6,697   (2,607)  4,090 
Cash-flow hedges  (409)  159   (250)
          
             
Net current period change $17,677   (4,288)  13,389 
          
55(Continued)
             
  2009 
      Deferred Tax    
  Before-Tax  (Expense)  Net-of-Tax 
  Amount  Benefit  Amount 
Unrealized holding losses on securities arising during the period $5,455  $(825) $4,630 
Less reclassification adjustment for gains and losses realized in income  (1,278)  187   (1,091)
          
Net change in unrealized loss  4,177   (638)  3,539 
             
Liability for pension benefits  4,070   (1,520)  2,550 
          
Net current period change $8,247  $(2,158) $6,089 
          

53

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
                        
 2006  2008 
 Deferred tax    Deferred Tax   
 Before-tax (expense) Net-of-tax  Before-Tax (Expense) Net-of-Tax 
 amount benefit amount  Amount Benefit Amount 
Unrealized holding losses on securities arising during the period $(6,008) 1,201  (4,807) $(18,944) $2,088 $(16,856)
       
Less reclassification adjustment for gains and losses realized in income 1,993  (398) 1,595  14,138  (1,234) 12,904 
       
        
Net change in unrealized loss  (4,015) 803  (3,212)  (4,806) 854  (3,952)
  
Liability for pension benefits 7,915  (2,963) 4,952   (12,411) 4,796  (7,615)
Cash-flow hedges  (105) 40  (65)  (93) 37  (56)
Adjustment to initially apply SFAS No.158  (26,233) 10,152  (16,081)
       
        
Net current period change $(22,438) 8,032  (14,406) $(17,310) $5,687 $(11,623)
              
(21)22. Share-Based Compensation
  In December 2007 the Company adopted the 2007 Incentive Plan (the Plan), which permits the board of directorsBoard the grant of stock options, restricted stock awards and performance awards to eligible officers, directors and key employees. The Plan authorizes grants to issue up to 4,700,000 of Class B common shares of authorized but unissued stock. At December 31, 2008,2010, there were 3,367,583 additional3,282,969 shares available for the Company to grant under the Plan. Stock options can be granted with an exercise price at least equal the stock’s fair market value at the date of grant. The stock option awards vest in equal annual installments over 3 years and its expiration date cannot exceed 7 years. The restricted stock and performance awards are issued at the fair value of the stock on the grant date.date with vesting periods ranging from one to three years. Restricted stock awards vest in equal annual installments, over 3 years.as stipulated in each restricted stock agreement. Performance awards vest on the last day of the performance period, provided that at least minimum performance standards were achieved.
56(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
  The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted average assumptions in the following table. In absence of adequate historical data, the Company estimates the expected life of the option using the shortcutsimplified method allowed by Staff Accounting Bulletin (SAB) No. 107. Since the Company was a newly public entity, expected volatility was computed based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option was based on the U.S. Treasury zero-coupon bonds yield curve in effect at the time of grant.
  The following assumptions were used in the development of fair value of option awards:
2007
Expected dividend yield0.00%
Expected volatility (per year)33.00%
Expected term (in years)4.50
Risk-free interest rate3.51%
             
  2010  2009  2008 
Expected dividend yield  —   —   — 
Expected volatility (per year)  43.00%  53.85%  — 
Expected term (in years)  4.50   4.50   — 
Risk-free interest rate  1.12%  1.47%  — 

54

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
  Stock option activity during the periods indicatedyear ended December 31, 2010 is as follows:
                 
      Weighted  Weighted    
      average  average  Aggregate 
  Number of  exercise  contractual  intrinsic 
  shares  price  term (years)  value 
                 
Outstanding balance at January 1, 2008  999,309  $14.50         
Grants  —             
               
                 
Outstanding balance at December 31, 2008  999,309  $14.50   5.93  $— 
               
                 
Exercisable at December 31, 2008  333,100  $14.50   5.93  $— 
                 
      Weighted  Weighted    
      Average  Average  Aggregate 
  Number of  Exercise  Contractual  Intrinsic 
  Shares  Price  Term (Years)  Value 
Outstanding balance at January 1, 2010  1,012,630  $14.47         
Grants  4,032  $16.85         
Exercised during the year  (21,982) $14.50         
Canceled during the year  (7,242) $14.50         
               
Outstanding balance at December 31, 2010  987,438  $14.48   3.96  $4,539,767 
               
Exercisable at December 31, 2010  974,525  $14.49   3.94  $4,472,252 
  During 2007, 999,309 options were granted. The weighted average grant date fair value of options granted during the year 20072010 and 2009 was $14.50.$6.20 and $5.63, respectively. No options were granted in 2008. There were 21,982 exercised options during 2010. There were no options exercised during the yearyears ended December 31, 20082009 and 2007. No options were granted in 2008.
57(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
  A summary of the status of the Company’s nonvested restricted and performance shares as of December 31, 2008,2010, and changes during the year ended December 31, 2008,2010, are presented below:
                 
  Restricted awards  Performance awards 
      Weighted      Weighted 
      average      average 
  Number of  exercise  Number of  exercise 
  shares  price  shares  price 
                 
Outstanding balance at January 1, 2008  166,554  $14.50   166,554  $14.50 
Granted  19,935   18.81   —     
Lapsed  (55,516)  14.50   —     
             
                 
Outstanding balance at December 31, 2008  130,973  $15.16   166,554  $14.50 
             
                 
Excercisable at end of year  55,516  $14.50   —  $— 
                 
  Restricted Awards  Performance Awards 
      Weighted      Weighted 
      Average      Average 
  Number of  Fair  Number of  Exercise 
  Shares  Value  Shares  Price 
Outstanding balance at January 1, 2010  81,675  $13.77   167,142  $14.46 
Granted  16,221   19.26   741   16.85 
Vested  —   —   —   — 
Lapsed  (78,467)  13.79   (65,479)  14.50 
Forefeited  (1,207)  14.50   (98,661)  14.50 
             
Outstanding balance at December 31, 2010  18,222  $18.52   3,743  $13.35 
             
  The weighted average grant date fair value of restricted shares granted during the year 2010, 2009 and 2008 were $19.26, $12.33, and 2007 were $18.81, respectively. Total fair value of restricted stock vested during the year ended December 31, 2010 and $14.50,2009 was $1,480 and $1,158, respectively. There were no restricted shares exercisedvested during the year ended December 31, 2008 and 2007.2008.
  At December 31, 2008 and 2007,2010 there was $5,956 and $8,590, respectively,$240 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.920.97 years. The Company currently uses authorized and unissued Class B common shares to satisfy share award exercises.

55

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
(22)23. Net Income Available to Stockholders and Basic Net Income per Share
  The following table sets forth the computation of basic and diluted earnings per share for the three-year period ended December 31, 2008.2010.
                        
 2008 2007 2006  2010 2009 2008 
Numerator for earnings per share: 
Numerator for earnings per share          
Net income available to stockholders $24,790 58,518 54,533  $66,801 $68,780 $24,790 
              
Denominator for basic earnings per share — Weighted average of common shares $32,120,461 27,200,067 26,729,500 
Effect of dilutive securities — Nonvested restricted stock awards 42,094 2,038 — 
 
Denominator for basic earnings per share —       
Weighted average of common shares 29,034,442 29,494,468 32,120,461 
 
Effect of dilutive securities 207,911 68,862 42,094 
              
Denominator for diluted earnings per share 32,162,555 27,202,105 26,729,500  $29,242,353 $29,563,330 $32,162,555 
              
Basic net income per share $0.77 2.15 2.04  $2.30 $2.33 $0.77 
Diluted net income per share 0.77 2.15 2.04  $2.28 $2.33 $0.77 
  During the years ended December 31, 20082010, 2009 and 2007,2008, the weighted average of all stock option shares of 999,3091,027, 1,012,594, and 83,276,999,309, respectively, were excluded from the denominator for diluted earnings per share
58(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
because the stock options were anti-dilutive. There were no anti-dilutive stock options during the year ended December 31, 2006.
(23)24. Commitments
  The Company leases its regional offices, certain equipment, and warehouse facilities under noncancelable operating leases. Minimum annual rental commitments at December 31, 20082010 under existing agreements are summarized as follows:
        
Year ending December 31: 
2009 $6,039 
2010 4,408 
Year ending December 31   
2011 2,731  $7,461 
2012 1,119  7,798 
2013 473  7,907 
2014 8,109 
2015 1,779 
Thereafter 2,134  2,993 
      
Total $16,904  $36,047 
      
  Rental expense for 2010, 2009, and 2008 2007,was $4,546, $4,690, and 2006 was $3,532, $4,007, and $3,962, respectively, after deducting the amount of $265, $303,$112, $132, and $348,$265, respectively, reimbursed by CMS for the administration of the Medicare Part B Program (see note 13)15).
(24)25. Contingencies
Legal Proceedings
 (a)Legal Proceedings
As of December 31, 2008, the CompanyThe Corporation is a defendant in various lawsuits arising in the ordinary course of business. We are also defendants in various other claims and proceedings, some of which are described below. Furthermore, the Commissioner of Insurance, as well as other Federal and Puerto Rico government authorities, regularly make inquiries and conduct audits concerning the Corporation’s compliance with applicable insurance and other laws and regulations.

56

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
  Management believes that the aggregate liabilities, if any, arising from all such claims, assessments, audits and lawsuits will not have a material adverse effect on the consolidated financial position or results of operations of the Corporation. However, given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Company’s financial condition, operating results and/or cash flows. Where the Corporation believes that a loss is both probable and estimable, such amounts have been recorded. In other cases, it is at least reasonably possible that the Corporation may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Corporation is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.
Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have contractual rights to acquire shares of the Corporation on favorable terms or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.
  
