##### Table of Contents



United States Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER: 0-49762
 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 AvenueSan Juan, Puerto Rico
    
    00920(Address of principal executive offices)
    
    (Zip code)
 (787) 749-4949
 Not applicable
 þ o
  o o þ
 o þ
  Title of each class
    
    Outstanding at September 30, 2006Common Stock, $40.00 par value
    
    8,911




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##### 



Triple-S Management Corporation
 FORM 10-Q
   PAGEPART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Earnings for the three months and nine months
ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Stockholders Equity and Comprehensive Income
for the nine months ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September
30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    46Item 1A Risk Factors
    
    
    46Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3. Defaults Upon Senior Securities
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURES
    
    
    47EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICAITON OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




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##### Table of Contents



Part I  Financial Information
 
 Item 1. Financial Statements
 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
 (Unaudited)September 30,
    
    December 31,2006
    
    2005ASSETSInvestments and cash:Securities held for trading, at fair value:Equity securities
    
    $
    82,460
    
    
    
    78,215Securities available for sale, at fair value:Fixed maturities
    
    
    710,997
    
    
    
    515,174Equity securities
    
    
    61,775
    
    
    
    51,810Securities held to maturity, at amortized cost:Fixed maturities
    
    
    21,522
    
    
    
    21,129Policy loans
    
    
    5,281
    
    
    
    Cash and cash equivalents
    
    
    62,757
    
    
    
    48,978Total investments, cash and cash equivalents
    
    
    944,792
    
    
    
    715,306Premiums and other receivables, net
    
    
    187,459
    
    
    
    244,038Deferred policy acquisition costs and value of business acquired
    
    
    107,607
    
    
    
    81,568Property and equipment, net
    
    
    41,169
    
    
    
    34,709Net deferred tax asset
    
    
    
    
    
    
    2,151Other assets
    
    
    57,979
    
    
    
    59,690Total assets
    
    $
    1,339,006
    
    
    
    1,137,462LIABILITIES AND STOCKHOLDERS EQUITYClaim liabilities:Claims processed and incomplete
    
    $
    163,379
    
    
    
    139,694Unreported losses
    
    
    164,795
    
    
    
    143,224Unpaid loss-adjustment expenses
    
    
    16,359
    
    
    
    14,645Total claim liabilities
    
    
    344,533
    
    
    
    297,563Future policy benefits
    
    
    176,652
    
    
    
    Future policy benefits reserve related to funds withheld reinsurance
    
    
    
    
    
    
    118,635Unearned premiums
    
    
    94,171
    
    
    
    95,703Policyholder deposits
    
    
    49,175
    
    
    
    41,738Liability to Federal Employees Health Benefits Program
    
    
    2,544
    
    
    
    4,356Accounts payable and accrued liabilities
    
    
    134,548
    
    
    
    106,468Short-term borrowings
    
    
    
    
    
    
    1,740Long-term borrowings
    
    
    183,497
    
    
    
    150,590Income tax payable
    
    
    4,677
    
    
    
    Net deferred tax liability
    
    
    1,013
    
    
    
    Additional minimum pension liability
    
    
    10,411
    
    
    
    11,966Total liabilities
    
    
    1,001,221
    
    
    
    828,759Stockholders equity:Common stock, $40 par value. Authorized 12,500 shares;
issued and outstanding 8,911 at September 30, 2006 and
8,904 at December 31, 2005
    
    
    356
    
    
    
    356Additional paid-in capital
    
    
    150,408
    
    
    
    150,408Retained earnings
    
    
    195,563
    
    
    
    162,964Accumulated other comprehensive loss
    
    
    (8,542
    )
    
    
    (5,025
    )Total stockholders equity
    
    
    337,785
    
    
    
    308,703Total liabilities and stockholders equity
    
    $
    1,339,006
    
    
    
    1,137,462
  3




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Earnings (Unaudited)   (Dollar amounts in thousands, except per share data)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005REVENUE:Premiums earned, net
    
    $
    392,004
    
    
    
    345,728
    
    
    
    1,163,318
    
    
    
    1,018,735Net fee revenue
    
    
    3,725
    
    
    
    3,234
    
    
    
    10,356
    
    
    
    9,746395,729
    
    
    
    348,962
    
    
    
    1,173,674
    
    
    
    1,028,481Net investment income
    
    
    10,509
    
    
    
    7,158
    
    
    
    31,325
    
    
    
    21,439Net realized investment gains
    
    
    363
    
    
    
    1,857
    
    
    
    1,324
    
    
    
    6,534Net unrealized investment gain (loss) on trading securities
    
    
    3,407
    
    
    
    905
    
    
    
    3,718
    
    
    
    (5,522
    )Other income, net
    
    
    1,295
    
    
    
    1,576
    
    
    
    1,208
    
    
    
    2,066Total revenue
    
    
    411,303
    
    
    
    360,458
    
    
    
    1,211,249
    
    
    
    1,052,998BENEFITS AND EXPENSES:Claims incurred
    
    
    319,365
    
    
    
    299,577
    
    
    
    980,235
    
    
    
    900,401Operating expenses, net of reimbursement
for services
    
    
    55,810
    
    
    
    44,568
    
    
    
    170,472
    
    
    
    133,787Interest expense
    
    
    4,089
    
    
    
    1,880
    
    
    
    11,175
    
    
    
    5,524Total benefits and expenses
    
    
    379,264
    
    
    
    346,025
    
    
    
    1,161,882
    
    
    
    1,039,712Income before taxes
    
    
    32,039
    
    
    
    14,433
    
    
    
    49,367
    
    
    
    13,286INCOME TAX EXPENSE (BENEFIT):Current
    
    
    6,130
    
    
    
    802
    
    
    
    9,545
    
    
    
    2,781Deferred
    
    
    1,079
    
    
    
    1,758
    
    
    
    992
    
    
    
