Triple-s Management (GTS) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

or

¨ 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	66-0555678
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico	00920
(Address of principal executive offices)	(Zip code)

(787) 749-4949

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes  ¨  No

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  þ
Non-accelerated filer  ¨	Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  þ No

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

Title of each class	Outstanding at June 30, 2013
Common Stock Class A, $1.00 par value	2,380,686
Common Stock Class B, $1.00 par value	25,093,744

TRIPLE-S MANAGEMENT CORPORATION

FORM 10-Q

For the Quarter Ended June 30, 2013

Table of Contents

Part I – Financial Information	3
Item 1.  Financial Statements	3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Cautionary Statement Regarding Forward-Looking Information	33
Overview	33
Recent Developments	35
Recent Accounting Standards	36
Managed Care Membership	37
Consolidated Operating Results	37
Managed Care Operating Results	40
Life Insurance Operating Results	42
Property and Casualty Insurance Operating Results	44
Liquidity and Capital Resources	45
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.  Controls and Procedures	47
Part II – Other Information	47
Item 1.  Legal Proceedings	47
Item 1A.  Risk Factors	48
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.  Defaults Upon Senior Securities	48
Item 4.  Mine Safety Disclosures	48
Item 5.  Other Information	48
Item 6.  Exhibits	49
SIGNATURES	50

2

Part I – Financial Information

Item 1.  Financial Statements

Triple-S Management Corporation

Consolidated Balance Sheets (Unaudited)

(Dollar amounts in thousands, except per share data)

	June 30,		December 31,
	2013		2012
Assets
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities	$	1,019,090	$	1,059,761
Equity securities		273,945		209,722
Securities held to maturity, at amortized cost:
Fixed maturities		4,979		5,000
Policy loans		6,337		6,161
Cash and cash equivalents		55,821		89,564
Total investments and cash		1,360,172		1,370,208
Premiums and other receivables, net		337,711		292,197
Deferred policy acquisition costs and value of business acquired		170,566		168,657
Property and equipment, net		93,339		92,423
Deferred tax asset		38,348		33,548
Goodwill		27,766		27,766
Other assets		68,274		74,545
Total assets	$	2,096,176	$	2,059,344
Liabilities and Stockholders' Equity
Claim liabilities	$	413,271	$	416,918
Liability for future policy benefits		287,729		276,570
Unearned premiums		92,002		95,860
Policyholder deposits		114,804		111,692
Liability to Federal Employees' Health Benefits Program (FEHBP)		13,516		21,353
Accounts payable and accrued liabilities		185,881		128,580
Deferred tax liability		26,002		32,934
Short-term borrowings		28,095		30,000
Long-term borrowings		100,288		101,271
Liability for pension benefits		84,756		82,019
Total liabilities		1,346,344		1,297,197
Stockholders’ equity:
Triple-S Management Corporation stockholders' equity
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 2,380,686 and 9,042,809 at June 30, 2013 and December 31, 2012, respectively		2,381		9,043
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 25,093,744 and 19,321,944 shares at June 30, 2013 and December 31, 2012, respectively		25,094		19,322
Additional paid-in capital		128,474		144,677
Retained earnings		577,141		539,761
Accumulated other comprehensive income		16,621		49,104
Total Triple-S Management Corporation stockholders' equity		749,711		761,907
Non-controlling interest in consolidated subsididary		121		240
Total stockholders' equity		749,832		762,147
Total liabilities and stockholders’ equity	$	2,096,176	$	2,059,344

See accompanying notes to unaudited consolidated financial statements.

3

Triple-S Management Corporation

Consolidated Statements of Earnings (Unaudited)

(Dollar amounts in thousands, except per share data)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Revenues:
Premiums earned, net	$	556,035		$	582,246		$	1,105,996		$	1,129,550
Administrative service fees		28,543			27,768			55,653			55,292
Net investment income		12,019			11,562			23,386			22,754
Other operating revenues		1,212			1,105			2,399			2,152
Total operating revenues		597,809			622,681			1,187,434			1,209,748
Net realized investment gains		1,661			458			3,549			2,136
Other income (loss), net		366			(154	)		847			916
Total revenues		599,836			622,985			1,191,830			1,212,800
Benefits and expenses:
Claims incurred		460,818			496,249			912,818			971,893
Operating expenses		120,225			102,268			235,090			204,774
Total operating costs		581,043			598,517			1,147,908			1,176,667
Interest expense		2,426			2,667			4,810			5,225
Total benefits and expenses		583,469			601,184			1,152,718			1,181,892
Income before taxes		16,367			21,801			39,112			30,908
Income tax expense (benefit):
Current		3,768			3,744			9,231			6,772
Deferred		(7,479	)		1,041			(7,380	)		(380	)
Total income taxes		(3,711	)		4,785			1,851			6,392
Net income		20,078			17,016			37,261			24,516
Less: Net loss attributable to non-controlling interest		64			19			119			33
Net income attributable to Triple-S Management Corporation	$	20,142		$	17,035		$	37,380		$	24,549
Earnings per share attributable to Triple-S Management Corporation
Basic net income per share	$	0.72		$	0.60		$	1.33		$	0.87
Diluted net income per share	$	0.72		$	0.60		$	1.33		$	0.86

See accompanying notes to unaudited consolidated financial statements.

4

Triple-S Management Corporation

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollar amounts in thousands, except per share data)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income	$	20,078		$	17,016		$	37,261		$	24,516
Other comprehensive income (loss), net of tax:
Net unrealized change in fair value of available for sale securities, net of taxes		(41,164	)		6,484			(34,522	)		20,170
Defined benefit pension plan:
Actuarial loss, net		927			1,118			2,176			2,130
Prior service credit, net		(58	)		(82	)		(137	)		(156	)
Total other comprehensive income (loss), net of tax		(40,295	)		7,520			(32,483	)		22,144
Comprehensive income (loss)		(20,217	)		24,536			4,778			46,660
Comprehensive loss attributable to non-controlling interest		64			19			119			33
Comprehensive income (loss) attributable to Triple-S Management Corporation	$	(20,153	)	$	24,555		$	4,897		$	46,693

See accompanying notes to unaudited consolidated financial statements.

5

Triple-S Management Corporation

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollar amounts in thousands, except per share data)

	2013			2012
Balance at January 1	$	761,907		$	676,959
Share-based compensation		1,163			1,360
Stock issued upon the exercise of stock options		315			606
Repurchase and retirement of common stock		(18,571	)		(930	)
Net current period change in comprehensive income		4,897			46,693
Total Triple-S Management Corporation stockholders' equity		749,711			724,688
Non-controlling interest in consolidated subsididary		121			339
Balance at June 30	$	749,832		$	725,027

See accompanying notes to unaudited consolidated financial statements.

6

Triple-S Management Corporation

Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands, except per share data)

	Six months ended
	June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	37,261		$	24,516
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,214			11,801
Net amortization of investments		3,028			2,447
Provision for doubtful receivables, net		3,404			535
Deferred tax benefit		(7,380	)		(380	)
Net realized investment gain on sale of securities		(3,549	)		(2,136	)
Share-based compensation		1,163			1,360
(Increase) decrease in assets:
Premium and other receivables, net		(42,396	)		(32,625	)
Deferred policy acquisition costs and value of business acquired		(1,909	)		(5,936	)
Other deferred taxes		-			369
Other assets		1,896			(3,588	)
Increase (decrease) in liabilities:
Claim liabilities		(3,647	)		30,635
Liability for future policy benefits		11,159			10,510
Unearned premiums		(3,858	)		88,148
Policyholder deposits		1,592			1,040
Liability to FEHBP		(7,837	)		(4,769	)
Accounts payable and accrued liabilities		23,142			3,558
Net cash provided by operating activities		24,283			125,485

(Continued)

7

Triple-S Management Corporation

Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands, except per share data)

	Six months ended
	June 30,
	2013			2012
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold	$	35,173		$	55,080
Fixed maturities matured/called		62,494			64,292
Equity securities sold		76,966			29,217
Securities held to maturity:
Fixed maturities matured/called		520			10,580
Acquisition of investments:
Securities available for sale:
Fixed maturities		(100,054	)		(114,064	)
Equity securities		(131,862	)		(76,134	)
Securities held to maturity:
Fixed maturities		(500	)		(560	)
Other investments		(116	)		(246	)
Net inflows (outflows) from policy loans		(176	)		140
Acquisition of business, net of cash acquired of $816 in the six months ended June 30, 2012		-			(2,685	)
Net capital expenditures		(8,639	)		(5,680	)
Net cash used in investing activities		(66,194	)		(40,060	)
Cash flows from financing activities:
Change in outstanding checks in excess of bank balances		27,786			(10,135	)
Net change in short-term borrowings		(1,905	)		2,855
Repayments of long-term borrowings		(983	)		(976	)
Repurchase and retirement of common stock		(18,250	)		(637	)
Proceeds from exercise of stock options		-			316
Proceeds from policyholder deposits		6,580			19,587
Surrenders of policyholder deposits		(5,060	)		(3,311	)
Net cash provided by financing activities		8,168			7,699
Net (decrease) increase in cash and cash equivalents		(33,743	)		93,124
Cash and cash equivalents:
Beginning of period		89,564			71,834
End of period	$	55,821		$	164,958

See accompanying notes to unaudited consolidated financial statements.

8

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(1) Basis of Presentation

The accompanying consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited.  In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries.  The consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements.  These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

On May 16, 2013, the Corporation, in connection with a registered underwritten secondary public offering of its Class B common stock (the “Offering”), entered into an underwriting agreement (the “Underwriting Agreement”) with certain shareholders of the Corporation (the “Selling Shareholders”), pursuant to which the Selling Shareholders sold to the underwriters an aggregate of 6,210,423 shares (the “Shares”) of Class B common stock at a price of $18.25 per share.  The Shares included 810,055 shares of Class B common stock purchased pursuant to the over-allotment option granted to the Underwriters pursuant to the Underwriting Agreement. The Corporation purchased and retired 1,000,000 shares in the Offering at a price of $18.25 per share. The Corporation did not receive any proceeds from the sale of the Shares by the Selling Shareholders.

During the three months ended June 30, 2013, we recorded an out-of-period adjustment that affected the consolidated results of operations for the three months ended March 31, 2013, as well as those of our Managed Care segment. The out-of-period adjustment was related to an amount accrued as incentives to providers. The effect of this out-of-period adjustment would have increased the consolidated and Managed Care claims incurred by $2,100 during the three months ended March 31, 2013. As a result of this out-of-period adjustment the consolidated net income for the three months ended March 31, 2013 was overstated by $1,500. We assessed the impact of the adjustment needed to account for this error in its appropriate period and concluded that recording the adjustment in the three months ended June 30, 2013, rather than restating the quarter affected, was quantitatively and qualitatively not material to the results of operations, financial position, or cash flows corresponding to each of the quarters in the six-month period ended June 30, 2013.

In the opinion of management all adjustments necessary for a fair presentation of such consolidated interim financial statements have been included.  The results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the results for the full year ending December 31, 2013.

(2) Recent Accounting Standards

In July 2011, the FASB issued guidance to address questions about how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act.  A health insurer’s portion of the annual fee becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk for each applicable calendar year.  The amendments specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.  This guidance is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective.  We are currently evaluating the impact, if any, that the adoption of this guidance will have on our financial position or results of operations.