59(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
Hau et al Litigation (formerly known as Jordan et al)
  On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the Corporation, TSICompany, the Company’s subsidiary TSS and others in the Court of First Instance for San Juan, Superior Section (the “Court”“Court of First Instance”), alleging, among other things, violations by the defendants of provisions of the Puerto Rico Insurance Code, antitrust violations, unfair business practices, RICO violations, breach of contract with providers, and damages in the amount of $12 million. Following years of complaint amendments, motions practice and interim appeals up to the level of the Puerto Rico Supreme Court, the plaintiffs amended their complaint on June 20, 2008 to allege with particularity the same claims initially asserted but on behalf of a more limited group of plaintiffs, and increase their claim for damages to approximately $207 million. At a status conference heldAfter extensive discovery, Plaintiffs amended their complaint for the third time and dropped all claims predicated on August 18, 2008, the parties informed the Court that they had reached an agreement to try to simplify the case. Based on the agreement, which was approved by the Court, the defendants sent a letter to the plaintiffs on September 19, 2008 explaining the reasons why the allegationsviolations of the amended complaint should be dismissed. We are currently waitingantitrust and RICO laws and the Puerto Rico Insurance Code. In addition, the Plaintiffs voluntarily dismissed with prejudice any and all claims against officers of the Corporation and TSS. Two of the original plaintiffs were also eliminated from the Third Amended Complaint (TAC). The TAC only alleges breach of seven share acquisition agreements, breach of the provider contract by way of discriminatory audits and improper payment of services rendered. Against former President of the Company, Plaintiffs allege a claim for the plaintiffslibel and slander. Discovery is ongoing. The Company intends to reply.vigorously defend this claim.
Thomas Litigation
  On May 22, 2003, Kenneth A. Thomas, M.D. and Michael Kutell, M.D. filed a putative class action suit against the Blue Cross Blue ShieldDentists Association and substantially all of the other Blue Cross and Blue Shield plans in the United States, including TSI. The complaint alleges 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. TSI, along with the other defendants, moved to dismiss the complaint on multiple grounds, including but not limited an arbitration right and the applicability of the McCarran Ferguson Act. The parties announced a Settlement Agreement on April 27, 2007 and on April 19, 2008, the Court granted final approval of the settlement. A small group of physicians filed an appeal of the settlement that is pending in the Eleventh Circuit. The Company recorded an accrual for the settlement that is included within accounts payable and accrued liabilities in the accompanying consolidated financial statements.
Colón Litigation
On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSI predecessor stock, filed suit against TSI and the Puerto Rico Commissioner of Insurance (the Commissioner) in the Court of First Instance for San Juan, Superior Section. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner in which the sale of 1,582 shares to a number of TSI shareholders was voided. The Puerto Rico Court of Appeals upheld the order on March 31, 2000. The plaintiff requests that the court direct TSI to return his share of stock and pay damages in excess of $500,000 and attorney’s fees. Management plans to vigorously contest this lawsuit because, among other reasons, the Commissioner’s order is final and cannot be collaterally attacked in this litigation.
60(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
Puerto Rico Center for Municipal Revenue Collection
On March 1, 2006 and March 3, 2006, respectively, the Puerto Rico Center for Municipal Revenue Collection (CRIM) imposed a real property tax assessment of approximately $1.3 million and a personal property tax assessment of approximately $4.0 million upon TSI for fiscal years 1992-1993 through 2002-2003. During that time, TSI qualified as a tax-exempt entity under Puerto Rico law pursuant to rulings issued by the Puerto Rico tax authorities. In imposing the tax assessments, CRIM revoked the tax rulings retroactively, based on its contention that a for-profit corporation such as TSI is not entitled to such an exemption. On March 28, 2006 and March 29, 2006, respectively, TSI challenged the real and personal property tax assessments in the Court of First Instance for San Juan, Superior Section. The court granted summary judgment affirming the real property and personal property tax assessments on October 29, 2007 and December 5, 2007, respectively.
After unsuccessfully filing motions for reconsideration in both cases, TSI appealed the court’s decisions before the Puerto Rico Court of Appeals on November 29, 2007 and February 21, 2008, respectively. TSI also requested a consolidation of both cases, which the Court of Appeals approved on April 17, 2008. On May 27, 2008, TSI submitted a motion to the Court of Appeals requesting the Court to take notice of a recent decision of the Puerto Rico Supreme Court that addresses administrative law issues involving other parties and which TSI believes confirms its position that the rulings issued by the Puerto Rico tax authorities may not be revoked on a retroactive basis. On June 30, 2008 the Court of Appeals confirmed the summary judgment issued by the Court of First Instance in both property tax cases. On September 29, 2008, TSI timely filed a certiorari petition with the Puerto Rico Supreme Court, which is currently pending. Management believes that these municipal tax assessments are improper and expects to prevail in this litigation.
Dentists Association Litigation
  On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico, or “CCD”)Rico) filed a complaint in the Puerto Rico Court of First Instance for San Juan against 24 health plans operating in Puerto Rico that offer dental health coverage. The Company TSI, and Triple-C, Inc., a Company subsidiary,two of its subsidiaries, TSS and TCI were included as defendants. This litigation purports to be a class action filed on behalf of Puerto Rico dentists who are similarly situated; however, the complaint does not include a single dentist as a class representative nor a definition of the intended class.
  The complaint alleges that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to dentists so that they are not paid in a timely and complete manner for the covered medically necessary services they render. The complaint also alleges, among other things, violations to the Puerto Rico Insurance Code, antitrust laws, the Puerto Rico racketeering statute, unfair business practices, breach of contract with providers, and damages in the amount of $150 million. In addition, the complaint claims that the

57

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
Puerto Rico Insurance Companies Association (“ACODESE” for its Spanish acronym) is the hub of an alleged conspiracy concocted by the member plans to defraud dentists.
61(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
There are numerous available defenses to oppose both the request for class certification and the merits. The CompanyCorporation intends to vigorously defend this claim.
 Two codefendant plans, whose main operations are outside Puerto Rico, removed the case to federal court in Florida, which the plaintiffs and the other codefendants, including the Corporation, opposed. The federal district court in Florida decided that it lacked jurisdiction under the Class Action Fairness Act (CAFA) and remanded the case to state court. The removing defendants petitioned to appeal to the First Circuit Court of Appeals. Having accepted the appeal, the First Circuit Court of Appeals issued an order in late October 2009 which found the lower court’s decision premature. The Court of Appeals remanded the case to the federal district court in Puerto Rico (the DC) and allowed limited discovery to determine whether the case should be heard in federal court pursuant to CAFA. The parties completed the limited discovery in August 2010 and supplemented their previous filings.
On February 8, 2011 the DC issued its Opinion and Order, denying plaintiff’s motion to remand the case to state court because the injuries alleged in the complaint could be suffered outside Puerto Rico. It also decided to retain jurisdiction.
The Company plans to petition the DC to reconsider its ruling, pointing to clear evidence that the removing defendants are not primary defendants for purposes of CAFA and therefore, the case should be heard in state court.
Colón Litigation
On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSS predecessor stock, filed suit against TSS and the Puerto Rico Commissioner of Insurance (the “Commissioner”) in the Court of First Instance. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner in which the sale of 1,582 shares to a number of TSS shareholders was voided. TSS, however, appealed the Commissioner’s order before the Puerto Rico Court of Appeals, which upheld the order on March 31, 2000. Plaintiff requests that the court direct TSS to return his share of stock and compensate him for alleged damages in excess of $500,000 plus attorney’s fees. On January 13, 2011 case was dismissed [with prejudice] and plaintiff filed an appeal on the Puerto Rico Court of Appeals. The Company is vigorously contesting this lawsuit because, among other reasons, the Commissioner’s order is final and cannot be collaterally attacked in this litigation.
Claims by Heirs of Former Shareholders
  The Company and TSITSS are also defending fourfive individual lawsuits, and one purported class action, all filed in state court, from persons who claim to have inherited a total of 9071 shares of the CompanyCorporation or one of its predecessors or affiliates (before giving effect to the 3,000-for-one stock split). While each case presents unique facts and allegations, the lawsuits generally allege that the redemption of the shares by the CompanyCorporation pursuant to transfer and ownership restrictions contained in the Company’s (or its predecessor’s)predecessors’ or affiliates’) articles of incorporation and bylaws was improper. On February 18, 2009, the Court of First Instance for San Juan, Superior Section, issued an order granting our motion to dismiss the purported class action suit, on grounds that the claim was time barred under the Puerto Rico Securities Act. Motions to dismiss are pending in a majorityOne of the remaining cases is in its initial stage; one case was dismissed [with prejudice] and plaintiff filed a request for reconsideration; in the other cases, discovery has begun in all of them.been completed and the parties are awaiting trial. Management believes all these claims are time barred under one or more statutes of limitations and intends toother grounds and is vigorously defenddefending them. This belief is supported by the outcome of a similar claim brought by non-medical heirs against them.us in 2009. The Puerto Rico Court of Appeals

58

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
 (b)dismissed that case as time barred under the two year statute of limitations contained in the local securities law, and the Puerto Rico Supreme Court denied the plaintiffs petition for certiorari in January 2011.
 Guarantee AssociationsACODESE Investigation
During April 2010, each of the Company’s wholly-owned insurance subsidiaries received subpoenas for documents from the U.S. Attorney for the Commonwealth of Puerto Rico (the “U.S. Attorney”) and the Puerto Rico Department of Justice (“PRDOJ”) requesting information principally related to the Asociación de Compañías de Seguros de Puerto Rico, Inc. (“ACODESE” by its Spanish acronym). Also in April, the Company’s insurance subsidiaries received a request for information from the Office of the Commissioner of Insurance of Puerto Rico (“OCI”) related principally to ACODESE. The Company’s insurance subsidiaries are members of ACODESE, an insurance trade association established in Puerto Rico since 1975, and their current presidents have participated over the years on ACODESE’s board of directors.
The Company believes similar subpoenas and information requests were issued to other member companies of ACODESE in connection with the investigation of alleged payments by the former Executive Vice President of ACODESE to members of the Puerto Rico Legislative Assembly beginning in 2005. The Company, however, has not been informed of the specific subject matter of the investigations being conducted by the U.S. Attorney, the PRDOJ or the OCI. The Company is fully complying with the subpoenas and the request for information and intends to cooperate with any related government investigation. The Company at this time cannot reasonably assess the outcome of these investigations or their impact on the Company.
Intrusions into TCI’s Internet IPA Database
On September 21, 2010, the Company learned from a competitor that a specific internet database managed by our subsidiary TCI, containing information pertaining to individuals previously insured by TSS under the Government of Puerto Rico’s Health Insurance Plan (“HIP”) and to independent practice associations (“IPAs”) that provided services to those individuals, had been accessed without authorization by certain of the Company’s competitor’s employees from September 9 to September 15, 2010. TCI served as a third-party administrator for TSS in the administration of its HIP contracts until September 30, 2010. The Company conducted a thorough investigation with the assistance of external resources, and identified the information that was accessed and downloaded into the competitor’s system. The September 2010 intrusions may have potentially compromised protected health information of approximately 398,000 beneficiaries in the North and Metro-North regions of the HIP. Our investigation also revealed that protected health information of approximately 5,500 HIP beneficiaries, 2,500 Medicare beneficiaries and IPA data from all three HIP regions previously serviced by TSS was accessed through multiple, separate intrusions into the TCI IPA database from October 2008 to August 2010. The Company has no evidence indicating that the stolen information included Social Security numbers. The Company attempted to notify by mail all such beneficiaries whose information may have been compromised by these intrusions and established a toll-free call center to address inquiries and complaints from the individuals to whom notice was provided. The Company has received a total of approximately 1,530 inquiries and no complaints from these individuals.
The Company’s investigation revealed that the security breaches were the result of unauthorized use of one or more active user IDs and passwords specific to the TCI IPA database, and not the result of breaches of TCI’s, TSS’s or the Company’s system security features. Nonetheless, we took measures to strengthen the TCI server security and credentials management procedures and

59

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
conducted an assessment of our system-wide data and facility security to prevent the occurrence of a similar incident in the future.
 
  PursuantThe Company was unable to the Insurance Code, STS is a member of Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de Responsabilidad Professional Médico-Hospitalaria (SIMED) and of the Sindicato de Aseguradores de Responsabilidad Professional para Médicos. Both syndicates were organized fordetermine the purpose of underwriting medical-hospital professional liability insurance. As a member,these breaches and do not know the subsidiary shares risks with other member companiesextent of any fraudulent use of the information or its impact on the potentially affected individuals and accordingly, is contingently liable inIPAs. According to representations made by the event thatCompany’s competitor, however, the above-mentioned syndicates cannot meet their obligations. During 2008, 2007, and 2006, no assessments or payments were made for this contingency.target was financial information related to IPAs rather than the individuals’ information.
 