    (569
    )Total income taxes
    
    
    7,209
    
    
    
    2,560
    
    
    
    10,537
    
    
    
    2,212Net income
    
    $
    24,830
    
    
    
    11,873
    
    
    
    38,830
    
    
    
    11,074Basic net income per share
    
    $
    2,786
    
    
    
    1,333
    
    
    
    4,359
    
    
    
    1,244
  4




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Stockholders Equity and
Comprehensive Income (Unaudited)    (Dollar amounts in thousands, except per share data)
 2006
    
    2005BALANCE AT JANUARY 1
    
    $
    308,703
    
    
    
    301,433Dividends
    
    
    (6,231
    )
    
    
    Comprehensive income (loss):Net income
    
    
    38,830
    
    
    
    11,074Net unrealized change in investment securities
    
    
    (3,487
    )
    
    
    (12,830
    )Net change in minimum pension liability
    
    
    
    
    
    
    (755
    )Net change in fair value of cash flow hedges
    
    
    (30
    )
    
    
    390Total comprehensive income (loss)
    
    
    35,313
    
    
    
    (2,121
    )BALANCE AT SEPTEMBER 30
    
    $
    337,785
    
    
    
    299,312
  5




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TRIPLE-S
MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows (Unaudited)   (Dollar amounts in thousands, except per share data)
 Nine months endedSeptember 30,2006
    
    2005Net income
    
    $
    38,830
    
    
    
    11,074Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,486
    
    
    
    4,001Amortization of investment discounts
    
    
    927
    
    
    
    400Accretion in value of securities
    
    
    (570
    )
    
    
    (474
    )Increase in provision for doubtful
receivables
    
    
    1,588
    
    
    
    455Increase (decrease) in net deferred taxes
    
    
    776
    
    
    
    (339
    )Gain on sale of securities
    
    
    (1,324
    )
    
    
    (6,534
    )Unrealized (gain) loss of trading securities
    
    
    (3,718
    )
    
    
    5,522Proceeds from trading securities sold:Fixed maturities
    
    
    
    
    
    
    102,667Equity securities
    
    
    14,137
    
    
    
    19,692Acquisition of securities in trading portfolio:Fixed maturities
    
    
    
    
    
    
    (30,502
    )Equity securities
    
    
    (14,599
    )
    
    
    (17,749
    )Loss (gain) on sale of property and equipment
    
    
    22
    
    
    
    (1
    )(Increase) decrease in assets:Premiums receivable
    
    
    (34,552
    )
    
    
    (8,124
    )Accrued interest receivable
    
    
    41
    
    
    
    (676
    )Agents balances
    
    
    (528
    )
    
    
    Reinsurance receivable
    
    
    (3,637
    )
    
    
    (2,343
    )Other receivables
    
    
    (2,843
    )
    
    
    4,185Deferred policy acquisition costs
    
    
    (4,066
    )
    
    
    (1,186
    )Prepaid income tax
    
    
    3,353
    
    
    
    (4,254
    )Other assets
    
    
    (1,142
    )
    
    
    (6,881
    )Increase (decrease) in liabilities:Claims processed and incomplete
    
    
    18,971
    
    
    
    (3,726
    )Unreported losses
    
    
    17,402
    
    
    
    18,573Unpaid loss-adjustment expenses
    
    
    1,414
    
    
    
    (110
    )Future policy benefits
    
    
    10,254
    
    
    
    Unearned premiums
    
    
    (3,832
    )
    
    
    7,986Policyholder deposits
    
    
    1,356
    
    
    
    900Liability to FEHBP
    
    
    (1,812
    )
    
    
    (1,643
    )Accounts payable and accrued liabilities
    
    
    3,970
    
    
    
    (5,814
    )Income tax payable
    
    
    4,677
    
    
    
    (1,827
    )Net cash provided by operating activities
    
    $
    49,581
    
    
    
    83,272
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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES  Consolidated Statements of Cash Flows (Unaudited)   (Dollar amounts in thousands, except per share data)
 Nine months endedSeptember 30,2006
    
    2005CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from investments sold or matured:Securities available for sale:Fixed maturities sold
    
    $
    16,151
    
    
    
    5,373Fixed maturities matured
    
    
    30,895
    
    
    
    17,847Equity securities
    
    
    1,209
    
    
    
    3,487Securities held to maturity:Fixed maturities matured
    
    
    342
    
    
    
    721Acquisitions of investments:Securities available for sale:Fixed maturities
    
    
    (54,221
    )
    
    
    (97,818
    )Equity securities
    
    
    (11,517
    )
    
    
    (6,821
    )Securities held to maturity:Fixed maturities
    
    
    (500
    )
    
    
    (8,499
    )Acquisition of business, net of $10,403 of cash acquired
    
    
    (27,793
    )
    
    
    Net disbursements for policy loans
    
    
    (502
    )
    
    
    Capital expenditures
    
    
    (9,468
    )
    
    
    (5,031
    )Net cash used in investing activities
    
    
    (55,404
    )
    
    
    (90,741
    )CASH FLOWS FROM FINANCING ACTIVITIES:Change in outstanding checks in excess of bank balances
    
    
    490
    
    
    
    1,151Payments of short-term borrowings
    
    
    (119,547
    )
    
    
    (104,635
    )Proceeds from short-term borrowings
    
    
    117,807
    
    
    
    107,540Payments of long-term borrowings
    
    
    (2,093
    )
    
    
    (4,730
    )Proceeds from long-term borrowings
    
    
    35,000
    
    
    
    Dividends
    
    
    (6,231
    )
    
    
    Proceeds from policyholder deposits
    
    
    4,389
    
    
    
    9,315Surrenders of policyholder deposits
    
    
    (10,213
    )
    
    
    (4,079
    )Net cash provided by financing activities
    
    
    19,602
    
    
    