In August 27, 2012 and October 1, 2012, the FASB issued guidance to make generally non-substantive technical corrections to certain codification topics, remove inconsistencies and outdated provisions, clarify the FASB’s intent and amend or delete various Securities and Exchange Commission (“SEC”) paragraphs.  In particular, the updates consist of:

• Technical corrections and amendments as part of the FASB’s standing agenda to review and improve the Accounting Standards Codification,

• Conforming amendments related to fair value measurements, in accordance with Topic 820,

• Reflect the issuance of the SEC’s Staff Accounting Bulletin No. 114, Revisions and Rescissions of Portions of the Interpretative Guidance Included in the Codification of Staff Accounting Bulletins, and

• Reflect the issuance of the SEC Final Rulemaking Release No. 33-9250, Technical Amendments to Commission Rules and Forms Related to the FASB's Accounting Standards Codification.

The Corporation adopted this guidance in January 1, 2013; there was no significant impact on our financial position or results of operations as a result of the adoption.

9

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

In February 5, 2013 the FASB issued guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income.  In particular, the guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  This guidance applies to all entities that issue financial statements that are presented in conformity with GAAP and that report items of other comprehensive income.  The Corporation adopted this guidance in January 1, 2013; there was no significant impact on our financial position or results of operations as a result of the adoption.

In July 18, 2013, the FASB issued guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when a net operating loss carry-forward or a tax credit carry-forward exists.  In particular, the guidance provides that an entity's unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward, with one exception.  That exception states that, to the extent a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  This guidance is effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2013.  We are currently evaluating the impact, if any, the adoption of this guidance will have on the financial position or results of operations.

Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the six months ended June 30, 2013 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.

(3) Segment Information

The operations of the Corporation are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance.  The Corporation evaluates performance based primarily on the operating revenues and operating income of each segment.  Operating revenues include premiums earned, net, administrative service fees, net investment income, and revenues derived from other segments.  Operating costs include claims incurred and operating expenses.  The Corporation calculates operating income or loss as operating revenues less operating costs.

10

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The following tables summarize the operations by reportable segment for the three months and six months ended June 30, 2013 and 2012:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Operating revenues:
Managed Care:
Premiums earned, net	$	498,942		$	528,125		$	992,410		$	1,023,551
Administrative service fees		28,543			27,768			55,653			55,292
Intersegment premiums /service fees		1,366			1,553			2,773			3,133
Net investment income		4,113			3,953			8,034			7,784
Total managed care		532,964			561,399			1,058,870			1,089,760
Life Insurance:
Premiums earned, net		31,985			30,693			63,712			60,536
Intersegment premiums		104			101			216			195
Net investment income		5,719			5,160			11,014			10,097
Total life insurance		37,808			35,954			74,942			70,828
Property and Casualty Insurance:
Premiums earned, net		25,108			23,428			49,874			45,463
Intersegment premiums		154			154			307			307
Net investment income		2,061			2,272			4,036			4,497
Total property and casualty insurance		27,323			25,854			54,217			50,267
Other segments: *
Intersegment service revenues		2,032			3,622			5,230			7,253
Operating revenues from external sources		1,213			1,106			2,400			2,154
Total other segments		3,245			4,728			7,630			9,407
Total business segments		601,340			627,935			1,195,659			1,220,262
TSM operating revenues from external sources		117			141			257			304
Elimination of intersegment premiums		(1,624	)		(1,808	)		(3,296	)		(3,635	)
Elimination of intersegment service fees		(2,032	)		(3,622	)		(5,230	)		(7,253	)
Other intersegment eliminations		8			35			44			70
Consolidated operating revenues	$	597,809		$	622,681		$	1,187,434		$	1,209,748

* Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.

11

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Operating income:
Managed care	$	13,396		$	18,623		$	33,891		$	25,991
Life insurance		3,675			4,034			7,717			8,415
Property and casualty insurance		188			3,549			572			2,111
Other segments *		20			235			(513	)		161
Total business segments		17,279			26,441			41,667			36,678
TSM operating revenues from external sources		117			141			257			304
TSM unallocated operating expenses		(2,800	)		(4,614	)		(6,767	)		(8,294	)
Elimination of TSM intersegment charges		2,170			2,196			4,369			4,393
Consolidated operating income		16,766			24,164			39,526			33,081
Consolidated net realized investment gains		1,661			458			3,549			2,136
Consolidated interest expense		(2,426	)		(2,667	)		(4,810	)		(5,225	)
Consolidated other income, net		366			(154	)		847			916
Consolidated income before taxes	$	16,367		$	21,801		$	39,112		$	30,908
Depreciation and amortization expense:
Managed care	$	5,139		$	5,154		$	10,578		$	10,350
Life insurance		210			170			415			328
Property and casualty insurance		130			143			266			298
Other segments*		262			227			524			401
Total business segments		5,741			5,694			11,783			11,377
TSM depreciation expense		214			215			431			424
Consolidated depreciation and amortization expense	$	5,955		$	5,909		$	12,214		$	11,801

* Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.

12

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	June 30,			December 31,
	2013			2012
Assets:
Managed care	$	993,986		$	916,712
Life insurance		690,860			691,425
Property and casualty insurance		358,298			356,161
Other segments *		30,961			31,480
Total business segments		2,074,105			1,995,778
Unallocated amounts related to TSM:
Cash, cash equivalents, and investments		28,252			41,334
Property and equipment, net		20,998			21,430
Other assets		43,806			29,858
		93,056			92,622
Elimination entries-intersegment receivables and others		(70,985	)		(29,056	)
Consolidated total assets	$	2,096,176		$	2,059,344

* Includes segments that are not required to be reported separately, primarily the data processing services organization and the health clinic.

13

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(4) Investment in Securities

The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at June 30, 2013 and December 31, 2012, were as follows:

	June 30, 2013
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
Securities available for sale:
Fixed maturities:
Obligations of government-sponsored enterprises	$	43,879	$	2,221	$	(257	)	$	45,843
U.S. Treasury securities and obligations of U.S. government instrumentalities		39,179		1,461		-			40,640
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		51,779		754		(8	)		52,525
Municipal securities		574,535		33,181		(4,715	)		603,001
Corporate bonds		139,713		13,134		(1,073	)		151,774
Residential mortgage-backed securities		12,701		364		(32	)		13,033
Collateralized mortgage obligations		109,048		3,411		(185	)		112,274
Total fixed maturities		970,834		54,526		(6,270	)		1,019,090
Equity securities
Mutual funds		242,207		35,170		(3,432	)		273,945
Total equity securities		242,207		35,170		(3,432	)		273,945
Total	$	1,213,041	$	89,696	$	(9,702	)	$	1,293,035

14

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2012
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
Securities available for sale:
Fixed maturities:
Obligations of government-sponsored enterprises	$	56,758	$	4,876	$	-		$	61,634
U.S. Treasury securities and obligations of U.S. government instrumentalities		39,365		1,848		-			41,213
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		63,470		2,277		(2	)		65,745
Municipal securities		529,822		59,106		(165	)		588,763
Corporate bonds		106,968		22,899		-			129,867
Residential mortgage-backed securities		20,009		551		(52	)		20,508
Collateralized mortgage obligations		147,071		5,129		(169	)		152,031
Total fixed maturities		963,463		96,686		(388	)		1,059,761
Equity securities:
Common stock		16		993		-			1,009
Mutual funds		185,498		23,256		(41	)		208,713
Total equity securities		185,514		24,249		(41	)		209,722
Total	$	1,148,977	$	120,935	$	(429	)	$	1,269,483

	June 30, 2013
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities held to maturity:
Obligations of government-sponsored enterprises	$	1,793	$	67	$	-	$	1,860
U.S. Treasury securities and obligations of U.S. government instrumentalities		623		158		-		781
Residential mortgage-backed securities		449		34		-		483
Certificates of deposit		2,114		-		-		2,114
Total	$	4,979	$	259	$	-	$	5,238

15

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2012
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
Securities held to maturity:
Obligations of government-sponsored enterprises	$	1,793	$	115	$	-	$	1,908
U.S. Treasury securities and obligations of U.S. government instrumentalities		623		225		-		848
Residential mortgage-backed securities		450		37		-		487
Certificates of deposit		2,134		-		-		2,134
Total	$	5,000	$	377	$	-	$	5,377

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 June 30, 2013 and December 31, 2012 were as follows:

	June 30, 2013
	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 government-sponsored enterprises	$	28,759	$	(257	)		3	$	-	$	-			-	$	28,759	$	(257	)		3
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		5,820		(8	)		1		-		-			-		5,820		(8	)		1
Municipal securities		146,862		(4,715	)		36		-		-			-		146,862		(4,715	)		36
Corporate bonds		34,330		(1,073	)		16		-		-			-		34,330		(1,073	)		16
Residential mortgage-backed securities		6,985		(32	)		4		-		-			-		6,985		(32	)		4
Collateralized mortgage obligations		8,819		(67	)		3		3,845		(118	)		1		12,664		(185	)		4
Total fixed maturities		231,575		(6,152	)		63		3,845		(118	)		1		235,420		(6,270	)		64
Equity securities:
Mutual funds		75,763		(3,432	)		13		-		-			-		75,763		(3,432	)		13
Total equity securities		75,763		(3,432	)		13		-		-			-		75,763		(3,432	)		13
Total for securities available for sale	$	307,338	$	(9,584	)		76	$	3,845	$	(118	)		1	$	311,183	$	(9,702	)		77

16

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2012
	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 government-Commonwealth of Puerto Rico and its instrumentalities	$	5,770	$	(2	)		1	$	-	$	-			-	$	5,770	$	(2	)		1
Municipal securities		27,426		(165	)		10		-		-			-		27,426		(165	)		10
Residential mortgage-backed securities		5,892		(52	)		2		-		-			-		5,892		(52	)		2
Collateralized mortgage obligations		20,894		(169	)		6		-		-			-		20,894		(169	)		6
Total fixed maturities		59,982		(388	)		19		-		-			-		59,982		(388	)		19
Equity securities:
Mutual funds		-		-			-		2,708		(41	)		1		2,708		(41	)		1
Total equity securities		-		-			-		2,708		(41	)		1		2,708		(41	)		1
Total for securities available for sale	$	59,982	$	(388	)		19	$	2,708	$	(41	)		1	$	62,690	$	(429	)		20

The Corporation 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 evaluating: (1) the length of time and the extent to which the estimated fair value has been less than amortized cost for fixed maturity securities, or cost for equity securities, (2) the financial condition, near-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 interest for fixed maturity securities, or cost for equity securities, and (5) other factors, as applicable.  This process is not exact and requires further 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 Corporation’s analysis, along with the judgment that must be applied in the analysis, it is possible that the Corporation could reach a different conclusion whether or not to record an impairment to 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 Corporation determined during its analysis, which may lead to a different impairment conclusion in future periods.  If after monitoring and analyzing impaired securities, the Corporation determines that a decline in the estimated fair value of any available-for-sale or held-to-maturity security below cost is other-than-temporary, the carrying amount of the security is reduced to its fair value in accordance with current accounting guidance.  The new cost basis of an impaired security is 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.

The Corporation’s 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 investment losses that represent 20% or more of their cost and all investments with an unrealized loss greater than $100.

• 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 their 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.

17

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The Corporation continues to review the investment portfolios under the Corporation’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.  The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.

Obligations of Government-Sponsored Enterprises, Obligations of the Commonwealth of Puerto Rico and its Instrumentalities and Municipal Securities:  The unrealized losses on the Corporation’s investments in obligations of states of the United States and political subdivisions of the states, Commonwealth of Puerto Rico and its instrumentalities and municipal securities were mainly caused by fluctuations in interest rate 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, these investments have investment grade ratings.   Because the decline in fair value is attributable to changes in interest rates and not credit quality; because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.