  Additionally, pursuant to Article 12The Company notified the appropriate Puerto Rico and federal government agencies of Rule LXIXthese events, including and issued public notice of the Insurance Code, STS isbreaches as required under Puerto Rico and federal law. The Company received a membernumber of the Compulsory Vehicle Liability Insurance Joint Underwriting Association (the Association). The Association was organized during 1997inquiries and requests for information related to underwrite insurance coverage of motor vehicle property damage liability risks effective January 1, 1998. As a participant, STS shares the risk, proportionatelythese events from these government agencies and are cooperating with other members, based on a formula established by the Insurance Code. During the three-year period ended December 31, 2008, the Association distributed good experience refunds. STS received refunds amounting to $1,131, $1,023, and $769, in 2008, 2007, and 2006, respectively.them.
 
  STS isThe Puerto Rico government agency that oversees the HIP has levied a memberfine of the Asociación de Garantía de Seguros de Todas Clases, excepto Vida, Incapacidad y Salud and TSI, TSV are members of the Asociación de Garantía de Seguros de Vida, Incapacidad y Salud. As members, they are required to provide funds for the payment of claims and unearned premiums reimbursements for policies issued by insurance companies declared insolvent. During 2008 and 2007 no assessment or payment was made by STS$100 on TSS in connection with insurance companies declared insolvent. During 2006, STS paid assessmentsthese incidents, but following our request for reconsideration, the agency decided to withdraw the fine until the pertinent federal authorities conclude their investigations of $995. Moreover, no assessments were attributablethis matter. The Compnay does not have sufficient information at this time to TSI and Triple-S Vida, Inc. during 2008, 2007, and 2006.
predict whether any future action by government entities or others as a result of the data breaches would adversely affect our business, financial condition or results of operations.
 
62(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(25)26. Statutory Accounting
 
  TSI,TSS, TSV and STSTPS (collectively known as the regulated subsidiaries) are regulated by the Commissioner of Insurance. The regulated subsidiaries are required to prepare financial statements using accounting practices prescribed or permitted by the Commissioner of Insurance, which differ from GAAP.
 
  The accumulated earnings of TSI,TSS, TSV, and STSTSP are restricted as to the payment of dividends by statutory limitations applicable to domestic insurance companies. Such limitations restrict the payment of dividends by insurance companies generally to unrestricted unassigned surplus funds reported for statutory purposes. As more fully described in note 17,19, a portion of the accumulated earnings of STSTSP are also restricted by the catastrophe loss reserve balance (amounting to $31,349$35,975 and $29,918$34,411 as of December 31, 20082010 and 2007,2009, respectively) as required by the Insurance Code.
 
  The combined net admitted assets, unassigned surplus and capital and surplusnet income of the insuranceregulated subsidiaries at December 31, 2008 (preliminary)2010, 2009 and 20072008 are as follows:
             
  2008
  TSI STS TSV
Net admitted assets $593,781   270,684   332,041 
Unassigned surplus  62,089   57,508   (13,318)
Capital and surplus  212,089   96,525   48,742 
             
  2007
  TSI STS TSV
Net admitted assets $702,125   273,601   310,428 
Unassigned surplus  67,768   57,346   (17,021)
Capital and surplus  217,768   95,765   45,039 
The statutory net income of the insurance subsidiaries for the years ended December 31, 2008 (preliminary), 2007, and 2006 is as follows:
             
  TSI STS TSV
2008 $26,838   4,767   2,624 
2007  41,742   14,608   7,736 
2006  24,723   9,270   7,077 
63(Continued)
             
(dollar amounts in millions) 2010  2009  2008 
Net admitted assets $1,347  $1,298  $1,197 
Capital and surplus  458   416   260 
Net income  58   43   30 

60

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
(26)27. Supplementary Information on Noncash Transactions Affecting Cash Flow Activities
             
  2008 2007 2006
             
Supplementary information:            
Noncash transactions affecting cash flows activities:            
Change in net unrealized gain on securities available for sale, including deferred income tax liability of $854, $1,840, and $803 in 2008, 2007, and 2006, respectively $(3,952)  9,549   (3,212)
Change in cash-flow hedges, including deferred income tax liability of $37, $159 and $40 in 2008, 2007, and 2006, respectively  (56)  (250)  (65)
Change in liability for pension benefits, and deferred income tax asset of $4,796, $2,189, and $7,189, in 2008, 2007, and 2006, respectively  (7,615)  4,090   4,952 
Adjustment to initially apply SFAS No. 158, including deferred income tax effect of $10,152 in 2006.      —   (16,081)
Unsettled shares repurchases  6,235   —   — 
Unsettled investment acquisitions  —   117,706   226 
Unsettled investment sales  (1,500)  —   (13)
             
Other:            
Income taxes paid  25,597   25,940   2,813 
Interest paid  14,330   14,102   14,215 
             
  2010  2009  2008 
Supplementary information
            
Noncash transactions affecting cash flows activities            
Change in net unrealized gain on securities available for sale, including deferred income tax (asset)/liability of $4,243, $(638), and $854 in 2010, 2009, and 2008, respectively $(23,602) $3,539  $(3,952)
Change in cash-flow hedges, including deferred income tax liability of $37 $—  $—  $(56)
Change in liability for pension benefits, and deferred income tax (liability)/asset of $(4,282), $(1,520), $4,796, in 2010, 2009, and 2008, respectively $(6,562) $2,550  $(7,615)
Unsettled shares repurchases $—  $—  $6,235 
Unsettled investment sales $—  $—  $(1,500)
Other            
Income taxes paid $3,187  $15,552  $25,597 
Interest paid $11,925  $11,605  $14,330 
28. On January 31, 2006, the Company acquired GA Life (now TSV). Refer to note 18 for a summary of assets acquired and liabilities assumed as part of the acquisition.
Business Combination
 
  64On February 7, 2011 the Company announced that its subsidiary, TSS, completed the acquisition of 100% of the outstanding capital stock of Socios Mayores en Salud Holdings, Inc. (SMSH) for approximately $83.0 million in a transaction funded with unrestricted cash. SMSH is the parent company of American Health, Inc., a provider of Medicare Advantage managed care services to over 40,000 dual and non-dual eligible members in Puerto Rico. After this acquisition the Company expects to be better positioned for continued growth in the Medicare Advantage business. The results of operations of SMSH are not reflected in the accompanying consolidated financial statements since the effective date of the transaction is not until 2011. The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, as of this date it is not possible to determine the allocation of the purchase price to the net assets acquired.
 (Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(27)29. Segment Information
 
  The operations of the Company are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance. Business segments were identified according to the type of insurance products offered.offered and consistent with the information provided to the chief operating decision maker. These segments and a description of their respective operations are as follows:

61

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
• Managed Care segment — TSITSS is engaged in the sale of managed care products to the commercialCommercial, Medicare and Medicaid market sectors. The Commercial accounts sector (includingincludes corporate accounts, U.S. federal government employees, individual accounts, local government employees, individual accounts and Medicare supplement) as well as to the Medicare Advantage, the Commonwealth of Puerto Rico Health Reform (the Reform) and stand-alone PDP.supplement. The following represents a description of the major contracts by sector:
 • Commercial— The premiums for this business are mainly originated through TSI’s internal sales force and a network of brokers and independent agents. TSITSS is a qualified contractor to provide health coverage to federal government employees within Puerto Rico. Earned premiums revenue related to this contract amounted to $124,239, $121,126,$130,803, $125,994, and $113,355$124,239 for the three-year period ended December 31, 2008, 2007,2010, 2009, and 2006,2008, respectively (see note 10)11).
•Under its commercial business, TSITSS also provides health coverage to certain employees of the Commonwealth of Puerto Rico and its instrumentalities. Earned premium revenue related to such health plans amounted to $40,686, $46,649,$63,353, $46,114, and $54,143,$40,686, for the three-year period ended December 31, 2010, 2009, and 2008, 2007, and 2006, respectively. TSI also processes and pays claims as fiscal intermediary for the Medicare — Part B Program in Puerto Rico and is reimbursed for operating expenses (see note 13).
 
 • Medicare— TSITSS provides services through its Medicare health plans pursuant to a limited number of contracts with CMS. These contracts generally have terms of one year and must be renewed each year. Each of our contracts with CMS is terminable for cause if TSI breaches a material provision of the contract or violate relevant laws or regulations. The premiums for this business are mainly originated through TSI’s internal sales force and a network of brokers and independent agents. Earned premium revenue related to the Medicare business amounted to $468,401, $513,823, and $438,723, $255,570, and $170,820for the three-year period ended December 31, 2008, 2007,2010, 2009, and 2006,2008, respectively.
 
 • Reform— TSI participatesTSS participated in the ReformMedicaid program to provide health coverage to medically indigent citizens in Puerto Rico. The Reform program provides health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the Commonwealth of Puerto Rico. The Reform consists ofRico, up to September 30, 2010. TSS provided managed care services to Medicaid members in the North and Southwest regions on a single policy withfully-insured basis and in the same benefits for each qualified medically indigent citizen.Metro-North region on an Administrative Service Only (ASO) basis. Earned premium revenue related to this business amounted to $340,123, $327,544,$284,815, $348,096, and $455,891,$340,123, for three-year period ended December 31, 2010, 2009, and 2008, 2007, and 2006, respectively. Since the Reform’s inception in 1995, TSI had been the sole provider for two to three regions each year. The contract for each geographical area is subject to termination in the event of any noncompliance by the insurance company, which is not corrected or cured to the satisfaction of the government entity overseeing the Reform, or on ninety days’ prior written notice in the event that the government determines that there is an insufficiency of funds to finance the Reform. These contracts usually have one-year terms and expire on June 30. Upon the
65(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
expiration of the contract for a geographical area, of the Commonwealth of Puerto Rico usually commences an open bidding process to select the carrier for each area. In October 2006, TSI was informed that the new contract to serve one of these regions, Metro-North, had been awarded to another managed care company effective November 1, 2006. The contracts for the other two areas were renewed for additional terms ending June 30, 2009. Effective November 2008, the Company was awarded with the Metro-North Region as an Administrative Service Only (ASO) contract for the term of one year. Administrative service fee for the Metro-North Region for the year ended December 31, 20082010 and 2009 amounted to $2,712;$12,535 and $23,299; which is included in the Administrative service fee in the accompanying consolidated statement of earnings.
• Life Insurance segment— This segment offers primarily life and accident and health insurance coverage, and annuity products. The premiums for this segment are mainly subscribed through TSV’s internal sales force and a network of independent brokers and agents.
 
• Property and Casualty Insurance segment—The predominant insurance lines of business of this segment are commercial multiple peril, auto physical damage, auto liability, and dwelling. The premiums for this segment are originated through a network of independent insurance agents and brokers. Agents or general agencies collect the premiums from the insureds, which are subsequently remitted to STS,TSP, net of commissions. Remittances are due 60 days after the closing date of the general agent’s account current.
 
The Company evaluates performance based primarily on the operating revenues and operating income of each segment. Operating revenues include premiums earned, net, administrative service fees and net investment income. Operating costs include claims incurred and operating expenses. The Company calculates operating income or loss as operating revenues less operating costs.
 
The accounting policies for the segments are the same as those described in the summary of significant accounting policies included in the notes to consolidated financial statements. Services provided between reportable segments are done at transfer prices which approximate fair value. The financial data of each segment is accounted for separately; therefore no segment allocation is

62

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(dollar amounts in thousands, except per share data)
necessary. However, certain operating expenses are centrally managed, therefore requiring an allocation to each segment. Most of these expenses are distributed to each segment based on different parameters, such as payroll hours, processed claims, or square footage, among others. In addition, some depreciable assets are kept by one segment, while allocating the depreciation expense to other segments. The allocation of the depreciation expense is based on the proportion of asset used by each segment. Certain expenses are not allocated to the segments and are kept within TSM’s operations.