    4,562Net increase (decrease) in cash and cash equivalents
    
    
    13,779
    
    
    
    (2,907
    )Cash and cash equivalents at beginning of the period
    
    
    48,978
    
    
    
    35,115Cash and cash equivalents at end of the period
    
    $
    62,757
    
    
    
    32,208
  7




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
  (Dollar amounts in thousands, except per share data)
  (1) Basis of Presentation
     Future Policy Benefits
  Value of Business Acquired
  (2) Recent Accounting Standards
  8




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Fair Value Measurements
 Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109 Accounting for Income Taxes
 Accounting for Servicing of Financial Assets Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,
 Accounting for Certain Hybrid Financial Instruments Accounting for
Derivatives and Hedging Activities Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
 9




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(3) Segment Information
 Disclosures
about Segments of an Enterprise and Related Information
   10




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 Operating SegmentsProperty
    
    Life andManaged
    
    and Casualty
    
    DisabilityCare
    
    Insurance
    
    Insurance
    
    Other *
    
    TotalTHREE MONTHS ENDED SEPTEMBER 30, 2006Premiums earned, net
    
    $
    346,667
    
    
    
    21,827
    
    
    
    23,510
    
    
    
    
    
    
    
    392,004Net fee revenue
    
    
    3,725
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,725Intersegment premiums earned/service revenues
    
    
    1,336
    
    
    
    154
    
    
    
    78
    
    
    
    12,855
    
    
    
    14,423351,728
    
    
    
    21,981
    
    
    
    23,588
    
    
    
    12,855
    
    
    
    410,152Net investment income
    
    
    4,770
    
    
    
    2,340
    
    
    
    3,285
    
    
    
    
    
    
    
    10,395Realized gain on sale of securities
    
    
    (466
    )
    
    
    828
    
    
    
    1
    
    
    
    
    
    
    
    363Unrealized loss on trading securities
    
    
    2,537
    
    
    
    759
    
    
    
    111
    
    
    
    
    
    
    
    3,407Other income, net
    
    
    1,003
    
    
    
    66
    
    
    
    208
    
    
    
    
    
    
    
    1,277Total revenue
    
    $
    359,572
    
    
    
    25,974
    
    
    
    27,193
    
    
    
    12,855
    
    
    
    425,594Net income
    
    $
    17,780
    
    
    
    4,672
    
    
    
    1,499
    
    
    
    326
    
    
    
    24,277Claims incurred
    
    $
    295,604
    
    
    
    10,554
    
    
    
    13,207
    
    
    
    
    
    
    
    319,365Operating expenses
    
    $
    38,517
    
    
    
    10,011
    
    
    
    10,981
    
    
    
    12,350
    
    
    
    71,859Depreciation expense, included in operating expenses
    
    $
    977
    
    
    
    101
    
    
    
    195
    
    
    
    
    
    
    
    1,273Interest expense
    
    $
    1,755
    
    
    
    
    
    
    
    1,656
    
    
    
    
    
    
    
    3,411Income tax expense (benefit)
    
    $
    5,916
    
    
    
    737
    
    
    
    (150
    )
    
    
    179
    
    
    
    6,682
 *
    
    Includes segments which are not required to be reported separately. These segments include the data processing services organization
as well as the third-party administrator of managed care services.
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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 Operating SegmentsProperty
    
    Life andManaged
    
    and Casualty
    
    DisabilityCare
    
    Insurance
    
    Insurance
    
    Other *
    
    TotalTHREE MONTHS ENDED SEPTEMBER 30, 2005Premiums earned, net
    
    $
    320,052
    
    
    
    21,762
    
    
    
    3,914
    
    
    
    
    
    
    
    345,728Net fee revenue
    
    
    3,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,234Intersegment premiums earned/service revenues
    
    
    1,080
    
    
    
    
    
    
    
    
    
    
    
    12,473
    
    
    
    13,553324,366
    
    
    
    21,762
    
    
    
    3,914
    
    
    
    12,473
    
    
    
    362,515Net investment income
    
    
    4,092
    
    
    
    2,176
    
    
    
    772
    
    
    
    
    
    
    
    7,040Realized gain (loss) on sale of securities
    
    
    1,761
    
    
    
    128
    
    
    
    (32
    )
    
    
    
    
    
    
    1,857Unrealized gain on trading securities
    
    
    556
    
    
    
    295
    
    
    
    54
    
    
    
    
    
    
    
    905Other income, net
    
    
    1,382
    
    
    
    160
    
    
    
    17
    
    
    
    
    
    
    
    1,559Total revenue
    
    $
    332,157
    
    
    
    24,521
    
    
    
    4,725
    
    
    
    12,473
    
    
    
    373,876Net income (loss)
    
    $
    8,427
    
    
    
    2,807
    
    
    
    (16
    )
    
    
    355
    
    
    
    11,573Claims incurred
    
    $
    286,332
    
    
    
    10,826
    
    
    
    2,419
    
    
    
    
    
    
    
    299,577Operating expenses
    
    $
    33,997
    
    
    
    10,479
    
    
    
    2,011
    
    
    
    12,077
    
    
    
    58,564Depreciation expense, included in operating expenses
    
    $
    1,103
    
    
    
    105
    
    
    
    34
    
    
    
    
    
    
    
    1,242Interest expense
    
    $
    1,383
    
    
    
    
    
    
    
    320
    
    
    
    
    
    
    
    1,703Income tax expense (benefit)
    
    $
    2,018
    
    
    
    409
    
    
    
    (9
    )
    
    
    41
    
    
    
    2,459
 *
    
    Includes segments which are not required to be reported separately. These segments include the data processing services organization
as well as the third-party administrator of managed care services.
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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 Operating SegmentsProperty
    
    Life andManaged
    
    and Casualty
    
    DisabilityCare
    
    Insurance
    
    Insurance
    
    Other *
    
    TotalNINE MONTHS ENDED SEPTEMBER 30, 2006Premiums earned, net
    
    $
    1,028,451
    
    
    