Residential mortgage-backed securities and Collateralized mortgage obligations:  The unrealized losses on investments in residential mortgage-backed securities and collateralized mortgage obligations (“CMOs”) were mostly caused by fluctuations in interest rates and credit spreads.  The contractual cash flows of these securities, other than private CMOs, are guaranteed by a U.S. government-sponsored enterprise.  Any loss in these securities is determined according to the seniority level of each tranche, with the 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 Corporation owns.  The Corporation does not consider these investments other-than-temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality, the Corporation does not intend to sell the investments and it is more likely than not that the Corporation will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity, and because the Corporation expects to collect all contractual cash flows.

Corporate Bonds:  The unrealized losses of these bonds were principally caused by fluctuations in interest rates and general market conditions.  All corporate bonds included in this table have investment grade ratings and, except for one position, 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 rate; 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 expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.

Mutual Funds:  All funds have been in an unrealized loss position for less than twelve months.  These positions are not considered other-than-temporarily impaired because the Company does not have the intent to sell these investments, and the Company has the ability to hold the investments until a market price recovery.

18

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Maturities of investment securities classified as available for sale and held to maturity at June 30, 2013 were as follows:

	June 30, 2013
	Amortized		Estimated
	cost		fair value
Securities available for sale:
Due in one year or less	$	51,632	$	52,004
Due after one year through five years		210,664		216,766
Due after five years through ten years		162,118		170,400
Due after ten years		424,671		454,613
Residential mortgage-backed securities		12,701		13,033
Collateralized mortgage obligations		109,048		112,274
	$	970,834	$	1,019,090
Securities held to maturity:
Due in one year or less	$	2,114	$	2,114
Due after five years through ten years		1,793		1,860
Due after ten years		623		781
Residential mortgage-backed securities		449		483
	$	4,979	$	5,238

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.

Information regarding realized and unrealized gains and losses from investments for the three months and six months ended June 30, 2013 and 2012 is as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Realized gains (losses):
Fixed maturity securities:
Securities available for sale:
Gross gains from sales	$	1,407		$	558		$	2,401		$	1,632
Gross losses from sales		(463	)		(76	)		(648	)		(189	)
Total debt securities		944			482			1,753			1,443
Equity securities:
Securities available for sale:
Gross gains from sales		1,531			224			2,631			1,462
Gross losses from sales		(814	)		(248	)		(835	)		(769	)
Total equity securities		717			(24	)		1,796			693
Net realized gains on securities	$	1,661		$	458		$	3,549		$	2,136

19

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Changes in net unrealized gains (losses):
Recognized in accumulated other comprehensive income:
Fixed maturities – available for sale	$	(43,830	)	$	11,217		$	(48,042	)		13,057
Equity securities – available for sale		(4,494	)		(3,580	)		7,530			9,527
	$	(48,324	)	$	7,637		$	(40,512	)	$	22,584
Not recognized in the consolidated financial statements:
Fixed maturities – held to maturity	$	(88	)	$	(17	)	$	(118	)	$	(151	)

The deferred tax liability on net unrealized gains change recognized in accumulated other comprehensive income during the six months ended June 30, 2013 and 2012 was ($5,990) and $3,377, respectively.

As of June 30, 2013 and December 31, 2012, no individual investment in securities exceeded 10% of stockholders’ equity.

The components of net investment income were as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2013		2012		2013		2012
Fixed maturities	$	8,907	$	9,448	$	18,226	$	19,347
Equity securities		2,801		1,740		4,519		2,693
Policy loans		118		116		232		231
Cash equivalents and interest-bearing deposits		17		27		45		54
Other		176		231		364		429
Total	$	12,019	$	11,562	$	23,386	$	22,754

(5) Premiums and Other Receivables, Net

Premiums and other receivables, net as of June 30, 2013 and December 31, 2012 were as follows:

	June 30,		December 31,
	2013		2012
Premiums	$	146,658	$	113,537
Self-funded group receivables		64,705		64,359
FEHBP		11,823		11,707
Agent balances		39,744		34,261
Accrued interest		11,555		11,409
Reinsurance recoverable		50,941		52,063
Other		40,118		29,290
		365,544		316,626
Less allowance for doubtful receivables:
Premiums		16,735		14,416
Other		11,098		10,013
		27,833		24,429
Total premiums and other receivables, net	$	337,711	$	292,197

20

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(6) Claim Liabilities

The activity in the total claim liabilities for the three months and six months ended June 30, 2013 and 2012 was as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Claim liabilities at beginning of period	$	414,124		$	403,562		$	416,918		$	391,259
Reinsurance recoverable on claim liabilities		(37,756	)		(36,493	)		(39,051	)		(37,234	)
Net claim liabilities at beginning of period		376,368			367,069			377,867			354,025
Incurred claims and loss-adjustment expenses:
Current period insured events		456,981			490,275			929,037			974,804
Prior period insured events		(2,493	)		222			(27,554	)		(13,642	)
Total		454,488			490,497			901,483			961,162
Payments of losses and loss-adjustment expenses:
Current period insured events		418,433			436,321			636,251			677,084
Prior period insured events		35,673			36,475			266,349			253,333
Total		454,106			472,796			902,600			930,417
Net claim liabilities at end of period		376,750			384,770			376,750			384,770
Reinsurance recoverable on claim liabilities		36,521			37,124			36,521			37,124
Claim liabilities at end of period	$	413,271		$	421,894		$	413,271		$	421,894

As a result of differences between actual amounts and estimates of insured events in prior periods, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.

The credit in the incurred claims and loss-adjustment expenses for prior period insured events for the three months ended June 30, 2013 and the six months ended June 30, 2013 and 2012 is due primarily to better than expected cost and utilization trends.  The amount in the incurred claims and loss-adjustment expenses for prior period insured events for the three months ended June 30, 2012 is due primarily to higher than anticipated utilization trends.  Reinsurance recoverable on unpaid claims is reported within the 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 expense, which amounted to $6,330 and $11,335 during the three and six months ended June 30, 2013, respectively. The change in the liability for future policy benefits during the three and six months ended June 30, 2012 amounted to $5,752 and $10,731, respectively.

(7) 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 current accounting guidance for fair value measurements and disclosures, 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 1 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.

21

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The Corporation uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. The Corporation limits valuation adjustments to those deemed necessary to ensure that the security’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 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 4.

The following tables summarize fair value measurements by level at June 30, 2013 and December 31, 2012 for assets measured at fair value on a recurring basis:

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Securities available for sale:
Fixed maturity securities
Obligations of government-sponsored enterprises	$	-	$	45,843	$	-	$	45,843
U.S. Treasury securities and obligations of U.S government instrumentalities		40,640		-		-		40,640
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		-		52,525		-		52,525
Municipal securities		-		603,001		-		603,001
Corporate bonds		-		151,774		-		151,774
Residential agency mortgage-backed securities		-		13,033		-		13,033
Collateralized mortgage obligations		-		112,274		-		112,274
Total fixed maturities		40,640		978,450		-		1,019,090
Equity securities
Mutual funds		150,263		107,328		16,354		273,945
Total equity securities		150,263		107,328		16,354		273,945
Total	$	190,903	$	1,085,778	$	16,354	$	1,293,035

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Securities available for sale:
Fixed maturity securities
Obligations of government-sponsored enterprises	$	-	$	61,634	$	-	$	61,634
U.S. Treasury securities and obligations of U.S government instrumentalities		41,213		-		-		41,213
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		-		65,745		-		65,745
Municipal securities		-		588,763		-		588,763
Corporate bonds		-		129,867		-		129,867
Residential agency mortgage-backed securities		-		20,508		-		20,508
Collateralized mortgage obligations		-		152,031		-		152,031
Total fixed maturities		41,213		1,018,548		-		1,059,761
Equity securities
Common stock		1,009		-		-		1,009
Mutual funds		134,398		61,493		12,822		208,713
Total equity securities		135,407		61,493		12,822		209,722
Total	$	176,620	$	1,080,041	$	12,822	$	1,269,483

22

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The fair value of fixed maturity and equity securities included in the Level 2 category were based on market values obtained from independent pricing services, which utilize evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and when available loan performance data.  Because many fixed income securities do not trade on a daily basis, the models used by independent pricing service providers to prepare evaluations apply available information, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing.  For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available.  The independent pricing service providers monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants.

Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement.  Transfers between levels, if any, are recorded as of the actual date of the event or change in circumstance that caused the transfer.  There were no transfers between Levels 1 and 2 during the three months and six months ended June 30, 2013 and 2012.

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 three months and six months ended June 30, 2013 and 2012 is as follows:

	Three months ended
	June 30, 2013						June 30, 2012
	Fixed						Fixed
	Maturity		Equity				Maturity		Equity
	Securities		Securities		Total		Securities		Securities		Total
Beginning balance	$	-	$	14,783	$	14,783	$	-	$	7,312	$	7,312
Unrealized gain in other accumulated comprehensive income		-		1,062		1,062		-		458		458
Purchases		-		509		509		-		1,244		1,244
Ending balance	$	-	$	16,354	$	16,354	$	-	$	9,014	$	9,014

	Six months ended
	June 30, 2013						June 30, 2012
	Fixed						Fixed
	Maturity		Equity				Maturity		Equity
	Securities		Securities		Total		Securities		Securities			Total
Beginning balance	$	-	$	12,822	$	12,822	$	-	$	7,094		$	7,094
Unrealized gain in other accumulated comprehensive income		-		2,024		2,024		-		411			411
Purchases		-		1,508		1,508		-		2,579			2,579
Transfers in and/or out of Level 3		-		-		-		-		(1,070	)		(1,070	)
Ending balance	$	-	$	16,354	$	16,354	$	-	$	9,014		$	9,014

In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets.

Non-financial instruments such as property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as claim liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.

23

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, receivables, accounts payable and accrued liabilities, and short-term borrowings approximate fair value because of the short term nature of these items.  These assets and liabilities are not listed in the table below.

The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:

(i) 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.

(ii) 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.

(iii) Long-term Borrowings

The carrying amount of the loans payable to bank – variable approximates fair value due to its floating interest-rate structure.  The fair value of the loans payable to bank – fixed and senior unsecured notes payable was determined using broker quotations.

(iv) Repurchase Agreement

The value of the repurchase agreement with a long term maturity is based on the discontinued value of the contractual cash flows using current estimated market discount rates for instruments with similar terms.

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on our consolidated balance sheet at June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
Assets:
Policy loans	$	6,337	$	-	$	6,337	$	-	$	6,337
Liabilities:
Policyholder deposits	$	114,804	$	-	$	114,804	$	-	$	114,804
Long-term borrowings:
Loans payable to bank - variable		16,927		-		16,927		-		16,927
Loans payable to bank - fixed		13,361		-		13,361		-		13,361
6.6% senior unsecured notes payable		35,000		-		34,169		-		34,169
6.7% senior unsecured notes payable		10,000		-		9,926		-		9,926
Repurchase agreement		25,000		-		25,705		-		25,705
Total long-term borrowings		100,288		-		100,088		-		100,088
Total liabilities	$	215,092	$	-	$	214,892	$	-	$	214,892

24

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2012
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
Assets:
Policy loans	$	6,161	$	-	$	6,161	$	-	$	6,161
Liabilities:
Policyholder deposits	$	111,692	$	-	$	111,692	$	-	$	111,692
Long-term borrowings:
Loans payable to bank - variable		17,747		-		17,747		-		17,747
Loans payable to bank - fixed		13,524		-		13,524		-		13,524
6.6% senior unsecured notes payable		35,000		-		34,213		-		34,213
6.7% senior unsecured notes payable		10,000		-		9,950		-		9,950
Repurchase agreement		25,000		-		25,937		-		25,937
Total long-term borrowings		101,271		-		101,371		-		101,371
Total liabilities	$	212,963	$	-	$	213,063	$	-	$	213,063

(8) Share-Based Compensation

Share-based compensation expense recorded during the three months and six months ended June 30, 2013 was $485 and $1,163, respectively.  Share-based compensation expense recorded during the three months and six months ended June 30, 2012 was $455 and $1,360, respectively.  During the six months ended June 30, 2012 cash received from stock options exercised was $316.  The impact of these cash receipts is included within the cash flows from financing activities in the accompanying consolidated statement of cash flows.  There was no cash received from stock option exercises during the six months ended June 30, 2013.  During the six months ended June 30, 2013 and 2012, 14,095 and 12,370 shares, respectively, were repurchased and retired as a result of non-cash exercises of stock options.