63

Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
  The following tables summarize the operations by operating segment for each of the years in the three-year period ended December 31, 2008, 2007,2010, 2009, and 2006.2008.
66(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
                        
 2008 2007 2006  2010 2009 2008 
 
Operating revenues: 
Managed care: 
Operating revenues
 
Managed care 
Premiums earned, net $1,509,778 1,298,776 1,337,070  $1,697,083 $1,673,762 $1,506,665 
Fee revenue 19,187 14,018 14,089  39,546 48,643 19,187 
Intersegment premiums/fee revenue 6,538 6,229 5,531  6,852 5,995 6,538 
Net investment income 23,091 19,673 18,852  19,799 21,641 23,091 
              
Total managed care 1,558,594 1,338,696 1,375,542  1,763,280 1,750,041 1,555,481 
              
  
Life: 
Life 
Premiums earned, net 92,469 88,505 86,595  105,437 99,726 92,469 
Intersegment premiums 374 356 293  382 386 374 
Net investment income 16,482 15,016 13,749  17,130 16,763 16,482 
              
Total life 109,325 103,877 100,637  122,949 116,875 109,325 
              
  
Property and casualty: 
Property and casualty 
Premiums earned, net 93,211 96,267 87,961  98,580 95,596 93,211 
Intersegment premiums 610 616 591  613 613 610 
Net investment income 12,545 11,849 9,589  10,132 11,679 12,545 
              
Total property and casualty 106,366 108,732 98,141  109,325 107,888 106,366 
              
Other segments — intersegment service revenues* 46,578 44,971 53,375 
 
Other segments* 
Intersegment service revenues 45,852 52,997 46,578 
Operating revenues from external sources 2 — — 
       
Total other segments 45,854 52,997 46,578 
              
Total business segments 1,820,863 1,596,276 1,627,695  2,041,408 2,027,801 1,817,750 
 
TSM operating revenues from external sources 4,135 656 467  2,082 2,053 4,135 
Elimination of intersegment premiums  (7,523)  (7,201)  (6,415)  (7,847)  (6,994)  (7,523)
Elimination of intersegment service revenue  (46,578)  (44,971)  (53,375)  (45,852)  (52,997)  (46,578)
              
Consolidated operating revenues $1,770,897 1,544,760 1,568,372  $1,989,791 $1,969,863 $1,767,784 
              
 
* Includes segments that are not required to be reported separately. These segments includeseparately, primarily the data processing services organization as well as the third-party administrator of health insurance services.
67(Continued)

64

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 20062008
(Dollar amounts in thousands, except per share data)
             
  2010  2009  2008 
Operating income
            
Managed care $63,798  $57,193  $52,632 
Life  17,334   14,555   12,489 
Property and casualty  3,579   8,746   13,147 
Other segments*  1,161   1,482   985 
          
Total business segments  85,872   81,976   79,253 
TSM operating revenues from external sources  2,082   2,053   4,135 
TSM unallocated operating expenses  (9,566)  (9,004)  (9,283)
Elimination of TSM charges  9,619   9,548   9,991 
          
Consolidated operating income  88,007   84,573   84,096 
Consolidated net realized investment gains (losses)  2,532   614   (13,940)
Consolidated net unrealized gain (loss) on trading securities  5,433   10,497   (21,064)
Consolidated interest expense  (12,658)  (13,270)  (14,681)
Consolidated other income (expense), net  889   1,237   (2,467)
          
Consolidated income before taxes $84,203  $83,651  $31,944 
          
             
  2008  2007  2006 
Operating income:            
Managed care $52,632   57,392   45,472 
Life  12,489   10,716   11,196 
Property and casualty  13,147   10,740   11,250 
Other segments*  985   891   1,115 
          
             
Total business segments  79,253   79,739   69,033 
             
TSM operating revenues from external sources  4,135   656   467 
TSM unallocated operating expenses  (9,283)  (7,846)  (6,648)
Elimination of TSM charges  9,991   10,903   10,474 
          
             
Consolidated operating income  84,096   83,452   73,326 
             
Consolidated net realized investment gains (losses)  (13,940)  5,931   837 
Consolidated net unrealized gain (loss) on trading securities  (21,063)  (4,116)  7,699 
Consolidated interest expense  (14,681)  (15,839)  (16,626)
Consolidated other income, net  (2,468)  3,217   2,323 
          
             
Consolidated income before taxes $31,944   72,645   67,559 
          
                        
 2008 2007 2006  2010 2009 2008 
Depreciation expense: 
Depreciation expense
 
Managed care $4,339 4,277 3,788  $12,282 $6,640 $4,339 
Life 656 677 750  674 663 656 
Property and casualty 1,450 1,488 775  1,680 1,477 1,450 
              
Total business segments 6,445 6,442 5,313  14,636 8,780 6,445 
  
TSM depreciation expense 922 1,120 1,130  864 863 922 
              
 
Consolidated depreciation expense $7,367 7,562 6,443  $15,500 $9,643 $7,367 
              
 
* Includes segments that are not required to be reported separately. These segments includeseparately, primarily the data processing services organization as well as the third-party administrator of health insurance servicesservices.
68(Continued)

60

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Triple-S Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2008, 2007,2010, 2009 and 20062008
(Dollar amounts in thousands, except per share data)
         
  2010  2009 
Assets
        
Managed care $790,485  $746,674 
Life  523,246   487,290 
Property and casualty  339,955   351,793 
Other segments*  16,842   14,193 
       
Total business segments  1,670,528   1,599,950 
       
Unallocated amounts related to TSM        
Cash, cash equivalents, and investments  62,841   39,029 
Property and equipment, net  20,712   21,577 
Other assets  20,600   4,780 
       
   104,153   65,386 
       
Elimination entries — intersegment receivables and others  (15,002)  (16,632)
       
Consolidated total assets $1,759,679  $1,648,704 
       
         
  2008  2007 
Assets:        
Managed care $678,889   762,422 
Life  460,109   430,807 
Property and casualty  337,869   375,415 
Other segments*  12,620   11,255 
       
Total business segments  1,489,487   1,579,899 
       
         
Unallocated amounts related to TSM:        
Cash, cash equivalents, and investments  58,480   82,980 
Property and equipment, net  21,648   22,523 
Other assets  4,079   2,280 
       
   84,207   107,783 
       
Elimination entries — intersegment receivables and others  (25,235)  (28,140)
       
Consolidated total assets $1,548,459   1,659,542 
       
                
 2008 2007  2010 2009 
Significant noncash items: 
Net change in unrealized gain on securities available for sale: 
Managed care $(4,359) 2,928 
Life 538 3,253 
Property and casualty 1,139 3,085 
     
Total business segments  (2,682) 9,266 
Amount related to TSM  (1,270) 283 
     
Consolidated net change in unrealized gain on securities available for sale $(3,952) 9,549 
     
Net change in liability for pension benefits: 
Significant noncash items
 
Net change in unrealized gain on securities available for sale 
Managed care $(4,946) 2,838  $(8,512) $(282)
Life  (81) 35   (7,746)  (2,427)
Property and casualty  (490) 275   (2,328)  (489)
Other segments*  (1,948) 844   (196) — 
          
Total business segments  (7,465) 3,992   (18,782)  (3,198)
Amount related to TSM  (150) 98   (4,820)  (341)
          
Consolidated net change in liability for pension benefits $(7,615) 4,090 
Consolidated net change in unrealized gain on securities available for sale $(23,602) $(3,539)
          
 
* Includes segments that are not required to be reported separately. These segments includeseparately, primarily the data processing services organization as well as the third-party administrator of health insurance services.
69(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(28)Quarterly Financial Information (Unaudited)
                     
  2008 
  March 31  June 30  September 30  December 31  Total 
Revenues:                    
Premiums earned, net $404,399   419,157   433,219   438,682   1,695,457 
Administrative service fees  3,713   3,920   4,448   7,106   19,187 
Net investment income  13,432   14,302   14,072   14,447   56,253 
               ��
                     
Total operating revenues  421,544   437,379   451,739   460,235   1,770,897 
                     
Net realized investment gains (losses)  609   (1,741)  (1,101)  (11,707)  (13,940)
Net unrealized investment loss on trading securities  (6,250)  (951)  (3,605)  (10,257)  (21,063)
Other income (loss), net  (1,521)  1,360   (1,147)  (1,160)  (2,468)
                
                     
Total revenues  414,382   436,047   445,886   437,111   1,733,426 
                
                     
Benefits and expenses:                    
Claims incurred  350,207   354,780   365,585   364,342   1,434,914 
Operating expenses  60,031   61,399   63,572   66,885   251,887 
                
                     
Total operating costs  410,238   416,179   429,157   431,227   1,686,801 
                     
Interest expense  3,673   3,926   3,749   3,333   14,681 
                
                     
Total benefits and expenses  413,911   420,105   432,906   434,560   1,701,482 
                
                     
Income before taxes  471   15,942   12,980   2,551   31,944 
                
                     
Income tax expense (benefit):                    
Current  (184)  4,291   4,580   2,855   11,542 
Deferred  (547)  (486)  (1,071)  (2,284)  (4,388)
                
                     
Total income taxes  (731)  3,805   3,509   571   7,154 
                
                     
Net income $1,202   12,137   9,471   1,980   24,790 
                
                     
Basic net income per share $0.04   0.38   0.29   0.06   0.77 
Diluted net income per share  0.04   0.38   0.29   0.06   0.77 
70(Continued)

TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
                     
  2007 
  March 31  June 30  September 30  December 31  Total 
Revenues:                    
Premiums earned, net $348,465   377,346   375,803   381,934   1,483,548 
Administrative service fees  3,509   3,617   3,908   2,984   14,018 
Net investment income  11,121   11,047   11,229   13,797   47,194 
                
Total operating revenues  363,095   392,010   390,940   398,715   1,544,760 
Net realized investment gains (losses)  1,196   3,784   1,183   (232)  5,931 
Net unrealized investment gain (loss) on trading securities  (1,925)  573   588   (3,352)  (4,116)
Other income (loss), net  209   2,158   (525)  1,375   3,217 
                
Total revenues  362,575   398,525   392,186   396,506   1,549,792 
                
Benefits and expenses:                    
Claims incurred  297,318   308,023   310,033   308,401   1,223,775 
Operating expenses  56,137   59,358   57,944   64,094   237,533 
                
Total operating costs  353,455   367,381   367,977   372,495   1,461,308 
Interest expense  3,952   4,058   3,938   3,891   15,839 
                
Total benefits and expenses  357,407   371,439   371,915   376,386   1,477,147 
                
Income before taxes  5,168   27,086   20,271   20,120   72,645 
                
Income tax expense (benefit):                    
Current  1,060   5,938   4,575   4,333   15,906 
Deferred  (397)  343   206   (1,931)  (1,779)
                
Total income taxes  663   6,281   4,781   2,402   14,127 
                
Net income $4,505   20,805   15,490   17,718   58,518 
                
Basic net income per share $0.17   0.78   0.58   0.62   2.15 
Diluted net income per share  0.17   0.78   0.58   0.62   2.15 