    65,713
    
    
    
    69,154
    
    
    
    
    
    
    
    1,163,318Net fee revenue
    
    
    10,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,356Intersegment premiums earned/service revenues
    
    
    4,225
    
    
    
    438
    
    
    
    234
    
    
    
    38,320
    
    
    
    43,2171,043,032
    
    
    
    66,151
    
    
    
    69,388
    
    
    
    38,320
    
    
    
    1,216,891Net investment income
    
    
    13,842
    
    
    
    7,020
    
    
    
    10,117
    
    
    
    
    
    
    
    30,979Realized gain on sale of securities
    
    
    443
    
    
    
    858
    
    
    
    23
    
    
    
    
    
    
    
    1,324Unrealized gain on trading securities
    
    
    2,545
    
    
    
    1,012
    
    
    
    161
    
    
    
    
    
    
    
    3,718Other income, net
    
    
    628
    
    
    
    174
    
    
    
    353
    
    
    
    
    
    
    
    1,155Total revenue
    
    $
    1,060,490
    
    
    
    75,215
    
    
    
    80,042
    
    
    
    38,320
    
    
    
    1,254,067Net income
    
    $
    23,862
    
    
    
    8,945
    
    
    
    4,271
    
    
    
    350
    
    
    
    37,428Claims incurred
    
    $
    909,436
    
    
    
    32,496
    
    
    
    38,303
    
    
    
    
    
    
    
    980,235Operating expenses
    
    $
    114,273
    
    
    
    32,729
    
    
    
    33,345
    
    
    
    37,311
    
    
    
    217,658Depreciation expense, included in operating expenses
    
    $
    2,786
    
    
    
    340
    
    
    
    512
    
    
    
    
    
    
    
    3,638Interest expense
    
    $
    5,004
    
    
    
    
    
    
    
    4,258
    
    
    
    
    
    
    
    9,262Income tax expense (benefit)
    
    $
    7,915
    
    
    
    1,045
    
    
    
    (135
    )
    
    
    659
    
    
    
    9,484
 *
    
    Includes segments which are not required to be reported separately. These segments include the data processing services organization
as well as the third-party administrator of managed care services.
 13




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 Operating SegmentsProperty
    
    Life andManaged
    
    and Casualty
    
    DisabilityCare
    
    Insurance
    
    Insurance
    
    Other *
    
    TotalNINE MONTHS ENDED SEPTEMBER 30, 2005Premiums earned, net
    
    $
    941,827
    
    
    
    64,960
    
    
    
    11,948
    
    
    
    
    
    
    
    1,018,735Net fee revenue
    
    
    9,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,746Intersegment premiums earned/service revenues
    
    
    3,185
    
    
    
    
    
    
    
    
    
    
    
    37,550
    
    
    
    40,735954,758
    
    
    
    64,960
    
    
    
    11,948
    
    
    
    37,550
    
    
    
    1,069,216Net investment income
    
    
    12,405
    
    
    
    6,461
    
    
    
    2,244
    
    
    
    
    
    
    
    21,110Realized gain on sale of securities
    
    
    5,284
    
    
    
    1,199
    
    
    
    51
    
    
    
    
    
    
    
    6,534Unrealized loss on trading securities
    
    
    (4,990
    )
    
    
    (482
    )
    
    
    (50
    )
    
    
    
    
    
    
    (5,522
    )Other income, net
    
    
    1,480
    
    
    
    330
    
    
    
    137
    
    
    
    
    
    
    
    1,947Total revenue
    
    $
    968,937
    
    
    
    72,468
    
    
    
    14,330
    
    
    
    37,550
    
    
    
    1,093,285Net income
    
    $
    1,709
    
    
    
    8,409
    
    
    
    44
    
    
    
    382
    
    
    
    10,544Claims incurred
    
    $
    860,392
    
    
    
    32,446
    
    
    
    7,563
    
    
    
    
    
    
    
    900,401Operating expenses
    
    $
    102,772
    
    
    
    29,928
    
    
    
    5,970
    
    
    
    36,795
    
    
    
    175,465Depreciation expense, included in operating expenses
    
    $
    2,786
    
    
    
    302
    
    
    
    93
    
    
    
    
    
    
    
    3,181Interest expense
    
    $
    3,991
    
    
    
    
    
    
    
    899
    
    
    
    
    
    
    
    4,890Income tax expense
    
    $
    73
    
    
    
    1,685
    
    
    
    (146
    )
    
    
    373
    
    
    
    1,985
 *
    
    Includes segments which are not required to be reported separately. These segments include the data processing services organization
as well as the third-party administrator of managed care services.
 14




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 Operating SegmentsProperty
    
    Life andManaged
    
    and Casualty
    
    DisabilityCare
    
    Insurance
    
    Insurance
    
    Other *
    
    TotalAS OF SEPTEMBER 30, 2006Segment assets
    
    $
    616,151
    
    
    
    316,184
    
    
    
    406,166
    
    
    
    5,363
    
    
    
    1,343,864Significant noncash item:Net change in unrealized gain on securities
available for sale
    
    $
    (1,412
    )
    
    
    (798
    )
    
    
    (1,254
    )
    
    
    
    
    
    
    (3,464
    )AS OF DECEMBER 31, 2005Segment assets
    
    $
    541,973
    
    
    
    307,228
    
    
    
    271,615
    
    
    
    4,310
    
    
    
    1,125,126Significant noncash item:Net change in unrealized gain on securities
available for sale
    
    $
    (13,733
    )
    
    
    (3,090
    )
    
    
    (1,844
    )
    
    
    
    
    
    
    (18,667
    )Net change in minimum pension liability
    
    
    (2,048
    )
    
    
    (142
    )
    
    
    (76
    )
    