(9) Comprehensive Income

The accumulated balances for each classification of other comprehensive income (loss), net of tax, are as follows:

	Net unrealized gain on securities			Liability for pension benefits			Accumulated other comprehensive income (loss)
Balance at January 1, 2013	$	102,515		$	(53,411	)	$	49,104
Other comprehensive income (loss) before reclassifications		(31,505	)		-			(31,505	)
Amounts reclassified from accumulated other comprehensive income (loss)		(3,017	)		2,039			(978	)
Net current period change		(34,522	)		2,039			(32,483	)
Balance at June 30, 2013	$	67,993		$	(51,372	)	$	16,621

Reclassifications out of accumulated other comprehensive income (loss) related to the net unrealized gain on securities affected the net realized investment gains line item in the accompanying consolidated statements of earnings.   Also, reclassifications out of accumulated other comprehensive income (loss) related to the liability for pension benefits affected the liability for pension benefits line item in the accompanying consolidated balance sheets.

25

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(10) Income Taxes

Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns with its subsidiaries.  The Corporation and its subsidiaries are subject to Puerto Rico income taxes.  The Corporation’s insurance subsidiaries are also subject to U.S. federal income taxes on foreign source dividend income.  As of June 30, 2013, tax years 2008 through 2012 of the Company and its subsidiaries are subject to examination by Puerto Rico taxing authorities.

Managed Care and Property and Casualty corporations 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.

The Life Insurance corporation operates as a qualified domestic life insurance company and is subject to the alternative minimum tax and taxes on its capital gains.

All other corporations within the group are subject to Puerto Rico income taxes as a regular corporation, as defined in the P.R. Internal Revenue Code, as amended.  The holding company within the American Health (“AH”) group of companies is a U.S.-based corporation and is subject to U.S. federal income taxes.  This U.S-based corporation within our group has not provided U.S. deferred taxes on an outside basis difference created as a result of the business combination of AH and cumulative earnings of its Puerto Rico-based subsidiaries that are considered to be indefinitely reinvested.  The total outside basis difference at December 31, 2012 is estimated at $48,000.  We do not intend to repatriate earnings to fund U.S. and Puerto Rico operations nor do any transaction that would cause a reversal of that outside basis difference.  Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability if such outside basis difference was reversed.

On June 30, 2013 the Governor of Puerto Rico signed into law Puerto Rico’s Act No. 40 and other Acts, which among other things, provide for an increase of the maximum corporate income tax rate from 30% to 39%.  This tax rate applies to fiscal years starting after December 31, 2012.  These new laws also include the amendments to the computations of the corporate alternative minimum tax that includes the consideration of an additional tax on gross receipts, and a special premium tax of 1% to premiums earned after June 30, 2013, except for annuities, premiums derived from Medicare Advantage, Medicaid, or the government of Puerto Rico’s miSalud program.

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of earnings in the period that includes the enactment date.  Quarterly income taxes are calculated using the effective tax rate determined based on the income forecasted for the full fiscal year.

As a result of the recently enacted amendments to the income tax law in Puerto Rico mentioned above, the Corporation adjusted the value of its deferred taxes, resulting in a benefit of $7,700 for the three months ended June 30, 2013.

26

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(11) Pension Plan

The components of net periodic benefit cost for the three months and six months ended June 30, 2013 and 2012 were as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
Components of net periodic benefit cost:
Service cost	$	1,023		$	1,438		$	2,046		$	2,746
Interest cost		1,952			1,963			3,904			3,725
Expected return on assets		(1,696	)		(1,639	)		(3,392	)		(3,073	)
Amortization of prior service benefit		(113	)		(117	)		(226	)		(223	)
Amortization of actuarial loss		1,784			1,597			3,568			3,042
Net periodic benefit cost	$	2,950		$	3,242		$	5,900		$	6,217

Employer contributions:   The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 2012 that it expected to contribute $7,000 to its pension program in 2013.  As of June 30, 2013, the Corporation has not made contributions to the pension program.

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

The following table sets forth the computation of basic and diluted earnings per share for the three months and six months ended June 30, 2013 and 2012:

	Three months ended				Six months ended
	June 30,				June 30,
	2013		2012		2013		2012
Numerator for earnings per share:
Net income attributable to TSM available to stockholders	$	20,142	$	17,035	$	37,380	$	24,549
Denominator for basic earnings per share:
Weighted average of common shares		27,825,150		28,349,711		28,054,362		28,341,252
Effect of dilutive securities		101,451		116,047		94,409		139,887
Denominator for diluted earnings per share		27,926,601		28,465,758		28,148,771		28,481,139
Basic net income per share attributable to TSM	$	0.72	$	0.60	$	1.33	$	0.87
Diluted net income per share attributable to TSM	$	0.72	$	0.60	$	1.33	$	0.86

(13) Contingencies

As of June 30, 2013, 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 of Puerto Rico, as well as other Federal and Puerto Rico government authorities, regularly make inquiries and conduct audits concerning the Company'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 Company. 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 financial condition, operating results and/or cash flows of the Company. Where the Company 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 Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.

27

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

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 Company on favorable terms ("Share Acquisition Agreements") or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.

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 Company, the Company's subsidiary Triple-S Salud, Inc. ("TSS") and others in the Court of First Instance for San Juan, Superior Section (the "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 $12,000. 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 $207,000.  Plaintiffs amended their complaint for the third time in December 2010 and dropped all claims predicated on violations of the antitrust 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 Company and TSS. Two of the original plaintiffs were also eliminated from the Third Amended Complaint ("TAC"). The TAC alleges breach of six Share Acquisition Agreements, breach of the provider contract by way of discriminatory audits and improper payment of services rendered. Plaintiffs also allege a claim for libel and slander against a former president of the Company. In January 2011, we filed our response and a counterclaim for malicious prosecution and abuse of process. Discovery has been substantially completed. On April 13, 2012 the Company filed a motion to dismiss and for summary judgment, seeking the dismissal of the TAC, which the plaintiffs opposed. On March 25, 2013, the parties reached an agreement in open court that settles all claims and counterclaims involved in this case (which amount had already been reserved in our books).  The parties executed a written settlement agreement and general release and, on May 8, 2013, jointly moved the court to dismiss the complaint with prejudice. The parties are awaiting the court’s judgment granting their motion.

Dentists Association Litigation

On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico) filed a complaint in the Court of First Instance against 24 health plans operating in Puerto Rico that offer dental health coverage. The Company and two of its subsidiaries, TSS and Triple-C, Inc. ("TCI"), were included as defendants. This litigation purports to be a class action filed on behalf of Puerto Rico dentists who are similarly situated.

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 $150,000. In addition, the complaint claims that the Puerto Rico Insurance Companies Association 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 Company 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 Company, opposed. Following months of jurisdictional proceedings in the federal court system, the federal district court in Puerto Rico decided to retain jurisdiction on February 8, 2011. The defendants filed a joint motion to dismiss the case on the merits, because the complaint fails to state a claim upon which relief can be granted. On August 31, 2011, the District Court dismissed all of plaintiffs' claims except for its breach of contract claim, and ordered the parties to brief the issue of whether the court still has federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”). Plaintiffs moved the court to reconsider its August 31, 2011 decision and the defendants did the same, arguing that the breach of contract claim failed to state a claim upon which relief can be granted. On May 2, 2012, the court denied the plaintiffs' motion. On May 31, 2012, plaintiffs appealed the District Court's dismissal of their complaint and the denial of plaintiffs' motion for reconsideration. The Court of Appeals for the First Circuit dismissed the appeal for lack of jurisdiction. On September 25, 2012 the District Court denied without prejudice the defendants' motion for reconsideration. On October 10, 2012 the parties filed their briefs with respect to class certification.  On March 13, 2013, the district court denied plaintiffs’ request for class certification and ordered the parties to brief the court on whether jurisdiction still exists under CAFA following such denial. On April 24, 2013, all parties briefed the court and are awaiting the court’s decision.

28

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Claims by Heirs of Former Shareholders

The Company and TSS are defending six individual lawsuits, all filed in state court, from persons who claim to have inherited a total of 92 shares of the Company 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 Company pursuant to transfer and ownership restrictions contained in the Company's (or its predecessors' or affiliates') articles of incorporation and bylaws was improper.

In one of these cases, the plaintiffs argued that the redemption of shares was fraudulent and was not subject to the two-year statute of limitations contained in the local securities law. The Court of First Instance determined that the plaintiffs' claims are time barred under the local securities law. The plaintiffs appealed, and in January 2012, the Puerto Rico Court of Appeals upheld the dismissal, holding that even if the plaintiffs could have survived the securities law's two-year statute of limitations, their complaint was time-barred under the Civil Code's four-year statute of limitations on claims of fraud. On March 28, 2012 the plaintiffs filed a petition for writ of certiorari before the Puerto Rico Supreme Court that was granted on May 31, 2012. We filed our respondent's brief on October 5, 2012. The parties are waiting for the Supreme Court's decision.

In the second case, the Puerto Rico Court of First Instance granted the Company’s motion to dismiss on grounds that the complaint was time-barred under the two-year statute of limitations of the securities laws.  On appeal, the Court of Appeals affirmed the decision of the lower court. Plaintiffs filed a petition for certiorari before the Puerto Rico Supreme Court which was granted on January 20, 2012. On January 8, 2013, the Supreme Court ruled that the applicable statute of limitations is the fifteen-year period of the Puerto Rico Civil Code for collection of monies. On January 28, 2013, the Company filed a motion for reconsideration which was subsequently denied.  On March 26, 2013, Plaintiffs amended the complaint for the second time and the Company answered on April 16, 2013.  Discovery is ongoing.

In the third case, the court of First Instance denied our motion for summary judgment based on its determination that there are material issues of fact in controversy. In response to our appeal, the Puerto Rico Court of Appeals confirmed the decision of the Court of First Instance. Our request for reconsideration was denied in December 2011. Trial is set to begin September 19, 2013.

The fourth case was filed on November 29, 2011. The Company filed a motion to dismiss on the grounds that the claim is time barred under the local securities laws. While the motion to dismiss was pending, plaintiffs amended their complaint on October 15, 2012.  The Company filed a motion to dismiss the amended complaint.  On January 24, 2013, the court denied the motion to dismiss. The Company answered the complaint on March 8, 2013.  Subsequently, plaintiffs amended their complaint and the Company filed its response on June 13, 2013. Discovery is ongoing.

The fifth case was filed on March 26, 2013, and the Company filed its response on May 16, 2013.  Discovery is ongoing.

The sixth case was filed on April 16, 2013 and the Company filed its response on June 21, 2013.  On June 28, 2013, the court of First Instance ordered the plaintiff to reply to the Company’s response specifically on the matter of the statutes of limitations applicable to the complaint.