7161

Triple-S Management Corporation and Subsidiaries
Schedule III — Supplementary Insurance InformationNotes to Consolidated Financial Statements
For the years ended December 31, 2008, 20072010, 2009 and 20062008
(Dollar amounts in thousands)30. Quarterly Financial Information (Unaudited)
                                             
  Deferred                              Amortization of       
  Policy                              Deferred Policy       
  Acquisition      Liability for      Other              Acquisition       
  Costs and Value      Future      Policy Claims      Net      Costs and Value  Other  Net 
  of Business  Claim  Policy  Unearned  and Benefits  Premium  Investment  Claims  of Business  Operating  Premiums 
Segment Acquired  Liabilities  Benefits  Premiums  Payable  Revenue  Income  Incurred  Acquired  Expenses  Written��
 
                                             
2008                                            
                                             
Managed care $—  $201,849  $—  $5,585  $—  $1,513,025  $23,091  $1,345,371  $—  $160,591  $1,513,025 
Life insurance  101,243   39,948   207,545   3,370   —   92,843   16,482   47,432   16,404   33,000   92,843 
Property and casualty insurance  25,104   81,913   —   101,186   —   93,821   12,546   42,111   27,383   23,725   95,867 
Other non-reportable segments, parent company operations and net consolidating entries.  —   —   —   —   —   (4,232)  4,134   —   —   (9,216)  — 
                                  
                                             
Total $126,347  $323,710  $207,545  $110,141  $—  $1,695,457  $56,253  $1,434,914  $43,787  $208,100  $1,701,735 
                                  
                                             
2007                                            
                                             
Managed care $—  $201,604  $—  $27,923  $—  $1,301,792  $19,673  $1,133,241  $—  $148,063  $1,301,792 
Life insurance  93,564   35,485   194,131   2,931   —   88,861   15,016   45,669   16,033   31,459   88,861 
Property and casualty insurance  23,675   116,741   —   101,745   —   96,883   11,849   44,865   28,917   24,210   101,747 
Other non-reportable segments, parent company operations and net consolidating entries.  —   —   —   —   —   (3,988)  656   —   —   (11,149)  — 
                                  
                                             
Total $117,239  $353,830  $194,131  $132,599  $—  $1,483,548  $47,194  $1,223,775  $44,950  $192,583  $1,492,400 
                                  
                                             
2006                                            
                                             
Managed care $—  $185,249  $—  $17,812  $—  $1,339,807  $18,852  $1,173,622  $—  $156,448  $1,339,807 
Life insurance  88,590   35,164   180,420   1,960   —   86,888   13,749   43,619   16,339   29,483   84,752 
Property and casualty insurance  22,827   94,269   —   93,810   —   88,552   9,589   41,740   25,118   20,033   93,252 
Other non-reportable segments, parent company operations and net consolidating entries.  —   —   —   —   —   (3,621)  467   —   —   (11,356)  — 
                                  
                                             
Total $111,417  $314,682  $180,420  $113,582  $—  $1,511,626  $42,657  $1,258,981  $41,457  $194,608  $1,517,811 
                                  
See accompanying independent registered public accounting firm’s report and notes to consolidated financial statements.
                     
  2010 
  March 31  June 30  September 30  December 31  Total 
Revenues
                    
Premiums earned, net $494,177  $502,761  $496,511  $407,651  $1,901,100 
Administrative service fees  12,498   12,166   10,195   4,687   39,546 
Net investment income  12,423   12,671   12,794   11,257   49,145 
                
Total operating revenues  519,098   527,598   519,500   423,595   1,989,791 
Net realized investment (losses) gains  (1,379)  1,433   (313)  2,791   2,532 
Net unrealized investment (losses) gains on trading securities  2,030   (6,010)  4,611   4,802   5,433 
Other (loss) income, net  152   (324)  576   485   889 
                
Total revenues  519,901   522,697   524,374   431,673   1,998,645 
                
Benefits and expenses
                    
Claims incurred  425,828   424,838   421,514   324,609   1,596,789 
Operating expenses  76,871   76,720   74,111   77,293   304,995 
                
Total operating costs  502,699   501,558   495,625   401,902   1,901,784 
Interest expense  3,228   3,372   3,026   3,032   12,658 
                
Total benefits and expenses  505,927   504,930   498,651   404,934   1,914,442 
                
Income before taxes  13,974   17,767   25,723   26,739   84,203 
                
Income tax expense (benefit)                    
Current  3,544   4,877   6,040   (113)  14,348 
Deferred  (762)  (2,167)  (805)  6,788   3,054 
                
Total income taxes  2,782   2,710   5,235   6,675   17,402 
                
Net income $11,192  $15,057  $20,488  $20,064  $66,801 
                
Basic net income per share $0.38  $0.52  $0.70  $0.70  $2.30 
Diluted net income per share $0.38  $0.51  $0.70  $0.69  $2.28 

62

Triple-S Management Corporation and Subsidiaries
Schedule IV — ReinsuranceNotes to Consolidated Financial Statements
For the years ended December 31, 2008, 20072010, 2009 and 20062008
(Dollar amounts in thousands)
                     
  2009 
  March 31  June 30  September 30  December 31  Total 
Revenues
                    
Premiums earned, net $451,438  $463,072  $476,269  $478,305  $1,869,084 
Administrative service fees  8,866   11,319   9,797   18,661   48,643 
Net investment income  12,541   13,360   12,955   13,280   52,136 
                
Total operating revenues  472,845   487,751   499,021   510,246   1,969,863 
Net realized investment (losses) gains  (1,727)  (1,625)  2,150   1,816   614 
Net unrealized investment (losses) gains on trading securities  (2,476)  5,652   4,860   2,461   10,497 
Other (loss) income, net  (379)  704   67   845   1,237 
                
Total revenues  468,263   492,482   506,098   515,368   1,982,211 
                
Benefits and expenses
                    
Claims incurred  393,486   395,271   412,392   404,723   1,605,872 
Operating expenses  68,252   68,603   71,205   71,358   279,418 
                
Total operating costs  461,738   463,874   483,597   476,081   1,885,290 
Interest expense  3,264   3,357   3,338   3,311   13,270 
                
Total benefits and expenses  465,002   467,231   486,935   479,392   1,898,560 
                
Income before taxes  3,261   25,251   19,163   35,976   83,651 
                
Income tax expense (benefit)                    
Current  451   9,090   2,096   7,560   19,197 
Deferred  (1,122)  (2,499)  (1,017)  312   (4,326)
                
Total income taxes  (671)  6,591   1,079   7,872   14,871 
                
Net income $3,932  $18,660  $18,084  $28,104  $68,780 
                
Basic net income per share $0.13  $0.64  $0.62  $0.96  $2.33 
Diluted net income per share $0.13  $0.63  $0.62  $0.96  $2.33 
                     
                Percentage 
      Ceded to  Assumed      of Amount 
  Gross  Other  from Other  Net  Assumed 
  Amount  Companies (1)  Companies  Amount  to Net 
 
                     
2008                    
                     
Life insurance in force $10,503,170   2,823,647   —   7,679,523   0.0%
                
                     
Premiums:                    
Life insurance $100,413   7,570   —   92,843   0.0%
Accident and health insurance  1,518,648   5,623   —   1,513,025   0.0%
Property and casualty insurance  167,982   72,115   —   95,867   0.0%
                
Total premiums $1,787,043   85,308   —   1,701,735   0.0%
                
                     
2007                    
                     
Life insurance in force $10,321,749   2,459,100   —   7,862,649   0.0%
                
                     
Premiums:                    
Life insurance $97,700   8,839   —   88,861   0.0%
Accident and health insurance  1,305,141   3,349   —   1,301,792   0.0%
Property and casualty insurance  170,884   69,137   —   101,747   0.0%
                
Total premiums $1,573,725   81,325   —   1,492,400   0.0%
                
                     
2006                    
                     
Life insurance in force $10,433,690   6,957,946   —   3,475,744   0.0%
                
                     
Premiums:                    
Life insurance $89,736   9,397   4,413   84,752   5.2%
Accident and health insurance  1,341,952   2,145   —   1,339,807   0.0%
Property and casualty insurance  158,975   65,723   —   93,252   0.0%
                
Total premiums $1,590,663   77,265   4,413   1,517,811   0.3%
                
(1)31. Premiums ceded onSubsequent Events
The Company evaluated subsequent events through the life insurance business are net of commission income on reinsurance amountingdate the financial statements were issued. No events, other than those described in these notes, have occurred that require disclosure pursuant to $287, $258 and $275 for the years ended December 31, 2008, 2007 and 2006.current Accounting Standard Codification.

63

See
Triple-S Management Corporation
Schedule II
Condensed Financial Information of Triple-S Management Corporation
(Registrant)
Balance Sheets
         
  As of December 31, 
(in thousands) 2010  2009 
Assets:        
Cash and cash equivalents $167  $361 
Securities available for sale, at fair value:        
Fixed maturities (amortized cost of $45,753 in 2010 and $31,914 in 2009)  49,649   32,242 
Equity Securities (cost of $11,444 in 2010 and $7,800 in 2009)  12,172   6,426 
Securities held to maturity, at amortized cost:        
Fixed maturities (fair value of $974 in 2010)  1,017   — 
Investment in subsidiaries  661,886   579,588 
Note receivable and accrued interest from subsidiary  44,140   46,354 
Due from subsidiaries  —   2,552 
Deferred tax assets  18,829   14,984 
Other assets  23,139   24,152 
       
Total assets $810,999  $706,659 
       
         
Liabilities:        
Due to subsidiary  4,182   4,335 
Short-term borrowings  15,575   — 
Long-term borrowings  116,027   117,667 
Liability for pension benefits  51,246   41,044 
Other liabilities  6,697   5,841 
       
Total liabilities  193,727   168,887 
       
         
Stockholders’ equity:        
Common stock, class A  9,043   9,043 
Common stock, class B  19,773   20,110 
Additional paid-in-capital  155,299   159,303 
Retained earnings  427,693   360,892 
Accumulated other comprehensive income (loss), net  5,464   (11,576)
       
Total stockholder’s equity  617,272   537,772 
       
Total liabilities and stockholder’s equity $810,999  $706,659 
       
The accompanying independent registered public accounting firm’s report and notes to consolidatedare an integral part of these condensed financial statements.statements

Triple-S Management Corporation
Schedule II
Condensed Financial Information of Triple-S Management Corporation
Triple-S Management Corporation
Statements of Earnings
             
(in thousands) 2010  2009  2008 
Investment income $4,588  $5,068  $7,324 
Other revenues  11,385   8,690   8,215 
          
Total revenues  15,973   13,758   15,539 
          
             
Operating expenses:            
General and administrative expenses  9,566   9,004   9,283 
Interest expense  6,038   6,693   7,301 
          
Total operating expenses  15,604   15,697   16,584 
             
          
(Loss) income before income taxes  369   (1,939)  (1,045)
          
Income tax (benefit) expense  529   (463)  268 
          
(Loss) Income of parent company  (160)  (1,476)  (1,313)
Equity in income of subsidiaries  66,961   70,256   26,103 
          
Net income $66,801  $68,780  $24,790 
          
The accompanying notes are an integral part of these condensed financial statements

 

Triple-S Management Corporation and Subsidiaries
Schedule V — Valuation and Qualifying AccountsII
For the years ended December 31, 2008, 2007 and 2006Condensed Financial Information of Triple-S Management Corporation
(Registrant)
Statements of Cash Flows
(Dollar amounts in thousands)
             