    
    (453
    )
    
    
    (2,719
    )
 *
    
    Includes segments which are not required to be reported separately. These segments include the data processing services organization
as well as the third-party administrator of managed care services.
 15




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES  Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 RECONCILIATION OF REPORTABLE SEGMENT TOTALS
WITH FINANCIAL STATEMENTS
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005TOTAL REVENUETotal revenues for reportable segments
    
    $
    412,739
    
    
    
    361,403
    
    
    
    1,215,747
    
    
    
    1,055,735Total revenues for other segments
    
    
    12,855
    
    
    
    12,473
    
    
    
    38,320
    
    
    
    37,550425,594
    
    
    
    373,876
    
    
    
    1,254,067
    
    
    
    1,093,285Elimination of intersegment premiums earned
    
    
    (1,568
    )
    
    
    (1,080
    )
    
    
    (4,897
    )
    
    
    (3,185
    )Elimination of intersegment service revenues
    
    
    (12,855
    )
    
    
    (12,473
    )
    
    
    (38,320
    )
    
    
    (37,550
    )Unallocated amount  revenues from external sources
    
    
    132
    
    
    
    135
    
    
    
    399
    
    
    
    448(14,291
    )
    
    
    (13,418
    )
    
    
    (42,818
    )
    
    
    (40,287
    )Consolidated total revenue
    
    $
    411,303
    
    
    
    360,458
    
    
    
    1,211,249
    
    
    
    1,052,998NET INCOMENet income for reportable segments
    
    $
    23,951
    
    
    
    11,218
    
    
    
    37,078
    
    
    
    10,162Net income for other segments
    
    
    326
    
    
    
    355
    
    
    
    350
    
    
    
    38224,277
    
    
    
    11,573
    
    
    
    37,428
    
    
    
    10,544Elimination of TSM charges:Rent expense
    
    
    1,726
    
    
    
    1,666
    
    
    
    5,101
    
    
    
    4,907Interest expense
    
    
    1,420
    
    
    
    330
    
    
    
    4,164
    
    
    
    886Management fees
    
    
    1,020
    
    
    
    
    
    
    
    2,630
    
    
    
    4,166
    
    
    
    1,996
    
    
    
    11,895
    
    
    
    5,793Unallocated amounts related to TSM:General and administrative expenses
    
    
    (1,120
    )
    
    
    (1,223
    )
    
    
    (3,762
    )
    
    
    (3,964
    )Income tax expense
    
    
    (527
    )
    
    
    (101
    )
    
    
    (1,053
    )
    
    
    (227
    )Interest expense
    
    
    (2,098
    )
    
    
    (507
    )
    
    
    (6,077
    )
    
    
    (1,520
    )Other revenues from external sources
    
    
    132
    
    
    
    135
    
    
    
    399
    
    
    
    448(3,613
    )
    
    
    (1,696
    )
    
    
    (10,493
    )
    
    
    (5,263
    )Consolidated net income
    
    $
    24,830
    
    
    
    11,873
    
    
    
    38,830
    
    
    
    11,074
 16




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
 Three months ended September 30, 2006Segment
    
    
    
    
    
    ConsolidatedTotals
    
    Adjustments *
    
    TotalsClaims incurred
    
    $
    319,365
    
    
    
    
    
    
    
    319,365Operating expenses
    
    
    71,859
    
    
    
    (16,049
    )
    
    
    55,810Depreciation expense
    
    
    1,273
    
    
    
    283
    
    
    
    1,556Interest expense
    
    
    3,411
    
    
    
    678
    
    
    
    4,089Income tax expense
    
    
    6,682
    
    
    
    527
    
    
    
    7,209
 Three months ended September 30, 2005Segment
    
    
    
    
    
    ConsolidatedTotals
    
    Adjustments *
    
    TotalsClaims incurred
    
    $
    299,577
    
    
    
    
    
    
    
    299,577Operating expenses
    
    
    58,564
    
    
    
    (13,996
    )
    
    
    44,568Depreciation expense
    
    
    1,242
    
    
    
    271
    
    
    
    1,513Interest expense
    
    
    1,703
    
    
    
    177
    
    
    
    1,880Income tax expense
    
    
    2,459
    
    
    
    101
    
    
    
    2,560
 Nine months ended September 30, 2006Segment
    
    
    
    
    
    ConsolidatedTotals
    
    Adjustments *
    
    TotalsClaims incurred
    
    $
    980,235
    
    
    
    
    
    
    
    980,235Operating expenses
    
    
    217,658
    
    
    
    (47,186
    )
    
    
    170,472Depreciation expense
    
    
    3,638
    
    
    
    1,121
    
    
    
    4,759Interest expense
    
    
    9,262
    
    
    
    1,913
    
    
    
    11,175Income tax expense
    
    
    9,484
    
    
    
    1,053
    
    
    
    10,537
 Nine months ended September 30, 2005Segment
    
    
    
    
    
    ConsolidatedTotals
    
    Adjustments *
    
    TotalsClaims incurred
    
    $
    900,401
    
    
    
    
    
    
    
    900,401Operating expenses
    
    
    175,465
    
    
    
    (41,678
    )
    
    
    133,787Depreciation expense
    
    
    3,181
    
    
    
    820
    
    
    
    4,001Interest expense
    
    
    4,890
    
    
    
    634
    
    
    
    5,524Income tax expense
    
    
    1,985
    
    
    
    227
    
    
    
    2,212
 
 *
    
    Adjustments represent TSM operations and the elimination of intersegment
charges. 17




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES  Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
 September 30,
    
    December 31,2006
    
    2005ASSETSTotal assets for reportable segments
    
    $
    1,338,501
    
    
    
    1,120,816Total assets for other segments
    
    
    5,363
    
    
    
    4,3101,343,864
    
    
    
    1,125,126Elimination entries  intersegment receivables and others
    
    
    (46,947
    )
    