Management believes the aforesaid claims are time barred under one or more statutes of limitations and will vigorously defend them on these grounds; however, as a result of the Supreme Court’s decision to deny the applicability of the statute of limitations contained in the local securities law, the claims will likely be litigated on their merits.

29

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Intrusions into Triple-C, Inc. Internet IPA Database

On September 21, 2010, the Company learned from a competitor that a specific internet database managed by its 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 its 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 an investigation of these events with the assistance of external resources and identified the information that was accessed and downloaded into the competitor's network. 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. The investigation also revealed that protected health information of additional beneficiaries and IPA data from all three HIP regions previously serviced by TSS was accessed during separate intrusions into the TCI IPA database from October 2008 to August 2010.

The Company gave public notice of the intrusions and sent written notices to all identifiable beneficiaries potentially affected by the intrusions. It also established a toll-free call center to address inquiries and complaints from the individuals notified. The call center received approximately 1,530 inquiries. However, to date, the Company has not received complaints from potentially affected individuals.

The Company reported these events to the appropriate Puerto Rico and federal government agencies. It then received and complied with requests for information from the Puerto Rico Health Insurance Administration ("ASES", by its acronym in Spanish) and the Office for Civil Rights ("OCR") of the U.S. Department of Health and Human Services, which entities are conducting reviews of these data breaches and TSS' and TCI's compliance with applicable security and privacy rules. ASES levied a fine of $100 on TSS in connection incidents, but following the Company's request for reconsideration, ASES withdrew the fine pending the outcome of the review by OCR. The Company at this time cannot reasonably assess the impact of these proceedings on the Company.

The Company has conducted an assessment of its system-wide data and facility security and has taken measures to strengthen its systems' security and credential management procedures to prevent future intrusions.

On February 11, 2011, the Company filed an action before the Puerto Rico Court of First Instance against certain individuals believed to have participated in the intrusions. The complaint was later amended to include additional defendants, including the Company's competitor. After being removed to the federal District Court for Puerto Rico, this case was recently remanded to state court and is in its initial pleadings stage.  On April 22, 2013, the state court denied all motions to dismiss filed in the case and ordered the defendants to answer the complaint.  The state court also ordered the Company to re-serve some individual defendants that had been served while the case was in federal court. All Defendants have been served now and there are six parties who have requested extensions to answer.  Discovery is scheduled to follow.

Joint Underwriting Association Litigations

On August 19, 2011, plaintiffs, purportedly a class of motor vehicle owners, filed an action in the United States District Court for the District of Puerto Rico against the Puerto Rico Joint Underwriting Association ("JUA") and 18 other defendants, including Triple-S Propiedad, Inc. ("TSP"), alleging violations under the Puerto Rico Insurance Code, the Puerto Rico Civil Code, the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the local statute against organized crime and money laundering. JUA is a private association created by law to administer a compulsory public liability insurance program for motor vehicles in Puerto Rico ("CLI"). As required by its enabling act, JUA is composed of all the insurers that underwrite private motor vehicle insurance in Puerto Rico and exceed the minimum underwriting percentage established in such act. TSP is a member of JUA.

In this lawsuit, entitled Noemí Torres Ronda, et al v. Joint Underwriting Association, et al., plaintiffs allege that the defendants illegally charged and misappropriated a portion of the CLI premiums paid by motor vehicle owners in violation of the Puerto Rico Insurance Code. Specifically, they claim that because the defendants did not incur acquisition or administration costs allegedly totaling 12% of the premium dollar, charging for such costs constitutes the illegal traffic of premiums. Plaintiffs also claim that the defendants, as members of JUA, violated RICO through various inappropriate actions designed to defraud motor vehicle owners located in Puerto Rico and embezzle a portion of the CLI premiums for their benefit.

30

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Plaintiffs seek the reimbursement of funds for the class amounting to $406,600, treble damages under RICO, and equitable relief, including a permanent injunction and declaratory judgment barring defendants from their alleged conduct and practices, along with costs and attorneys' fees.

On December 30, 2011, TSP and other insurance companies filed a joint motion to dismiss, arguing that plaintiffs' claims are barred by the filed rate doctrine, inasmuch a suit cannot be brought, even under RICO, to amend the compulsory liability insurance rates that were approved by the Puerto Rico Legislature and the Commissioner of Insurance of Puerto Rico. The motion also argues that since RICO is not a federal statute that specifically relates to the business of insurance, and its application in the claims at issue would frustrate state policy and interfere with Puerto Rico's insurance administrative regime, the McCarran-Ferguson Act precludes plaintiffs' claims. Finally, TSP argued that plaintiffs failed to allege the necessary elements of an actionable RICO claim, or, in the alternative, their damages claim is time barred.

On February 17, 2012, plaintiffs filed their opposition. On April 4, 2012, TSP filed a reply in support of our motion to dismiss. The court denied our motion to dismiss. On October 2, 2012, the court issued an order certifying the class. On October 12, 2012, several defendants, including TSP, filed an appeal before the U.S. Court of Appeals for the First District, requesting the court to vacate the District Court's certification order. The First Circuit denied the authorization to file the writ of appeals. The case is again before the court, pending further proceedings.

Given the early stage of this case, the Company cannot assess the probability of an adverse outcome, or the reasonable financial impact that the outcome may have on the Company. The Company intends to vigorously defend this lawsuit.

In re Blue Cross Blue Shield Antitrust Litigation

TSS is a co-defendant with multiple Blue Plans and the BCBSA in a multi-district class action litigation that alleges that the exclusive service area (ESA) requirements of the Primary License Agreements with Plans violate antitrust law, and the plaintiffs in these suits seek monetary awards and in some instances, injunctive relief barring ESAs. Those cases have been centralized in the United States District Court for the Northern District of Alabama. Prior to centralization, motions have been filed to dismiss some of the cases and are pending the court’s decision.  Discovery has not yet commenced. The Company has joined BCBSA in vigorously contesting these claims.

Claims Relating to the Provision of Health Care Services

TSS is a defendant in a lawsuit filed in 2007 by Centro Médico del Turabo, Inc. ("CMT") in state court originally claiming approximately $3,700 for collection of monies due to unpaid invoices for emergency services rendered to TSS-insured patients pursuant to the Puerto Rico Patients' Bill of Rights.  In February 2012, CMT amended the complaint to increase the claimed amount to $9,800.  Discovery began in November 2012.  After careful review of invoices provided by CMT during discovery, TSS determined in April 2013 that a number of these invoices are valid, but believes the amount due to CMT is substantially below the amount claimed.  TSS is vigorously defending this lawsuit.

Several other claims for collection of monies have been filed against TSS in connection with the provision of health care services.  Among them are individual complaints filed before the Puerto Rico Health Insurance Administration by six community health centers that contain similar breach of contract allegations and claim an aggregate of $9,597.  Discovery has not yet commenced in these complaints, and given their early stage, the Company cannot assess the probability of an adverse outcome or the reasonable financial impact that any such outcome may have on the Company.  However, we believe these complaints are time-barred and intend to vigorously defend them on these and other grounds.

31

Triple-S Management Corporation

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(14) Business Combination

On January 18, 2012, TSM completed the acquisition of 90.8% of the outstanding capital stock of a health clinic in Puerto Rico.  The cost of this acquisition was approximately $3,501, funded with unrestricted cash.  The following table summarizes the net assets acquired as a result of this acquisition:

Cash	$	816
Accounts receivable		1,466
Property and equipment		12,289
Intangible asset		2,730
Other assets		296
Accounts payable and accrued liabilities		(2,233	)
Loans payable		(13,838	)
Total net assets		1,526
Fair value of noncontrolling interest		(372	)
Total net assets	$	1,154

The acquisition is being accounted for under the purchase method of accounting and the health clinic is included in the Company's consolidated financial statements from the January 18, 2012 acquisition date. The allocation of purchase price to the fair value of the acquired assets less the liabilities assumed indicated goodwill of approximately $2,300.  Goodwill will not be deductible for tax purposes and is attributable to synergies and economies of scale expected from the acquisition.

(15) Subsequent Events

The Company evaluated subsequent events through the date that these consolidated interim financial statements were issued.  No other events have occurred that require disclosure or adjustments.

32

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

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries.  The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and six months ended June 30, 2013.  Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2012 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months and six months ended June 30, 2013 included in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding Forward-Looking Information

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

Overview

We are one of the most significant players in the managed care industry in Puerto Rico and have over 50 years of experience in this industry.  We offer a broad portfolio of managed care and related products in the Commercial and Medicare (including Medicare Advantage and the Part D stand-alone prescription drug plan (“PDP”)) markets.  In the Commercial market we are the largest provider of managed care products.  We offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement.  We also participate in the Government of Puerto Rico Health Reform (a government of Puerto Rico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (“Medicaid”), by administering the provision of the physical health component in designated service regions in Puerto Rico.  For the six months ended June 30, 2013, operating income generated under the Medicaid program represented 31% of our consolidated operating income.  See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2012 under the sub-caption “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.”  See also sub-caption “Recent Developments—Managed Care–Medicaid Business” of this Quarterly Report on Form 10-Q.

We have the exclusive right to use the Blue Cross Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands.  As of December 31, 2012, we serve approximately 1,700,000 members across all regions of Puerto Rico and U.S. Virgin Islands.  For the six months ended June 30, 2013, our managed care segment represented approximately 90% of our total consolidated premiums earned.  We also have significant positions in the life insurance and property and casualty insurance markets.  Our life insurance segment had a market share of approximately 13.9% (in terms of direct premiums) during the year ended December 31, 2012.  Our property and casualty segment had a market share of approximately 8.8% (in terms of direct premiums) during the year ended December 31, 2012.

We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (“TSS”) and Socios Mayores en Salud Holdings, Inc. (from now on referred to as “American Health” or “AH”).  TSS is a Blue Cross Blue Shield Association (“BCBSA”) licensee, which provides us with exclusive use of the Blue Cross Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands.  Also, as of January 1, 2013, AH was granted the license to use the names and mark of the BCBSA in Puerto Rico.

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We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (“TSV”) and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (“TSP”), each one representing approximately 6% and 4%, respectively, of our consolidated premiums earned, net for the six months ended June 30, 2013.

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

	Three months ended						Six months ended
	June 30,						June 30,
(Dollar amounts in millions)	2013			2012			2013			2012
Premiums earned, net:
Managed care	$	499.3		$	528.5		$	993.2		$	1,024.3
Life insurance		32.1			30.7			63.9			60.7
Property and casualty insurance		25.3			23.6			50.2			45.8
Intersegment premiums earned		(0.7	)		(0.6	)		(1.3	)		(1.3	)
Consolidated premiums earned, net	$	556.0		$	582.2		$	1,106.0		$	1,129.5
Administrative service fees:
Managed care	$	29.6		$	28.9		$	57.7		$	57.6
Intersegment administrative service fees		(1.0	)		(1.1	)		(2.0	)		(2.3	)
Consolidated administrative service fees	$	28.6		$	27.8		$	55.7		$	55.3
Operating income:
Managed care	$	13.4		$	18.6		$	33.9		$	26.0
Life insurance		3.7			4.0			7.7			8.4
Property and casualty insurance		0.2			3.5			0.6			2.1
Intersegment and other		(0.5	)		(1.9	)		(2.7	)		(3.4	)
Consolidated operating income	$	16.8		$	24.2		$	39.5		$	33.1

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

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

We use operating income as a measure of performance of the underwriting and investment functions of our segments.  We also use the loss ratio and the operating expense ratio as measures of performance.  The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100.  The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.