(in thousands) 12/31/2010  12/31/2009  12/31/2008 
Net income $66,801  $68,780  $24,790 
Adjustment to reconcile net income to net cash (used in)            
provided by operating activities:            
Equity in net income of subsidiaries  (66,961)  (70,256)  (26,103)
Depreciation and amortization  865   863   922 
Shared- based compensation  1,894   3,924   3,268 
Deferred income tax (expense) benefit  392   (644)  (363)
Dividends received from subsidiary  15,000   —   — 
Other  (314)  934   1,965 
Changes in assets and liabilities:            
Accrued interest from subisidiary  2,214   1,985   (3,188)
Due from subsidiaries  2,552   6,404   (8,359)
Other assets  148   (175)  (1,173)
Due to subsidiary  (153)  4,138   (5,818)
Other liabilities  (768)  (85)  2,343 
          
Net cash provided by (used in) operating activities  21,670   15,868   (11,716)
          
Cash flows from investing activities:            
Acquisition of investment in securities classified as available for sale  (95,346)  (40,996)  (70,684)
Proceeds from sale and maturities of investment in securities            
classified as available for sale  71,782   58,324   45,905 
Capitalization of subsidiary  (6,000)  —   — 
Net (acquisition) retirement of property and equipment  —   (792)  (47)
          
Net cash (used in) provided by investing activities  (29,564)  16,536   (24,826)
          
Cash flow from financing activities:            
Repayments of borrowings  (26,640)  (1,640)  (1,639)
Net proceeds from short-term borrowings  15,575   —   — 
Proceeds from long-term borrowings  25,000   —   — 
Repurchase of common stock  (6,235)  (32,355)  (7,645)
Other  —   —   6 
          
Net cash provided by (used in) financing activities  7,700   (33,995)  (9,278)
          
Net decrease in cash and cash equivalents  (194)  (1,591)  (45,820)
Cash and cash equivalents, beginning of year  361   1,952   47,772 
          
Cash and cash equivalents, end of year $167  $361  $1,952 
          
                     
      Additions        
  Balance at  Charged to  Charged to      Balance at 
  Beginning of  Costs and  Other Accounts  Deductions —  End of 
  Period  Expenses  — Describe (1)  Describe (2)  Period 
 
2008                    
                     
Allowance for doubtful receivables $15,925   821   —   (2,001)  14,745 
                
                     
2007                    
                     
Allowance for doubtful receivables $18,230   6,661   —   (8,966)  15,925 
                
2006                    
                     
Allowance for doubtful receivables $12,240   8,570   1,380   (3,960)  18,230 
                
(1)Represents amount of allowance for doubtful accounts acquired upon the purchase of GA Life and other adjustments.
(2)Deductions represent the write-off of accounts deemed uncollectible.
SeeThe accompanying independent registered public accounting firm’s report and notes to consolidatedare an integral part of these condensed financial statements.statements

 

TRIPLE-S MANAGEMENT CORPORATIONTriple-S Management Corporation
(Parent Company Only)

Notes to Condensed Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(With Independent Auditors’ Report Thereon)

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Triple-S Management Corporation:
Under date of March 18, 2009, we reported on the consolidated balance sheets of Triple-S Management Corporation and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008 as contained in the 2008 annual report to stockholders. Our reports refers to the adoption of the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans as of December 31, 2006. These consolidated financial statements and our report thereon are included in the annual report on Form 10-K for the year 2008. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the Item 15. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP                    
San Juan, Puerto Rico
March 18, 2009
Stamp No. 2376401 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Balance Sheets
December 31, 2008 and 2007
(Dollardollar amounts in thousands, except per share data)
         
  2008  2007 
Assets
        
Current assets:        
Cash and cash equivalents $1,952   47,772 
       
         
Receivables:        
Due from subsidiaries  8,956   597 
Other  70   25 
       
         
Total receivables  9,026   622 
         
Investment in securities  56,528   35,208 
Prepaid income tax  385   111 
Net deferred tax assets  414   367 
Accrued interest  868   173 
Other assets  115   198 
       
         
Total current assets  69,288   84,451 
         
Note receivable from subsidiary  37,000   57,000 
Accrued interest on note receivable from subsidiary  11,339   8,151 
Net deferred tax assets  1,459   543 
Investments in wholly owned subsidiaries  484,535   448,579 
Property and equipment, net  21,648   22,523 
Other assets  768   863 
       
         
Total assets $626,037   622,110 
       
         
Liabilities and Stockholders’ Equity
        
Current liabilities:        
Current portion of long-term debt $1,640   1,640 
Due to subsidiary  197   6,015 
Accounts payable and accrued expenses  14,154   8,045 
         
Total current liabilities  15,991   15,700 
         
Long-term debt  117,667   119,306 
         
Liability for pension benefits  7,280   4,566 
       
         
Total liabilities  140,938   139,572 
       
         
Stockholders’ equity:        
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issue and outstanding 9,042,809 and 16,042,809 shares at December 31, 2008 and 2007  9,043   16,043 
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issue and outstanding 22,104,989 and 16,266,554 at December 31, 2008 and December 31, 2007  22,105   16,266 
Additional paid-in capital  179,504   188,935 
Retained earnings  292,112   267,336 
Accumulated other comprehensive loss, net  (17,665)  (6,042)
       
   485,099   482,538 
         
Commitments and contingencies        
       
Total liabilities and stockholders’ equity $626,037   622,110 
       
See accompanying independent registered public accounting firm’s report and notes to financial statements.

2

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Earnings
Years ended December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
             
  2008  2007  2006 
Rental income $7,361   7,096   6,897 
Management fees  2,805   3,880   3,650 
General and administrative expenses  (9,283)  (7,846)  (6,648)
          
             
Operating income  883   3,130   3,899 
          
             
Other revenue (expenses):            
Equity in net income of subsidiaries  26,103   57,980   53,632 
Interest expense, net of interest income of $6,093, $5,477, and $6,088, in 2008, 2007, and 2006, respectively  (1,941)  (2,557)  (2,078)
Other income  13   397   — 
          
             
Total other revenue, net  24,175   55,820   51,554 
          
             
Income before income taxes  25,058   58,950   55,453 
          
             
Income tax expense (benefit):            
Current  631   520   772 
Deferred  (363)  (88)  148 
          
             
Total income tax expense, net  268   432   920 
          
             
Net income $24,790   58,518   54,533 
          
See accompanying independent registered public accounting firm’s report and notes to financial statements.

3

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Stockholders’ Equity and Comprehensive Income
Years ended December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
                         
                  Accumulated    
  Common  Common  Additional      other    
  stock  stock  paid-in  Retained  comprehensive    
  Class A  Class B  capital  earnings  income (loss)  Total 
Balance, December 31, 2005  26,712   —   124,052   162,964   (5,025)  308,703 
Dividends declared      —   —   (6,231)  —   (6,231)
Adjustment to initially apply SFAS No. 158, net of tax      —   —   —   (16,081)  (16,081)
Other  21       (21)          — 
                         
Comprehensive income:                        
Net income  —   —   —   54,533   —   54,533 
Net unrealized change in fair value of available for sale securities  —   —   —   —   (3,212)  (3,212)
Net change in minimum pension liability  —   —   —   —   4,952   4,952 
Net change in fair value of cash-flow hedges  —   —   —   —   (65)  (65)
                        
                         
Total comprehensive income                      56,208 
                   
                         
Balance, December 31, 2006  26,733   —   124,031   211,266   (19,431)  342,599 
Dividends declared  —   —   —   (2,448)  —   (2,448)
Sale of stock in public offering  (10,813)  16,100   64,992   —   —   70,279 
Grant of resticted Class B common stock  —   166   —   —   —   166 
Share-based compensation  —   —   34   —   —   34 
Other  123   —   (122)  —   —   1 
                         
Comprehensive income:                        
Net income  —   —   —   58,518   —   58,518 
Net unrealized change in fair value of available for sale securities  —   —   —   —   9,549   9,549 
Defined benefit pension plan:                        
Prior service cost, net  —   —   —   —   3,935   3,935 
Actuarial loss  —   —   —   —   155   155 
Net change in fair value of cash-flow hedges  —   —   —   —   (250)  (250)
                        
                         
Total comprehensive income                      71,907 
                   
Balance, December 31, 2007 $16,043   16,266   188,935   267,336   (6,042)  482,538 
                   
                         
Conversion of Class A common stock to Class B common stock  (7,000)  7,000   —   —   —   — 
Share-based compensation  —   —   3,268   —   —   3,268 
Grant of restricted Class B common stock  —   20   —   —   —   20 
Repurchase and retirement of common stock  —   (1,181)  (12,699)  —   —   (13,880)
Other  —   —   —   (14)  —   (14)
Comprehensive income:                        
Net income  —   —   —   24,790   —   24,790 
Net unrealized change in fair value of available for sale securities  —   —   —   —   (3,952)  (3,952)
Defined benefit pension plan:                        
Prior service credit, net  —   —   —   —   (266)  (266)
Actuarial loss  —   —   —   —   (7,349)  (7,349)
Net change in fair value of cash flow hedges  —   —   —   —   (56)  (56)
                        
                         
Total comprehensive income                      13,167 
                   
                         
Balance, December 31, 2008 $9,043   22,105   179,504   292,112   (17,665)  485,099 
                   
See accompanying independent registered public accounting firm’s report and notes to financial statements.

4

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Cash Flows
Years ended December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
             
  2008  2007  2006 
Cash flows from operating activities:            
Net income $24,790   58,518   54,533 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:            
Equity in net income of subsidiaries  (26,103)  (57,980)  (53,632)
Depreciation and amortization  922   1,120   1,130 
Share-based compensation  3,268   200   — 
Provision for obsolescence  —   —   (83)
Deferred income tax (benefit) expense  (607)  (88)  148 
Other  1,965   (394)  — 
Changes in assets and liabilities:            
Receivables  (8,404)  (233)  1,062 
Accrued interest  (3,883)  (4,244)  (1,842)
Prepaid income tax and other assets  (189)  (146)  517 
Accounts payable, accrued expenses, liability for pension benefit and due to subsidiary  (3,475)  (3,945)  6,807 
Income taxes payable  —   (291)  291 
          
             
Net cash (used in) provided by operating activities  (11,716)  (7,483)  8,931 
          
             
Cash flows from investing activities:            
Acquisition of investment in securities classified as available for sale  (70,684)  (28,202)  — 
Proceeds from sale and maturities of investment in securities classified as available for sale  45,905   4,393   335 
Notes receivable from subsidiaries  —   22,000   4,000 
Acquisition of business  —   —   (38,196)
Net retirement (acquisition) of property and equipment  (47)  149   (162)
          
             
Net cash used in investing activities  (24,826)  (1,660)  (34,023)
          
             
Cash flows from financing activities:            
Dividends  —   (2,448)  (6,231)
Repayments of long-term borrowings  (1,639)  (12,141)  (2,503)
Proceeds from long-term borrowings  —   —   35,000 
Net proceeds from initial public offering  —   70,279   — 
Repurchases and retirement of common stock  (7,645)  —   — 
Other  6   1   — 
          
             
Net cash (used in) provided by financing activities  (9,278)  55,691   26,266 
          
             
Net increase (decrease) in cash and cash equivalents  (45,820)  46,548   1,174 
             
Cash and cash equivalents, beginning of year  47,772   1,224   50 
          
             
Cash and cash equivalents, end of year $1,952   47,772   1,224 
          
             
Supplemental information:            
Income taxes paid $1,149   922   402 
Interest paid  7,357   7,751   7,809 
             
Noncash activities:            
Change in net unrealized gain on securities available for sale, including deferred income tax liability of $854, $1,840, and $803 in 2008, 2007 and 2006, respectively $(3,952)  9,549   (3,212)
Change in cash-flow hedges, including deferred tax liability of $37 and $159, $40 in 2008, 2007 and 2006, respectively  (56)  (250)  (65)
Change in liability for pension benefits and deferred income tax asset of $4,796, $2,189, and $7,189 in 2008, 2007, and 2006, respectively  (7,615)  4,090   4,952 
Adjustment to initially apply SFAS No. 158, including deferred income tax effect of $10,152 in 2006  —   —   (16,081)
Unsettled shares repurchases  6,235   —   — 
See accompanying independent registered public accounting firm’s report and notes to financial statements.