    
    (28,705
    )Unallocated amounts related to TSM:Parent cash, cash equivalents and investments
    
    
    11,750
    
    
    
    11,054Parent net property and equipment
    
    
    23,999
    
    
    
    24,760Parent other assets
    
    
    6,340
    
    
    
    5,22742,089
    
    
    
    41,041Consolidated assets
    
    $
    1,339,006
    
    
    
    1,137,462
 OTHER SIGNIFICANT ITEMS
 As of September 30, 2006Segment
    
    
    
    
    
    ConsolidatedTotals
    
    Adjustments *
    
    TotalsSignificant noncash item  net change in unrealized
gain on securities available for sale
    
    $
    (3,464
    )
    
    
    (23
    )
    
    
    (3,487
    )
 As of December 31, 2005Segment
    
    
    
    
    
    ConsolidatedTotals
    
    Adjustments *
    
    TotalsSignificant noncash items:Net change in unrealized gain on securities
available for sale
    
    $
    (18,667
    )
    
    
    (165
    )
    
    
    (18,832
    )Net change in minimum pension liability
    
    
    (2,719
    )
    
    
    (69
    )
    
    
    (2,788
    )
 
 *
    
    Adjustments represent principally TSM operations and the elimination of intersegment charges. 18




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 (4) Investment in Securities
  September 30, 2006Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Estimated faircost
    
    gains
    
    losses
    
    valueTrading securities:Equity securities
    
    $
    69,924
    
    
    
    14,166
    
    
    
    (1,630
    )
    
    
    82,460
 September 30, 2006Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Estimated faircost
    
    gains
    
    losses
    
    valueSecurities available for sale:Fixed maturities
    
    $
    722,335
    
    
    
    654
    
    
    
    (11,992
    )
    
    
    710,997Equity securities
    
    
    51,700
    
    
    
    13,086
    
    
    
    (3,011
    )
    
    
    61,775$
    774,035
    
    
    
    13,740
    
    
    
    (15,003
    )
    
    
    772,772
 September 30, 2006Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Estimated faircost
    
    gains
    
    losses
    
    valueSecurities held to maturity:Fixed maturities
    
    $
    21,522
    
    
    
    343
    
    
    
    (760
    )
    
    
    21,105
 December 31, 2005Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Estimated faircost
    
    gains
    
    losses
    
    valueTrading securities:Equity securities
    
    $
    69,397
    
    
    
    11,378
    
    
    
    (2,560
    )
    
    
    78,215
 December 31, 2005Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Estimated faircost
    
    gains
    
    losses
    
    valueSecurities available for sale:Fixed maturities
    
    $
    524,287
    
    
    
    694
    
    
    
    (9,807
    )
    
    
    515,174Equity securities
    
    
    38,675
    
    
    
    14,550
    
    
    
    (1,415
    )
    
    
    51,810$
    562,962
    
    
    
    15,244
    
    
    
    (11,222
    )
    
    
    566,984
 19




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 December 31, 2005Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Estimated faircost
    
    gains
    
    losses
    
    valueSecurities held to maturity:Fixed maturities
    
    $
    21,129
    
    
    
    254
    
    
    
    (623
    )
    
    
    20,760
    20




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 (5) Premiums and Other Receivables
  September 30,
    
    December 31,2006
    
    2005Premiums
    
    $
    86,195
    
    
    
    53,391Self-funded group receivables
    
    
    25,052
    
    
    
    21,620FEHBP
    
    
    9,025
    
    
    
    9,491Accrued interest
    
    
    8,359
    
    
    
    5,074Agents balances
    
    
    3,483
    
    
    
    Funds withheld reinsurance receivable
    
    
    
    
    
    
    118,635Reinsurance recoverable
    
    
    38,375
    
    
    
    33,915Other
    
    
    31,663
    
    
    
    14,152202,152
    
    
    
    256,278Less allowance for doubtful receivables:Premiums
    
    
    9,909
    
    
    
    7,792Other
    
    
    4,784
    
    
    
    4,44814,693
    
    
    
    12,240Total premiums and other receivables
    
    $
    187,459
    
    
    
    244,038
 (6) Claim Liabilities
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Claim liabilities at beginning of period
    
    $
    341,598
    
    
    
    300,697
    
    
    
    297,563
    
    
    
    279,325Reinsurance recoverable on claim liabilities
    
    
    (29,173
    )
    
    
    (26,597
    )
    
    
    (28,720
    )
    
    
    (26,555
    )Net claim
liabilities at
beginning of period
    
    
    312,425
    
    
    
    274,100
    
    
    
    268,843
    
    
    
    252,770Claim liabilities acquired from GA Life
    
    
    
    
    
    
    
    
    
    
    8,771
    
    
    
    Incurred claims and loss-adjustment expenses:Current period insured events
    
    
    317,413
    
    
    
    296,815
    
    
    
    975,170
    
    
    
    897,434Prior period insured events
    
    
    (6,163
    )
    
    
    2,762
    
    
    
    (12,471
    )
    
    
    2,967Total
    
    
    311,250
    
    
    
    299,577
    
    
    
    962,699
    
    
    
    900,401Payments of losses and loss-adjustment expenses:Current period insured events
    
    
    289,548
    
    
    
    287,921
    
    
    
    748,093
    
    
    
    703,068Prior period insured events
    
    
    20,010
    
    
    
    18,728
    
    
    
    178,103
    
    
    
    183,075Total
    
    
    309,558
    
    
    
    306,649
    
    
    
    926,196
    
    
    
    886,143Net claim liabilities at end of period
    
    
    314,117
    
    
    
    267,028
    
    
    
    314,117
    
    
    
    267,028Reinsurance recoverable on claim liabilities
    
    
    30,416
    
    
    
    27,034
    
    
    
    30,416
    
    
    
    27,034Claim liabilities at end of period
    
    $
    344,533
    
    
    
    294,062
    
    
    
    344,533
    
    
    
    294,062
  21




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
  (7) Long-term Borrowings
  September 30,
    
    December 31,2006
    
    2005Secured loan payable of $20,000, payable in various different
installments up to August 31, 2007, with interest payable on a
monthly basis at a rate reset periodically of 130 basis points
over LIBOR selected (which was 6.73% and 5.71% at
September 30, 2006 and December 31, 2005, respectively)
    
    $
    10,500
    
    
    
    11,500Senior unsecured notes payable of $50,000 due September 2019.
Interest is payable semiannually at a fixed rate of 6.30%.
    