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Recent Developments

Puerto Rico’s 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, 2008, 2009, 2010 and 2011 the real gross national product contracted by 1.1%, 2.9%, 3.8%, 3.4%, and 1.5% respectively. For fiscal year 2012 Puerto Rico’s gross national product grew by 0.1%.  The latest projections of the Puerto Rico Planning Board (the “Planning Board”) made in April 2013, which took into account the preliminary results for fiscal year 2012, the estimated effects on the Puerto Rico economy of the United States’ budget sequestration, the end of the American Recovery and Reinvestment Act (ARRA) funds, the impact of the initial phase of the tax reform, the recent initiatives to promote private employment creation, the end of the local stimulus plan, and other economic factors, it is projected that Puerto Rico’s real gross national product for fiscal year 2013 will decrease by 0.4%. Puerto Rico’s real gross national product for fiscal year 2014 is forecasted to grow by 0.2%.

In fiscal year 2012, aggregate personal income was $59.4 billion and personal income per capita was $15,995.  From fiscal year 2000 to fiscal year 2012, total employment decreased at an average annual rate of 0.9%, from 1,150,291 to 1,035,465.  A reduction in total employment began in the fourth quarter of fiscal year 2007 and has continued consistently through fiscal year 2012 due to the current recession and contractionary fiscal adjustment measures.  According to the Puerto Rico Department of Labor and Human Resources Household Employment Survey, known as the “Household Survey”), total employment fell by 1.1% in fiscal year 2012 and remained virtually stationary, with a negative 0.1% growth for the first nine months of fiscal year 2013. The unemployment rate for fiscal year 2012 and for the first nine months of fiscal year 2013 was 15.2% and 14.2%, respectively.

The economy of Puerto Rico is closely linked to that of the 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 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. In recent years economic growth in Puerto Rico has not been consistent with the performance of the United States economy.

The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services. The services sector, which includes finance, insurance, real estate, wholesale and retail trade, transportation, communications and public 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.

Since 2000, the Government of Puerto Rico (“the Government”) has faced a number of fiscal challenges, including a continued imbalance between its general fund revenues and expenditures, reaching its highest level in fiscal year 2009 with a deficit of $3.3 billion.  Deficits were generally bridged through the use of non-recurring measures, such as borrowings, postponing payments to suppliers, and other one-time measures such as the use of derivatives and borrowings collateralized with government-owned real estate.

Recurrent budget deficits have substantially increased the amount of public sector debt. The total outstanding public sector debt amounted to $70.4 billion as of March 31, 2013. Gross National Product as of the end of FY 2012 was $69.5 billion, resulting in a debt/GNP ratio of 107%. Another obligation of the Government is an unfunded liability of the government public pension funds, which have funded ratios below 10%. The Government Employees Retirement System (“ERS”), the biggest of these public pension funds, announced in November 2012 that the total unfunded liability of all funds amounts to $37.3 billion.

In December 2012, Moody’s downgraded Puerto Rico General Obligation debt from Baa1 to Baa3, combined with a negative outlook. In March 2013, Standard & Poor’s downgraded Puerto Rico General Obligation debt to BBB-, combined with a negative outlook. In March 2013, Fitch also downgraded Puerto Rico General Obligation debt to BBB-, combined with a negative outlook. Most related Puerto Rico credits have also been downgraded over the same time period.

The rating agencies cite continued financial deterioration of Puerto Rico, continued weak economic growth forecasts, high and growing debt levels, and a high level of retirement liabilities. The lowest investment grade rating combined with a negative outlook by all rating agencies, reflects the challenge Puerto Rico will face attempting to address the underfunded pension systems from an already weak financial and economic position.  We depend on Government contracts for a significant amount of our consolidated revenues.  If the Government is unable to fund payment on these contracts, our results of operations would be materially affected.

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In recent years, the Government has been focused on implementing measures to achieve fiscal balance, restore economic growth, find solutions for its underfunded pension system and thereby safeguard the investment-grade ratings of its bonds.  Measures taken include (1) a reduction in the amount of Governmental employees, (2) tax reform, (3) privatization of the airport and certain highways through public-private partnerships, and, more recently, (4) a pension reform reducing benefits and increasing retirement age.  To address the economic situation in Puerto Rico, on June 30, 2013 the Governor of Puerto Rico signed House Bill 1073 (Act 40-2013) and other Bills, such as HB 1172  (Act 46-2013) and 991 (Act 42-2013) into law.  These new laws represent significant changes to the Puerto Rico Internal Revenue Code of 2011, as amended (“2011 Code”).  Relevant amendments to the 2011 Code impacting income taxes include the expansion of the corporate alternative minimum tax and individual alternative basic tax in lieu of the proposed "National Gross Receipts Tax", a moratorium on tax credits, modified excise taxes, sales and use taxes, and taxes on insurance premiums.  These changes, as applicable, have been considered and recorded in the Corporation’s financial statements as of and for the six months ended June 30, 2013.   In addition to the changes in the 2011 Code, the Government of Puerto Rico may take other revenue raising measures, which could have a material adverse effect on our business, financial condition and results of operations.

Managed Care – Medicaid Business

On July 1, 2013, TSS, amended and restated its agreement with the Puerto Rico Health Insurance Administration ("ASES" by its Spanish acronym).  The amended and restated agreement (the "Contract") extends the administration of the provision of the physical health component of the Medicaid program in service regions in the Commonwealth of Puerto Rico currently administered by TSS for a 12-month period.  The Contract also transfers the administration of the three remaining service regions to TSS upon completion of a transition period ending no later than October 1, 2013 (the "Transition").  The Contract expires on June 30, 2014.  TSS will receive a per-member per-month administrative fee for its services and will not bear the insurance risk of the program.  As customary, this contract needs to be approved by CMS, ASES is currently in the process of obtaining such approval.

Under the terms of the Contract, TSS is a third-party administrator responsible for the provision of administrative services to Medicaid enrollees in the following designated regions: West, North, Metro North, San Juan, Northeast, Virtual (which covers services provided throughout Puerto Rico to children in foster care and certain victims of domestic violence) and, after completion of the Transition, Southwest, Southeast and East.  The administrative services to be provided include case, disease and utilization management, network management and credentialing, enrollment and enrollee services and claims administration, among others.

Recent Accounting Standards

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

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Managed Care Membership

	As of June 30,
	2013		2012
Managed care enrollment:
Commercial 1		678,544		710,115
Medicare 2		113,984		122,151
Medicaid 3		898,180		889,091
Total		1,690,708		1,721,357
Managed care enrollment by funding arrangement:
Fully-insured		576,525		607,164
Self-insured		1,114,183		1,114,193
Total		1,690,708		1,721,357

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

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

(3) All are self-funded members.

Consolidated Operating Results

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

	Three months ended						Six months ended
	June 30,						June 30,
(Dollar amounts in millions)	2013			2012			2013		2012
Revenues:
Premiums earned, net	$	556.0		$	582.2		$	1,106.0	$	1,129.5
Administrative service fees		28.6			27.8			55.7		55.3
Net investment income		12.0			11.5			23.4		22.8
Other operating revenues		1.2			1.2			2.3		2.2
Total operating revenues		597.8			622.7			1,187.4		1,209.8
Net realized investment gains		1.7			0.5			3.6		2.1
Other income, net		0.3			(0.2	)		0.8		0.9
Total revenues		599.8			623.0			1,191.8		1,212.8
Benefits and expenses:
Claims incurred		460.8			496.2			912.8		971.9
Operating expenses		120.2			102.3			235.1		204.8
Total operating expenses		581.0			598.5			1,147.9		1,176.7
Interest expense		2.5			2.7			4.8		5.2
Total benefits and expenses		583.5			601.2			1,152.7		1,181.9
Income before taxes		16.3			21.8			39.1		30.9
Income tax expense (benefit)		(3.7	)		4.8			1.8		6.4
Net income		20.0			17.0			37.3		24.5
Less: net loss attributable to non-controlling interest		0.1			-			0.1		-
Net income attributable to TSM	$	20.1		$	17.0		$	37.4	$	24.5

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Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Operating Revenues

Consolidated premiums earned, net decreased by $26.2 million, or 4.5%, to $556.0million during the three months ended June 30, 2013 when compared to the three months ended June 30, 2012; mostly due to a decrease in Managed Care premiums resulting from lower member month enrollment in the Commercial and Medicare business, combined with lower risk score adjustments from CMS in 2013 as compared to 2012.

The consolidated administrative service fees remained in line during the three months ended June 30, 2013 when compared with the three months ended June 30, 2012.

Net Realized Investment Gains

Consolidated net realized investment gains of $1.7 million during the 2013 period mostly result the result of net realized gains from the sale of debt and equity securities.

Claims Incurred

Consolidated claims incurred decreased by $35.4 million, or 7.1%, to $460.8 million during the three months ended June 30, 2013 when compared to the claims incurred during the three months ended June 30, 2012.  This decrease is mostly due to lower claims in the Managed Care segment resulting from lower member month enrollment in the Commercial and Medicare businesses, and lower utilization and cost trends in the Medicare business.  The claims incurred in the Property and Casualty segment increased during this period as the result of an unfavorable loss experience, mostly in the Commercial Auto line of business.  The consolidated loss ratio decreased by 230 basis points to 82.9%.

Operating Expenses

Consolidated operating expenses during the three months ended June 30, 2013 increased by $17.9 million, or 17.5%, to $120.2 million as compared to the operating expenses during the three months ended June 30, 2012.  For the three months ended June 30, 2013, the consolidated operating expense ratio increased by 380 basis points to 20.6%.  The higher operating expenses and operating expenses ratio are mainly related to special technology initiatives, expenses related to the reorganization of the Medicare business, higher payroll and related expenses mostly as a result of recruitment of additional Medicare sales force, and an increase in professional services related to our CMS star ratings efforts.

Income Tax Expense (Benefit)

Consolidated income tax expense (benefit) during the three months ended June 30, 2013 decreased by $8.5 million, to a benefit of $3.7 million, as compared to the income tax expense during the three months ended June 30, 2012, primarily due to the effect of a one time $7.7 million adjustment to the consolidated net deferred tax assets after an increase in the enacted tax rate from 30% to 39%, net of the additional tax expense due to the aforementioned tax rate increase that was effective January 1, 2013.  Consequently, the effective tax rate decreased from 22.0% during the three months ended June 30, 2012 to a benefit rate of 22.7% during the three months ended June 30, 2013.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Operating Revenues

Consolidated premiums earned, net decreased by $23.5 million, or 2.1%, to $1,106.0 million during the six months ended June 30, 2013 when compared to the six months ended June 30, 2012.  The decrease was mostly the result of the lower member month enrollment in the Medicare and Commercial business and the receipt of lower risk score adjustments from CMS in 2013 as compared to 2012.

The consolidated administrative service fees remained in line during the 2013 period when compared with the 2012 period.

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Net Realized Investment Gains

Consolidated net realized investment gains of $3.6 million during the 2013 period are the result of net realized gains from the sale of debt and equity securities.

Claims Incurred

Consolidated claims incurred decreased by $59.1 million, or 6.1%, to $912.8 million during the six months ended June 30, 2013 when compared to the claims incurred during the six months ended June 30, 2012.  This decrease in the claims incurred of the Managed Care segment result the lower member month enrollment and lower utilization and cost trends in the Medicare and Commercial business.  This decrease was partially offset by an increase in claims of the Life and Property and Casualty segments.  The consolidated loss ratio decreased by 350 basis points to 82.5%.