5

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)thousands)
(1)Organization
Triple-S Management Corporation (the Company or TSM) was incorporated under the laws of the Commonwealth of Puerto Rico on January 17, 1997 to engage, among other things, as the holding company of entities primarily involved in the insurance industry.
  The Company has the following wholly owned subsidiaries that are subjectaccompanying notes to the regulations ofcondensed financial statements should be read in conjunction with the Commissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance): (a) Triple-S, Inc. (TSI) a managed care organization, that provides health benefits services to subscribers through contracts with hospitals, physicians, dentists, laboratories, and other organizations located mainly in Puerto Rico; (b) Triple-S Vida, Inc. (TSV), which is engaged in the underwriting of life and accident and health insurance policiesconsolidated financial statements and the administration of annuity contracts; and (c) Seguros Triple-S, Inc. (STS), which is engagedaccompanying notes thereto included in Item 15 to the underwriting of property and casualty insurance policies. Effective February 16, 2009, TSI and STS change their name to Triple-S Salud, Inc. and Triple-S Propiedad, Inc., respectively. The Company and TSI are members of the Blue Cross and Blue Shield Association (BCBSA).Annual Report on Form 10-K.
 
(1) Effective January 31, 2006, theFor purposes of these condensed financial statements, Triple-S Management Corporation’s (the Company completed the acquisition of 100% of the common stocks of Great American Life Assurance Company of Puerto Rico (GA Life) (now Triple-S Vida, Inc.) and effective June 30, 2006, the Company merged the operations ofor TSM) investment in its former life and accident and health insurance subsidiary, Seguros de Vida Triple-S, Inc. (SVTS), into the GA Life. The results of operations and financial position of GA Life are included as part of equity in net income of subsidiaries in the accompanying statements of earnings for the period following January 31, 2006. Effective November 1, 2007 GA Life changed its name to Triple-S Vida, Inc.
The Company also has two other wholly owned subsidiaries Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TC). ISI is mainly engaged in providing data processing services torecorded using the Company and its subsidiaries. TC is mainly engaged as a third party administrator for TSI in the administration of the Commonwealth of Puerto Rico Health Care Reform business (the Reform). Also, TC provides health care advisory services to TSI and other health insurance-related services to the health insurance industry.
A substantial majority of the Company’s business activity through its subsidiaries is with insureds located throughout Puerto Rico and, as such, the Company is subject to the risks associated with the Puerto Rico economy.equity basis accounting.
 
(2) Significant Accounting Policies
 
  The significant accounting policies followed by the Company are set forth in the notes to the consolidated financial statements ofand the Company referredaccompanying notes thereto. Refer to in Item 15 to the Annual Report onof Form 10-K.
(Continued)

6

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(3) Property and Equipment, NetReclassifications
 
  Property and equipment as of December 31 are composed ofCertain amounts in the following:
         
  2008  2007 
Land $6,531   6,531 
Buildings and leasehold improvements  27,825   27,778 
       
         
   34,356   34,309 
         
Less accumulated depreciation and amortization  (12,708)  (11,786)
       
         
Property and equipment, net $21,648   22,523 
       
(4)Investment in Wholly Owned Subsidiaries2009 financial statements were reclassified to conform to the 2010 presentation. We reclassified certain allocations made to subsidiaries related to the liability for pension benefits.
 
Summarized combined financial information for the Company’s wholly owned subsidiaries as of and for the years ended December 31, 2008 and 2007 is as follows:
         
  2008  2007 
Assets
        
Cash, cash equivalents, and investments $1,003,316   1,168,182 
Receivables, net  250,644   216,525 
Other assets  235,527   195,192 
       
         
Total assets $1,489,487   1,579,899 
       
         
Liabilities and Equity
        
         
Claim liabilities $323,710   353,830 
Future policy benefits  207,545   194,131 
Unearned premiums  110,141   132,599 
Annuity contracts  48,764   46,083 
Accounts payable and other liabilities  314,792   404,677 
       
         
Total liabilities  1,004,952   1,131,320 
         
Stockholders’ equity  484,535   448,579 
       
         
Total liabilities and equity $1,489,487   1,579,899 
       
The net income of the subsidiaries during the three-year period ended December 31, 2008 was $26,103, $57,980, and $53,632. The Company allocates to its subsidiaries certain expenses incurred in the administration of their operations. Total charges including other expenses paid on behalf of the subsidiaries amounted to $8,596, $4,989 and $4,346, in the three-year period ended December 31, 2008.
(Continued)

7

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)
(5)(4) Long-Term Borrowings
 
  A summary of the long-term borrowings entered into by the Company at December 31, 20082009 and 20072008 follows:
         
  2008  2007 
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%. $60,000   60,000 
         
Senior unsecured notes payable of $35,000 issued on January 2006; due January 2021. Interest is payable monthly at a fixed rate of 6.70%.  35,000   35,000 
         
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 2.43% and 6.24% at December 31, 2008 and 2007, respectively).  24,307   25,946 
       
   119,307   120,946 
         
Less current maturities  (1,640)  (1,640)
       
Total loans payable to bank $117,667   119,306 
       
Aggregate maturities of the Company’s long term borrowings as of December 31, 2008 are summarized as follows:
     
2009  1,640 
2010  1,640 
2011  1,640 
2012  1,640 
2013  1,640 
Thereafter  111,107 
    
  $119,307 
    
All of the Company’s senior notes can be prepaid at par, in total or partially, five years after issuance as determined by the Company.
Debt issuance costs related to each of the Company’s senior unsecured notes were deferred and are being amortized over the term of its respective senior note. Unamortized debt issuance costs related to these senior unsecured notes as of December 31, 2008 and 2007 amounted to $710 and $768, respectively, and are included within the other assets in the accompanying balance sheets.
(Continued)
         
  2010  2009 
Senior unsecured notes payable of $60,000 issued on December 2005; due December 2020. Interest is payable monthly at a fixed rate of 6.60%. $35,000  $60,000 
Senior unsecured notes payable of $35,000 issued on January 2006; due January 2021. Interest is payable monthly at a fixed rate of 6.70%.  35,000   35,000 
Secured loan payable of $41,000, payable in monthly installments of $137 through July 1, 2024, plus interest at a rate reset periodically of 100 basis points over selected LIBOR maturity (which was 1.29% and 1.28% at December 31, 2010, and 2009, respectively).  21,027   22,667 
Repurchase agreement of $25.0 million entered on November 2010, due November 2015. Interest is payable quarterly at a fixed rate of 1.96%.  25,000   — 
       
Total borrowings $116,027  $117,667 
       

81

TRIPLE-S MANAGEMENT CORPORATIONTriple-S Management Corporation
(Parent Company Only)

Notes to Condensed Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)thousands)
Aggregate maturities of the Company’s long term borrowings as of December 31, 2010 are summarized as follows:
     
Year ending December 31    
2011 $1,640 
2012  1,640 
2013  1,640 
2014  1,640 
2015  26,640 
Thereafter  82,827 
    
  $116,027 
    
All of the Company’s senior notes can be prepaid at par, in total or partially, five years after issuance as determined by the Company.
Debt issuance costs related to each of the Company’s senior unsecured notes were deferred and are being amortized over the term of its respective senior note. Unamortized debt issuance costs related to these senior unsecured notes as of December 31, 2010 and 2009 amounted to $431 and $651, respectively, and are included within the other assets in the accompanying condensed balance sheets.
  The secured loan note payable previously described is guaranteed by a first position held by the bank on the Company’s and its subsidiaries land, building, and substantially all leasehold improvements, as collateral for the term of the loans under a continuing general security agreement. This secured loan contains certain non-financial covenants, which are customary in this type of facility, including but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitation on changes in control.
 
  The Companyrepurchase agreement has pledged as collateral investment securities available for sale with fair value of $28,453 (face value of $23,918). The investment securities underlying such agreements were delivered to the financial institution with whom the agreement was also a partytransacted. The dealers may have loaned, or used as collateral securities in the normal course of business operations. We maintain effective control over the investment securities pledged as collateral and accordingly, such securities continue to another secured loan whose outstanding balance of $10,500 was repaid upon its maturity on August 1, 2007.
Interest expensebe carried on the above long-term borrowings amounted to $7,301, $8,415 and $8,545, in the three-year period ended December 31, 2008.
(6)Income Taxes
The Company is subject to Puerto Rico income taxes. Under Puerto Rico income tax law, the Company is not allowed to fileaccompanying consolidated tax returns with its subsidiaries. As of December 31, 2008, tax years 2004 through 2007 are subject to examination by Puerto Rico taxing authorities.
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No.48,Accounting for Uncertainty in income Taxes and Interpretation of FASB statement No.109;no adjustment was required upon the adoption of this accounting pronouncement.
The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to net income before income taxes as a result of the following:balance sheets.
             
  2008  2007  2006 
Income tax expense at statutory rate of 39% $9,772   22,990   21,626 
Increase (decrease) in taxes resulting from:            
Equity in net income of wholly owned subsidiaries  (10,180)  (22,612)  (20,916)
Disallowances  678   154   37 
Other, net  (2)  (100)  173 
          
Total income tax expense $268   432   920 
          
(Continued)

92

TRIPLE-S MANAGEMENT CORPORATIONTriple-S Management Corporation
(Parent Company Only)

Notes to Condensed Financial Statements

December 31, 2008, 2007,2010, 2009 and 2006
2008
(Dollardollar amounts in thousands, except per share data)
Deferred income taxes reflect the tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The net deferred tax asset at December 31, 2008 and 2007 is composed of the following:
         
  2008  2007 
Deferred tax assets:        
Employee benefits plan $535   388 
Accumulated depreciation  334   356 
Liability for pension benefits  440   344 
Deferred compensation  198   155 
Unrealized loss on securities available for sale  217   — 
Impairment loss on investments  299   — 
Tax credit  243   — 
Other  —   37 
       
         
Gross deferred tax assets  2,266   1,280 
       
         
Deferred tax liabilities:        
Unamortized bond issue costs  (180)  (196)
Postretirement benefits  (136)  (54)
Other  (77)  (120)
       
         
Gross deferred tax liabilities  (393)  (370)
       
         
Net deferred tax asset $1,873   910 
       
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes that it is more likely than not that the Company will realize the benefits of these deductible differences.
(Continued)

10

TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2008, 2007, and 2006
(Dollar amounts in thousands, except per share data)thousands)
(7)(5) TransactionTransactions with Related Parties
 
  The following are the significant related-party transactions made for the three-year period ended December 31, 2008, 20072010, 2009 and 2006:2008:
             
  2008 2007 2006
Rent charges to subsidiaries $7,286   7,023   6,824 
Interest charged to subsidiary on notes receivable  3,189   4,821   5,620 
As of December 31, 2008 the Company has a note receivable from a subsidiary pursuant to the provisions of Article 29.30 of the Puerto Rico Insurance Code.
On December 22, 2005, TSV borrowed $57,000 from TSM; this note receivable bears interest at an annual rate 6.6%. Accrued interest at December 31, 2008 and 2007 amounted to $11,339 and $8,150, respectively.
             