    
    50,000
    
    
    
    50,000Senior unsecured notes payable of $60,000 due December 2020.
Interest is payable monthly at a fixed rate of 6.60%.
    
    
    60,000
    
    
    
    60,000Senior unsecured notes payable of $35,000 due January 2021.
Interest is payable monthly at a fixed rate of 6.70%.
    
    
    35,000
    
    
    
    Secured loan payable of $41,000, payable in monthly installments of
$137 up to July 1, 2024, plus interest at a rate reset periodically
of 100 basis points over LIBOR selected (which was 6.33% and
5.29% at September 30, 2006 and December 31, 2005, respectively)
    
    
    27,997
    
    
    
    29,090Total long-term borrowings
    
    $
    183,497
    
    
    
    150,590
  (8) Comprehensive Income
  AccumulatedUnrealized
    
    Minimum
    
    
    
    
    
    othergain (loss) on
    
    pension
    
    Cash flow
    
    comprehensivesecurities
    
    liability
    
    hedges
    
    incomeBALANCE AT JANUARY 1
    
    $
    3,217
    
    
    
    (8,613
    )
    
    
    371
    
    
    
    (5,025
    )Net current period change
    
    
    (3,487
    )
    
    
    
    
    
    
    (30
    )
    
    
    (3,517
    )BALANCE AT SEPTEMBER 30
    
    $
    (270
    )
    
    
    (8,613
    )
    
    
    341
    
    
    
    (8,542
    )
 22




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##### Table of Contents



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands)
 (9) Income Taxes
   (10) Pension Plan
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    1,350
    
    
    
    1,186
    
    
    
    4,042
    
    
    
    3,516Interest cost
    
    
    1,151
    
    
    
    1,038
    
    
    
    3,454
    
    
    
    3,106Expected return on assets
    
    
    (954
    )
    
    
    (868
    )
    
    
    (2,880
    )
    
    
    (2,579
    )Amortization of prior service cost
    
    
    12
    
    
    
    12
    
    
    
    36
    
    
    
    36Amortization of actuarial loss
    
    
    602
    
    
    
    505
    
    
    
    1,794
    
    
    
    1,500Net periodic benefit cost
    
    $
    2,161
    
    
    
    1,873
    
    
    
    6,446
    
    
    
    5,579
 Employer contributions
  (11) Net Income Available to Stockholders and Net Income per Share
  23




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Numerator for basic earnings per share:Net income available to stockholders
    
    $
    24,830
    
    
    
    11,873
    
    
    
    38,830
    
    
    
    11,074Denominator for basic earnings per share:Weighted average of outstanding common shares
    
    
    8,911
    
    
    
    8,904
    
    
    
    8,909
    
    
    
    8,904Basic net income per share
    
    $
    2,786
    
    
    
    1,333
    
    
    
    4,359
    
    
    
    1,244
 (12) Contingencies
 (a)
    
    As of September 30, 2006, the Corporation is a defendant in various lawsuits arising
in the ordinary course of business. Management believes, based on the opinion of its
legal counsel, that the aggregate liabilities, if any, arising from such actions would not
have a material adverse effect on the consolidated financial position and results of
operations of the Corporation. Where the Corporation believes that a loss is both
probable and estimable, such amounts have been recorded. In other cases, it is at least
reasonably possible that the Corporation may have incurred a loss related to one or more
of the pending lawsuits or investigations disclosed above, but the Corporation is unable
to estimate the range of possible loss which may be ultimately realized, either
individually or in the aggregate, upon their resolution.(b)
    
    Drs. Carlyle Benavent and Ibrahim Pérez (the plaintiffs) caused the initiation of an
administrative proceeding before the Puerto Rico Insurance Commissioner (the Commissioner)
against TSI and TSM alleging the illegality of the repurchase and subsequent sale of 1,582
shares of TSIs common stock due to the fact that the ultimate purchasers of said shares
were selected on an improper and selective basis by the Corporation in violation of the
Puerto Rico Insurance Code. The plaintiffs alleged that they were illegally excluded from
participation in the sale of shares by TSI due to the illegally selective nature of the
sale of shares and that, consequently, the sale of shares should be eliminated.On May 26, 2006, Plaintiff Ibrahim Pérez filed a motion requesting a voluntary dismissal of
the case with prejudice arguing that the controversy had become moot. The Supreme Court
granted the motion, and on June 30, 2006 issued a Judgment dismissing this case as
requested by Plaintiff Pérez.(c)
    
    On September 4, 2003, José Sánchez and others filed a putative class action complaint
against the Corporation, present and former directors of TSM and TSI, and others, in the
United States District Court for the District of Puerto Rico, alleging violations under
the Racketeer Influenced and Corrupt Organizations Act, better known as the RICO Act. On
May 4, 2006, the Court issued an Opinion and Order, which entered a summary judgment in
favor of all the defendants, and dismissing the case. Plaintiffs filed a notice of appeal
before the United States Court of Appeals for the First Circuit. The Appeals Court
notified the briefing schedule, and Plaintiffs filed their brief on August 21, 2006.
Respondent filed theirs on September 30, 2006. The Court has yet to notify the date for
the hearing to argue the case.
 24




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 (d)
    