Operating Expenses

Consolidated operating expenses during the six months ended June 30, 2013 increased by $30.3 million, or 14.8%, to $235.1 million as compared to the operating expenses during the six months ended June 30, 2012.  For the six months ended June 30, 2013, the consolidated operating expense ratio increased by 290 basis points to 20.2%. The higher operating expenses and operating expenses ratio are mainly related to special technology initiatives, expenses related to the reorganization of the Medicare business, higher payroll and related expenses mostly as a result of recruitment of additional Medicare sales force.  In 2012, the sales efforts for some MA products were outsourced.  Professional services also reflect an increase related to our CMS star ratings efforts.

Income Tax Expense

Consolidated income tax expense during the six months ended June 30, 2013 decreased by $4.6 million, to $1.8 million, as compared to the income tax expense during the six months ended June 30, 2012. This decrease is primarily due to the effect of a $7.7 million adjustment to the consolidated net deferred tax assets after an increase in the enacted tax rate from 30% to 39%, net of the additional tax expense due to the aforementioned tax rate increase that was effective January 1, 2013.  Consequently, the effective tax rate decreased by 1610 basis points from 20.7% during the six months ended June 30, 2012, to 4.6% during the six months ended June 30, 2013.

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Managed Care Operating Results

	Three months ended						Six months ended
	June 30,						June 30,
(Dollar amounts in millions)	2013			2012			2013			2012
Operating revenues:
Medical premiums earned, net:
Commercial	$	238.7		$	242.8		$	472.3		$	484.4
Medicare		260.6			285.7			520.9			539.9
Medical premiums earned, net		499.3			528.5			993.2			1,024.3
Administrative service fees		29.6			28.9			57.7			57.6
Net investment income		4.1			3.9			8.0			7.8
Total operating revenues		533.0			561.3			1,058.9			1,089.7
Medical operating costs:
Medical claims incurred		428.6			469.0			851.8			917.5
Medical operating expenses		91.0			73.7			173.2			146.2
Total medical operating costs		519.6			542.7			1,025.0			1,063.7
Medical operating income	$	13.4		$	18.6		$	33.9		$	26.0
Additional data:
Member months enrollment:
Commercial:
Fully-insured		1,388,125			1,459,127			2,783,148			2,926,275
Self-funded		656,408			672,128			1,323,584			1,331,628
Total Commercial member months		2,044,533			2,131,255			4,106,732			4,257,903
Medicare:
Medicare Advantage		315,656			339,026			638,414			668,970
Stand-alone PDP		24,365			25,424			48,438			50,695
Total Medicare member months		340,021			364,450			686,852			719,665
Medicaid member months - Self-funded		2,670,314			2,641,905			5,320,932			5,254,863
Total member months		5,054,868			5,137,610			10,114,516			10,232,431
Medical loss ratio		85.8	%		88.7	%		85.8	%		89.6	%
Operating expense ratio		17.2	%		13.2	%		16.5	%		13.5	%

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Medical Operating Revenues

Medical premiums earned for the three months ended June 30, 2013 decreased by $29.2 million, or 5.5%, to $499.3 million when compared to the medical premiums earned during the three months ended June 30, 2012.  This decrease is principally the result of the following:

• Medical premiums generated by the Medicare business decreased during the three months ended June 30, 2013 by $25.1 million, or 8.8%, to $260.6 million.  This fluctuation primarily results from the overall decrease in the member month enrollment of this business by approximately 24,000, or 6.7%, when compared with the same period in 2012, attributed to decreased sales of our non-dual offerings.  Also contributing to the decrease in premiums during this period is the receipt of lower risk score adjustments from CMS as compared to 2012.  The three months ended June 30, 2013 and 2012 include the net effect of approximately $6.8 million and $15.3 million, respectively, related to CMS risk scores adjustments corresponding to prior periods.

• Medical premiums generated by the Commercial business decreased by $4.1 million, or 1.7%, to $238.7 million during the three months ended June 30, 2013, primarily resulting from the overall decrease in the member month enrollment of this business by approximately 87,000, or 4.1%.  This decrease is partially offset by a moderate increase in average premium rates of approximately 3.3%.

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Administrative service fees remained in line during the three months ended June 30, 2013 when compared with the three months ended June 30, 2012. The increase of $0.7 million, or 2.4%, during the 2013 period results from a higher Medicaid self-funded member month enrollment partially offset by a decrease in the Commercial self-funded membership.

Medical Claims Incurred

Medical claims incurred during the three months ended June 30, 2013 decreased by $40.4 million, or 8.6%, to $428.6 million when compared to the three months ended June 30, 2012.  The medical loss ratio (“MLR”) of the segment decreased 290 basis points during the 2013 period, to 85.8%.  These fluctuations are primarily attributed to the effect of the following:

• The medical claims incurred of the Medicare business decreased by $34.0 million, or 13.4% during 2013 and its MLR decreased by 450 basis points, to 84.1% for the three months ended June 30, 2013.  Excluding the effect of risk-score premium adjustments and prior period reserve developments in the 2013 and 2012 periods the MLR decreased 50 basis points, mostly as the result of improved drug costs in AH after the new Pharmacy Benefit Manager (“PBM”) contract and the impact of changes in 2013 product design, partially offset by higher utilization trends during this period.

• The medical claims incurred of the Commercial business decreased by $5.7 million, or 2.6%, during the 2013 period mostly due to the lower fully-insured member month enrollment.  The Commercial MLR was 87.5%, which is 90 basis points lower than the MLR for the prior year. Excluding the effect of prior period reserve developments in both periods, the MLR increased by 160 basis points, reflecting higher utilization and cost trends in the 2013 period.

Medical Operating Expenses

Medical operating expenses for the three months ended June 30, 2013 increased by $17.3 million, or 23.5%, to $91.0 million when compared to the three months ended June 30, 2012.  The operating expense ratio increased by 400 basis points, from 13.2% in 2012 to 17.2% in 2013.  This increase is mainly related to on-going special project initiatives related to TSS’s core system upgrade to QNXT 5.0, expenses related to the on-going reorganization of the MA business, higher payroll and related expenses mostly as a result of recruitment of additional MA sales force, a fine to the MA business assessed by a local regulatory agency, and an increase in professional services related to our CMS star ratings efforts.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Medical Operating Revenues

Medical premiums earned for the six months ended June 30, 2013 decreased by $31.1 million, or 3.0%, to $993.2 million when compared to the medical premiums earned during the six months ended June 30, 2012.  This decrease is principally the result of the following:

• Medical premiums generated by the Medicare business decreased during the six months ended June 30, 2013 by $19.0 million, or 3.5%, to $520.9 million.  This fluctuation is the result of an overall decrease in the member month enrollment of this business by approximately 33,000, or 4.6%, when compared with the same period in 2012.  Decrease in member month enrollment was attributed to lower sales of our non-dual offerings. Also contributing to this fluctuation is the receipt of a lower risk score adjustments from CMS in 2013 as compared to 2012.  The six months ended June 30, 2013 and 2012 include the net effect of approximately $3.1 million and $10.2 million, respectively, related to CMS final risk scores adjustments corresponding to prior periods.

• Medical premiums generated by the Commercial business decreased by $12.1 million, or 2.5%, to $472.3 million during the six months ended June 30, 2013.  This fluctuation is primarily the result of a decrease in member month enrollment by approximately 151,000, or 3.6%, which was partially offset by an increase in average premium rates of approximately 2.5%. The decrease in member month enrollment is mostly due to the non-renewal of one large commercial account.

Administrative service fees remained in line when compared with the six months period ended June 30, 2012.

Medical Claims Incurred

Medical claims incurred during the six months ended June 30, 2013 decreased by $65.7 million, or 7.2%, to $851.8 million when compared to the six months ended June 30, 2012.  The MLR of the segment decreased 380 basis points during the 2013 period, to 85.8%.  These fluctuations are primarily attributed to the effect of the following:

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•   The medical claims incurred of the Medicare business decreased by $49.0 million, or 10.1% during the 2013 period and its MLR was 83.6%, which is 620 basis points lower than the MLR for the prior year. The lower member month enrollment in this sector contributed to the decrease in claims incurred.  Excluding the effect of risk-score premium adjustments and prior period reserve developments in the 2013 and 2012 periods, the MLR decreased by 390 basis points, mostly as the result of lower utilization and cost trends.  The decrease also reflects improved drug costs after the new PBM contract in AH and the impact of changes in 2013 product design.

• The medical claims incurred of the Commercial business decreased by $15.1 million, or 3.5%, during the 2013 period mostly due to the lower fully-insured member month enrollment.  The commercial MLR was 88.0%, which is 90 basis points lower than the MLR for the prior year.  Excluding the effect of favorable prior period reserve developments in 2013 and 2012, the MLR would have increased by 40 basis points.

Medical Operating Expenses

Medical operating expenses for the six months ended June 30, 2013 increased by $27.0 million, or 18.5%, to $173.2 million when compared to the six months ended June 30, 2012.  The operating expense ratio increased by 300 basis points, from 13.5% in 2012 to 16.5% in 2013.  This increase is mainly related to on-going special project initiatives related to TSS’s core system upgrade to QNXT 5.0, the implementation of a new financial system, expenses related to the on-going reorganization of the MA business, higher payroll and related expenses mostly as a result of recruitment of additional MA sales force, a fine to the MA business assessed by a local regulatory agency, and an increase in professional services related to our CMS star ratings efforts.

Life Insurance Operating Results

	Three months ended						Six months ended
	June 30,						June 30,
(Dollar amounts in millions)	2013			2012			2013			2012
Operating revenues:
Premiums earned, net:
Premiums earned	$	34.3		$	32.7		$	68.1		$	64.7
Premiums earned ceded		(2.2	)		(2.0	)		(4.2	)		(4.0	)
Premiums earned, net		32.1			30.7			63.9			60.7
Net investment income		5.7			5.2			11.0			10.1
Total operating revenues		37.8			35.9			74.9			70.8
Operating costs:
Policy benefits and claims incurred		17.9			16.6			34.7			31.4
Underwriting and other expenses		16.2			15.3			32.5			31.0
Total operating costs		34.1			31.9			67.2			62.4
Operating income	$	3.7		$	4.0		$	7.7		$	8.4
Additional data:
Loss ratio		55.8	%		54.1	%		54.3	%		51.7	%
Operating expense ratio		50.5	%		49.8	%		50.9	%		51.1	%

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Operating Revenues

Premiums earned, net for the three months ended June 30, 2013 increased by $1.4 million, or 4.6% to $32.1 million when compared to the three months ended June 30, 2012, mostly related to new sales in the Individual Life business, which presented a year over year increase of $1.7 million, or 9.8%.

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Policy Benefits and Claims Incurred

Policy benefits and claims incurred for the three months ended June 30, 2013 increased by $1.3 million, or 7.8%, to $17.9 million when compared to the three months ended June 30, 2012.  This is the result of a higher amount of claims received in the 2013 period, particularly in Cancer products.  As a result, the loss ratio for the period increased from 54.1% in 2012 to 55.8% in 2013, or 170 basis points.

Underwriting and Other Expenses

Underwriting and other expenses for the three months period ended June 30, 2013 increased $0.9 million, or 5.9%, to $16.2 million when compared to the three months ended June 30, 2012, mostly related to a lower amount of expenses capitalized as Deferred Policy Acquisition Costs, mostly resulting from lower commission expenses.  As a result, the segment’s operating expense ratio increased by 70 basis points from 49.8% in 2012 to 50.5% in 2013.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Operating Revenues

Premiums earned, net for the six months ended June 30, 2013 increased by $3.2 million, or 5.3% to $63.9 million when compared to the six months ended June 30, 2012 mostly related to new sales and improved persistency in the Individual Life business, which presented a year over year increase of $3.0 million, or 8.7%.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred for the six months ended June 30, 2013 increased by $3.3 million, or 10.5%, to $34.7 million when compared to the six months ended June 30, 2012.  This is the result of a higher amount of claims received in the 2013 period, reflecting the growth of the segment’s inforce portfolio.  As a result, the loss ratio for the period increased from 51.7% in 2012 to 54.3% in 2013, or 260 basis points.