  2010 2009 2008
Rent charges to subsidiaries $7,468  $7,422  $7,286 
Interest charged to subsidiary on note receivable  2,786   3,015   3,189 
Transfers in due to investments purchased  83,502   3,230   — 
Transfers out due to investments sold  59,911   6,274   — 
  As of December 31, 2010 the Company has a note receivable from a subsidiary amounting to $37,000 pursuant to the provisions of Article 29.30 of the Puerto Rico Insurance Code. The note receivable from subsidiary areis due on demand; however, pursuant to the requirements established by the Commissioner of Insurance, of the Commonwealth of Puerto Rico (Commissioner of Insurance), the parties agreed that no payment of the total principal nor the interest due on the loan will be made without first obtaining written authorization from the Commissioner of Insurance within at least 60 days prior to the proposed payment date. Written authorization to convert $20,000 of the TSV’sThis note receivable into a capital contribution was obtained from the Commissioner of Insurance during 2008.
(8)Contingencies
Atbears interest at 6.6% at December 31, 20082010 and 2007, the Company is defendant in various lawsuits in the ordinary course of business. In the opinion of management, with the advice of its legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the position2009, respectively. Accrued interest at December 31, 2010 and results of operations of the Company.
(9)Stockholders’ Equity
(a)Common Stock
On April 24, 2007, the Company’s Board of Directors (the Board) authorized a 3,000-for-one stock split of its Class A common stock affected in the form of a dividend of 2,999 shares for every one share outstanding. This stock split was effective on May 1, 20072009 amounted to all stockholders of record at the close of business on April 24, 2007. The total number of authorized shares$7,140 and par value per share were unchanged by this action. The par value of the additional shares resulting from the stock split was reclassified from additional paid in capital to common stock. All references to the number of shares and per share amounts in these consolidated financial statements are presented after giving retroactive effect to the stock split.$9,354, respectively.

113

TRIPLE-S MANAGEMENT CORPORATIONTriple-S Management Corporation and Subsidiaries
(Parent Company Only)
Notes to Financial Statements
Schedule III — Supplementary Insurance Information
For the years ended December 31, 2008, 2007,2010, 2009 and 20062008
(Dollar amounts in thousands, except per share data)
                                             
(Dollar amounts in thousands) Deferred                              Amortization of       
  Policy                              Deferred Policy       
  Acquisition      Liability for      Other              Acquisition       
  Costs and Value      Future      Policy Claims      Net      Costs and Value  Other  Net 
  of Business  Claim  Policy  Unearned  and Benefits  Premium  Investment  Claims  of Business  Operating  Premiums 
Segment Acquired  Liabilities  Benefits  Premiums  Payable  Revenue  Income  Incurred  Acquired  Expenses  Written 
2010                                            
                                             
Managed care $—  $236,170  $—  $4,600  $—  $1,700,252  $19,799  $1,497,756  $—  $201,726  $1,700,252 
Life insurance  121,555   41,179   236,523   3,724   —   105,819   17,130   49,804   15,168   40,643   105,819 
Property and casualty insurance  24,531   82,861   —   90,017   —   99,193   10,132   49,229   32,861   23,656   95,508 
Other non-reportable segments, parent company operations and net consolidating entries  —   —   —   —   —   (4,164)  2,084   —   —   (9,059)  — 
                                  
                                             
Total $146,086  $360,210  $236,523  $98,341  $—  $1,901,100  $49,145  $1,596,789  $48,029  $256,966  $1,901,579 
                                  
                                             
2009                                            
                                             
Managed care $—  $236,366  $—  $6,996  $—  $1,677,080  $21,641  $1,508,185  $—  $184,663  $1,677,080 
Life insurance  112,908   40,100   222,619   4,163   —   100,112   16,763   50,353   16,844   35,123   100,112 
Property and casualty insurance  27,009   83,980   —   97,183   —   96,209   11,679   47,334   28,284   23,524   95,817 
Other non-reportable segments, parent company operations and net consolidating entries  —   —   —   —   —   (4,317)  2,053   —   —   (9,020)  — 
                                  
                                             
Total $139,917  $360,446 ��$222,619  $108,342  $—  $1,869,084  $52,136  $1,605,872  $45,128  $234,290  $1,873,009 
                                  
                                             
2008                                            
                                             
Managed care $—  $201,849  $—  $5,585  $—  $1,509,912  $23,091  $1,342,258  $—  $160,591  $1,509,912 
Life insurance  101,243   39,948   207,545   3,370   —   92,843   16,482   47,432   16,404   33,000   92,843 
Property and casualty insurance  25,104   81,913   —   101,186   —   93,821   12,546   42,111   27,383   23,725   95,867 
Other non-reportable segments, parent company operations and net consolidating entries  —   —   —   —   —   (4,232)  4,134   —   —   (9,216)  — 
                                  
 
Total $126,347  $323,710  $207,545  $110,141  $—  $1,692,344  $56,253  $1,431,801  $43,787  $208,100  $1,698,622 
                                  
In May 2007, the Company cancelled 24,000 director qualifying shares. Since February 2007, Board members are no longer required to hold qualifying shares to participate in the Board of Directors of the Company.
In December 7, 2007, the Company completed the initial public offering (IPO) of its Class B common stock. In this public offering the Company sold 16,100,000 shares, 10,813,191 of which were shares previously owned by selling shareholders. Proceeds received under this public offering amounted to $70,279, net of $6,248 of expenses directly related to the offering.
For a period of five years after the completion of the IPO, subject to the extension or shortening under certain circumstances, each holder of Class B common stock will benefit from anti-dilution protections provided in the Company’s amended and restated certificate of incorporation.
On December 8, 2008, the Company converted 7 million issued and outstanding Class A shares into Class B shares, in conjunction with the expiration of the lockup agreements signed by holders of Class A shares at the time of the Company’s IPO.
(b)Stock Repurchase Program
The Company may repurchase its common stock under a $40,000 share repurchase program authorized by the Company’s Board of Directors in October 2008. Repurchases may be conducted through open-market purchases and privately-negotiated transactions of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During 2008, the Company repurchased and retired approximately 1,181,500 shares at an average per share price of $11.75, for an aggregate cost of $13,880. Therefore, as of December 31, 2008, $26,120 remained authorized by the Company’s Board of Directors for future repurchases. At December 31, 2008, the Company had unsettled shares repurchases amounting to $6,235. Such amount is included in the accompanying consolidated balance sheet as account payable and accrued liabilities. The timing and extent of any purchases under the program will depend on market conditions, the trading price of the shares and other considerations, and the program may be suspended or terminated at any time.
(c)Preferred Stock
Authorized capital stock includes 100,000,000 of preferred stock with a par value of $1.00 per share. As of December 31, 2008 and 2007, there are no issued and outstanding preferred shares.
(d)Dividends
On March 12, 2007, the Board declared a cash dividend of $2,448 distributed pro rata among all of the Company’s issued and outstanding Class A common shares, excluding those shares issued to the representatives of the community that are members of the Board (the qualifying shares). All stockholders of record as of the close of business on March 23, 2007, except those who only hold qualifying shares, received a dividend per share of $0.09 for each share held on that date.
See accompanying independent registered public accounting firm’s report and notes to financial statements.

12

TRIPLE-S MANAGEMENT CORPORATIONTriple-S Management Corporation and Subsidiaries
(Parent Company Only)
Notes to Financial Statements
Schedule IV — Reinsurance
For the years ended December 31, 2008, 2007,2010, 2009 and 20062008
                     
                  Percentage 
      Ceded to  Assumed      of Amount 
  Gross  Other  from Other  Net  Assumed 
(Dollar amounts in thousands) Amount  Companies (1)  Companies  Amount  to Net 
2010                    
                     
Life insurance in force $8,926,668  $2,987,054  $—  $5,939,614   0.0%
                
                     
Premiums:                    
Life insurance $111,085  $5,648  $—  $105,437   0.0%
Accident and health insurance  1,708,289   11,206   —   1,697,083   0.0%
Property and casualty insurance  162,326   63,746   —   98,580   0.0%
                
Total premiums $1,981,700  $80,600  $—  $1,901,100   0.0%
                
                     
2009                    
                     
Life insurance in force $10,714,252  $2,937,377  $—  $7,776,875   0.0%
                
                     
Premiums:                    
Life insurance $106,243  $6,131  $—  $100,112   0.0%
Accident and health insurance  1,680,496   7,341   —   1,673,155   0.0%
Property and casualty insurance  163,358   67,541   —   95,817   0.0%
                
Total premiums $1,950,097  $81,013  $—  $1,869,084   0.0%
                
                     
2008                    
                     
Life insurance in force $10,503,170  $2,823,647  $—  $7,679,523   0.0%
                
                     
Premiums:                    
Life insurance $100,413  $7,570  $—  $92,843   0.0%
Accident and health insurance  1,509,257   5,623   —   1,503,634   0.0%
Property and casualty insurance  167,982   72,115   —   95,867   0.0%
                
Total premiums $1,777,652  $85,308  $—  $1,692,344   0.0%
                
(1)Premiums ceded on the life insurance business are net of commission income on reinsurance amounting to $42 and $287 for the years ended December 31, 2009 and 2008. None for the year ended December 31, 2010.
See accompanying independent registered public accounting firm’s report and notes to financial statements.

Triple-S Management Corporation and Subsidiaries
Schedule V — Valuation and Qualifying Accounts
For the years ended December 31, 2010, 2009 and 2008
(Dollar amounts in thousands, except per share data)thousands)
                     
      Additions        
  Balance at  Charged to  Charged (Reversal)      Balance at 
  Beginning of  Costs and  To Other Accounts  Deductions -  End of 
  Period  Expenses  - Describe (1)  Describe (2)  Period 
2010  
                    
                     
Allowance for doubtful receivables $25,234   7,118   (9,967)  (2,351) $20,034 
                
                     
2009  
                    
                     
Allowance for doubtful receivables $14,745   2,149   10,065   (1,725) $25,234 
                
                     
2008  
                    
                     
Allowance for doubtful receivables $15,925   821   —   (2,001) $14,745 
                
(1) On January 13, 2006,Represents premiums adjustment to provide for unresolved reconciliation items with the Board declared a cash dividendGovernment of $6,231 distributed pro rata among allPuerto Rico and other entities.
(2)Deductions represent the write-off of the Company’s issued and outstanding Class A common shares, excluding qualifying shares. All stockholders of record as of the close of business on January 16, 2006, except those who only hold qualifying shares, received a dividend per share of $0.23 for each share held on that date.accounts deemed uncollectible.
See accompanying independent registered public accounting firm’s report and notes to financial statements.

13