Underwriting and Other Expenses

Underwriting and other expenses for the six month period ended June 30, 2013 increased $1.5 million, or 4.8%, to $32.5 million when compared to the six months ended June 30, 2012, mostly related to a lower amount of expenses capitalized as Deferred Policy Acquisition Costs, mostly resulting from lower commission expenses.  The operating expense ratio decreased by 20 basis points from 51.1% in 2012 to 50.9% in 2013 as a result of the higher volume of business during the six months ended June 30, 2013 as compared to the six months period ended June 30, 2012.

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Property and Casualty Insurance Operating Results

	Three months ended						Six months ended
	June 30,						June 30,
(Dollar amounts in millions)	2013			2012			2013			2012
Operating revenues:
Premiums earned, net:
Premiums written	$	46.2		$	45.5		$	77.2		$	79.3
Premiums ceded		(14.9	)		(16.4	)		(28.1	)		(30.6	)
Change in unearned premiums		(6.0	)		(5.5	)		1.1			(2.9	)
Premiums earned, net		25.3			23.6			50.2			45.8
Net investment income		2.0			2.3			4.0			4.5
Total operating revenues		27.3			25.9			54.2			50.3
Operating costs:
Claims incurred		14.9			11.2			27.6			24.0
Underwriting and other expenses		12.2			11.2			26.0			24.2
Total operating costs		27.1			22.4			53.6			48.2
Operating income	$	0.2		$	3.5		$	0.6		$	2.1
Additional data:
Loss ratio		58.9	%		47.5	%		55.0	%		52.4	%
Operating expense ratio		48.2	%		47.5	%		51.8	%		52.8	%
Combined ratio		107.1	%		95.0	%		106.8	%		105.2	%

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Operating Revenues

Total premiums written during the three months ended June 30, 2013 increased by $0.7 million, or 1.5%, to $46.2 million, mostly resulting from higher sales of Commercial Package insurance products.

Premiums ceded to reinsurers during the three months ended June 30, 2013 decreased by $1.5 million, or 9.1%, to $14.9 million.  The ratio of premiums ceded to premiums written decreased by 370 basis points, from 36.0% in 2012 to 32.3% in 2013, mostly resulting from a change in the mix of business subscribed during 2013.

The change in unearned premiums presented a decrease of $0.5 million, to $6.0 million during the three months ended June 30, 2013, primarily as the result of the higher volume of premiums written in 2013.

Claims Incurred

Claims incurred during the three months ended June 30, 2013 increased by $3.7 million, or 33.0%, to $14.9 million.  The loss ratio increased by 1140 basis points, to 58.9% during this period as a result of an unfavorable loss experience, mostly in Commercial Packages, General Liability and Auto Insurance  products.

Underwriting and Other Expenses

Underwriting and other operating expenses for the three months ended June 30, 2013 increased by $1.0 million, or 8.9%, to $12.2 million.  The operating expense ratio increased by 70 basis points during the same period, to 48.2% in 2013. This increase is mainly related to an assessment received from the Puerto Rico Guarantee Fund and recorded as a charge to operations of $1.1 million to cover the insolvencies of insurers under liquidation.  This assessment is expected to be recovered with policy surcharges in premiums written after August 2013.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Operating Revenues

Total premiums written during the six months ended June 30, 2013 decreased by $2.1 million, or 2.6%, to $77.2 million, mostly resulting from lower sales of Dwelling insurance products.

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Premiums ceded to reinsurers during the six months ended June 30, 2013 decreased by $2.5 million, or 8.2%, to $28.1 million.  The ratio of premiums ceded to premiums written decreased by 220 basis points, from 38.6% in 2012 to 36.4% in 2013, mostly resulting from a change in the mix of business subscribed during 2013.

The change in unearned premiums presented an increase of $4.0 million, to $1.1 million during the six months ended June 30, 2013, primarily as the result of the lower volume of premiums written in 2013.

Claims Incurred

Claims incurred during the six months ended June 30, 2013 increased by $3.6 million, or 15.0%, to $27.6 million.  The loss ratio increased by 260 basis points, to 55.0% during this period as a result of an unfavorable loss experience, mostly in the Commercial Package, General Liability and Auto Insurance lines of business.

Underwriting and Other Expenses

Underwriting and other operating expenses for the six months ended June 30, 2013 increased by $1.8 million, or 7.4%, to $26.0 million.  This increase is mainly related to an assessment received from the Puerto Rico Guarantee Fund and recorded as a charge to operations of $1.1 million to cover the insolvencies of insurers under liquidation.  This assessment is expected to be recovered with policy surcharges in premiums written after August 2013.  Higher net commission expense resulting from an increase in the amortization of deferred policy acquisition costs also contributed to the increase in operating expenses.  However, the operating expense ratio decreased by 100 basis points during the same period, to 51.8% in 2013.

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:

	Six months ended
	June 30,
(Dollar amounts in millions)	2013			2012
Sources of cash:
Cash provided by operating activities	$	24.3		$	125.5
Proceeds from short-term borrowings		-			2.8
Proceeds from policyholder deposits		6.6			19.6
Other		27.7			0.5
Total sources of cash		58.6			148.4
Uses of cash:
Net purchases of investment securities		(57.4	)		(31.6	)
Net capital expenditures		(8.6	)		(5.7	)
Repurchase and retirement of common stock		(18.3	)		(0.6	)
Repayments of long-term borrowings		(1.0	)		(1.0	)
Repayments of short-term borrowings		(1.9	)		-
Surrenders of policyholder deposits		(5.1	)		(3.3	)
Acquisition of business, net of cash acquired of $0.8		-			(2.7	)
Other		-			(10.4	)
Total uses of cash		(92.3	)		(55.3	)
Net increase (decrease) in cash and cash equivalents	$	(33.7	)	$	93.1

Cash flow from operating activities decreased by $101.2 million for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, principally due to the effect of lower premium collections by $120.8 million and an increase in cash paid to suppliers and employees of $13.4 million, offset in part by a decrease in claims paid of $26.4 million.  The decrease in premiums collected is principally the result of the collection in advance of the CMS payment corresponding to the July 2012 premiums during prior year and the lower Managed Care member month enrollment.

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During the six months ended June 30, 2013 we received $6.6 million in policyholder deposits, this represents a decrease $13.0 million when compared to the prior year and is the result of lower sales of annuity products.

The increase in other sources of cash for the six months ended June 30, 2013 and the decrease in other uses of cash for the six months ended June 30, 2012 is attributed to changes in the amount of outstanding checks over bank balances.

Net acquisition of investment securities were $25.8 million higher during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, primarily resulting from the investment of excess cash flows from operations.

Net capital expenditures increased by $2.9 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, principally due to special projects initiatives related to information technology.

Repurchase and retirement of common stock increased by $17.7 million mainly due to the repurchase and retirement of 1,000,000 shares of common stock as part of the completed secondary public offering conducted during the six months ended June 30, 2013.

On January 18, 2012, we acquired a controlling stake in a health clinic in Puerto Rico at a cost of $2.7 million, net of $0.8 million of cash acquired.  There was no acquisition of business during the six months ended June 30, 2013.

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 June 30, 2013, we had $135.0 million of available credit under these facilities.  There are $28.1 million outstanding short-term borrowings under these facilities as of June 30, 2013.

As of June 30, 2013, we had the following long-term borrowings:

• On January 31, 2006, we issued and sold $35.0 million of our 6.7% senior unsecured notes due January 2021 (the 6.7% notes).  On September 10, 2012 we repaid $25.0 million of the principal of these senior unsecured notes.

• 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).  On October 1, 2010 we repaid $25.0 million of the principal of these senior unsecured notes.

• On November 1, 2010, we entered into a $25.0 million arrangement to sell securities under repurchase agreements that matures in November 2015.  This repurchase agreement pays interests on a quarterly basis at 1.96%.  At June 30, 2013 investment securities available for sale with fair value of $28.0 million (face value of $27.8 million) were pledged as collateral under this agreement.

The 6.6% notes and the 6.7% notes contain certain non-financial covenants.  At June 30, 2013, we are in compliance with these covenants.

In addition, we are a party to a secured term loan with a commercial bank in 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 repayments of $0.1 million.  As of June 30, 2013, this secured loan had an outstanding balance of $16.9 million and average annual interest rate of 1.29%.

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 that 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 June 30, 2013 we are in compliance with these covenants.  Failure to meet these covenants may trigger the accelerated payment of the outstanding balance.

As part of the acquisition transaction of the controlling stake in a health clinic, we assumed a term loan with balance of $13.4 million as of June 30, 2013.  The loan requires monthly payments of $0.1 million, including principal and interest, is due on December 23, 2014 with a final payment of $12.9 million and bears interest at an annual rate of 4.75%.

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We anticipate that we will have sufficient liquidity to support our currently expected needs.

Further details regarding the senior unsecured notes and the credit agreements are incorporated by reference to “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 3. Quantitative and Qualitative Disclosures about Market 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 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.  No material changes have occurred in our exposure to financial market risks since December 31, 2012.  A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. 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 chief financial officer have concluded that as of June 30, 2013, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.

There were no significant changes in our disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed the evaluation referred to above.

Changes in Internal Controls Over Financial Reporting

No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended June 30, 2013 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

For a description of legal proceedings, see note 13 to the unaudited consolidated financial statements included in this quarterly report on Form 10-Q.

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Item 1A. Risk Factors

For a description of our risk factors see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table presents information related to our repurchases of common stock for the period indicated:

(Dollar amounts in millions, except per share data)	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs 1		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (in millions)
April 1, 2013 to April 30, 2013		-		-		-	$	30.00
May 1, 2013 to May 31, 2013		1,000,000	$	18.25		1,000,000	$	-
June 1, 2013 to June 30, 2013		-		-		-	$	-

1   On March 6, 2013, the Board of Directors authorized the repurchase of up to $30.0 million of Class B shares concurrent with the conversion of 7 million Class A shares into Class B shares and the public offering of a substantial majority of such convertible shares.  As part of the offering, the Company repurchased $18.25 million of the authorized $30.0 million repurchase on May 17, 2013.

In July 29, 2013 the Company’s Board of Directors authorized an $11.5 million repurchase program of its Class B common stock.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

Exhibits	Description
11	Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three months and six months ended June 30, 2013 and 2012 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.
10.1*	Contract between Administración de Seguros de Salud de Puerto Rico and Triple-S Salud, Inc. to administer the provision of the physical health component of the miSalud Program.
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, Chief Financial Officer and Chief Accounting 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.C Section 1350.
32.2*	Certification of the Vice President, Chief Financial Officer and Chief Accounting Officer required pursuant to 18 U.S.C Section 1350.

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

* Filed herein.

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SIGNATURES

Pursuant to the requirements of the United States Securities and 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
Date:	August 8, 2013	By:	/s/ Ramón M. Ruiz-Comas
			Ramón M. Ruiz-Comas, CPA
			President and
			Chief Executive Officer
Date:	August 8, 2013	By:	/s/ Amílcar L. Jordán-Pérez
			Amílcar L. Jordán-Pérez
			Vice President,
			Chief Financial Officer and
			Chief Accounting Officer

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