    On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit
against TSM, TSI and others in the Court of First Instance for San Juan, Superior Section,
alleging, among other things, violations by the defendants of provisions of the Puerto
Rico Insurance Code, anti-monopolistic practices, unfair business practices and damages in
the amount of $12.0 million. They also requested that TSM sell shares to them. After a
preliminary review of the complaint, it appears that many of the allegations brought by
the plaintiffs have been resolved in favor of TSM and TSI in previous cases brought by the
same plaintiffs in the United States District Court for the District of Puerto Rico and by
most of the plaintiffs in the local courts. The defendants, including TSM and TSI
answered the complaint, filed a counterclaim and filed several motions to dismiss this
claim. On May 9, 2005 the plaintiffs amended the complaint and the defendants prepared
the corresponding motions to dismiss this amended complaint. The plaintiffs amended the
complaint to allege causes of action similar to those dismissed by the United States
District Court for the District of Puerto Rico in the Sánchez case. Defendants moved to
dismiss the amended complaint. Plaintiffs notified their opposition to some of the
defendants motion to dismiss, and the defendants filed the corresponding replies. On
January 25, 2006, the court held a hearing to argue the dispositive motions. On March 16,
2006 the Court held another hearing to hear additional arguments on the same motions. On
July 6, 2006 the Court held the last of three hearings to hear arguments on the defendants
dispositive motions. The Court stayed all discovery until the motions are resolved. The
Corporation is unable to estimate the range of possible loss which may be ultimately
realized upon the resolution of this case.(e)
    
    On May 22, 2003 a putative class action suit was filed by Kenneth A. Thomas, M.D. and
Michael Kutell, M.D., on behalf of themselves and all others similarly situated and the
Connecticut State Medical Society against the Blue Cross and Blue Shield Association
(BCBSA) and multiple other insurance companies including TSI. The case is pending before
the U.S. District Court for the Southern District of Florida, Miami District.The individual plaintiffs bring this action on behalf of themselves and a class of
similarly situated physicians seeking redress for alleged illegal acts of the defendants,
which they allege have resulted in a loss of their property and a detriment to their
business, and for declaratory and injunctive relief to end those practices and prevent
further losses. Plaintiffs alleged that the defendants, on their own and as part of a
common scheme, systematically deny, delay and diminish the payments due to doctors so that
they are not paid in a timely manner for the covered, medically necessary services they
render.The class action complaint alleges that the health care plans are the agents of BCBSA
licensed entities, and as such have committed the acts alleged above and acted within the
scope of their agency, with the consent, permission, authorization and knowledge of the
others, and in furtherance of both their interest and the interests of other defendants.Management believes that TSI was brought to this litigation for the sole reason of being
associated with the BCBSA. However, on June 18, 2004 the plaintiffs moved to amend the
complaint to include the Colegio de Médicos y Cirujanos de Puerto Rico (a compulsory
association grouping all physicians in Puerto Rico), Marissel Velázquez, MD, President of
the Colegio de Médicos y Cirujanos de Puerto Rico, and Andrés Meléndez, MD, as plaintiffs
against TSI. Later Marissel Velázquez, MD voluntarily dismissed her complaint against TSI.TSI, along with the other defendants, moved to dismiss the complaint on multiple grounds,
including but not limited to arbitration and applicability of the McCarran Ferguson Act.
 25




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
    (f)
    
    On December 8, 2003 a putative class action was filed by Jeffrey Solomon, MD and
Orlando Armstrong, MD, on behalf of themselves and all other similarly situated and the
American Podiatric Medical Association, Florida Chiropractic Association, California
Podiatric Medical Association, Florida Podiatric Medical Association, Texas Podiatric
Medical Association, and Independent Chiropractic Physicians, against the BCBSA and
multiple other insurance companies, including TSI and all members of the BCBSA. The case
is still pending before the United States District Court for the Southern District of
Florida, Miami District.The lawsuit challenges many of the same practices as the litigation described in the
immediately preceding item.Management believes that TSI was made a party to this litigation for the sole reason that
TSI is associated with the BCBSA.On June 25, 2004, plaintiffs amended the complaint but the allegations against TSI did not
vary. TSI along with the other defendants, moved to dismiss the complaint on multiple
grounds, including but not limited to arbitration and applicability of the McCarran
Ferguson Act.The Court issued a 90-day stay to allow the parties to discuss their differences and come
to an amicable agreement. The stay expired on March 7, 2006. Upon the expiration of the
stay, both plaintiffs and defendants agreed to request the Court to extend the stay until
April 21, 2006. The stay expired and the parties informed the Court that they need
additional time to iron out the details of an amicable solution. The Court has not reacted
to the parties joint request. If the Court denies another stay, the parties will have to
continue the proceedings where they were left before the issuance of the first stay. In
the meantime, the Court issued an Agreed Order on the Preservation of Records. This order
supersedes the parties existing record-keeping policies in regards to the documents and
materials specified in the order. The purpose of the order is to avoid the disposition of
documents that might be relevant for the case.During September 2006, the Court, sua sponte, ordered the parties to engage in Mediation
with former US District Judge, Edward Davis. Judge Davis divided the group of plans into
smaller
 26




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
   (13) Acquisition
 Business
Combinations
  Current assets
    
    $
    219,747Property and equipment
    
    
    1,500Value of business acquired
    
    
    21,973Total assets acquired
    
    
    243,220Total liabilities assumed
    
    
    205,024Net assets acquired
    
    $
    38,196
   27




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TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements   (Dollar amounts in thousands, except per share data)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Total revenue
    
    $
    411,303
    
    
    
    381,716
    
    
    
    1,218,532
    
    
    
    1,122,147Net income
    
    $
    24,830
    
    
    
    15,001
    
    
    
    39,147
    
    
    
    24,579Basic net income per share
    
    $
    2,786
    
    
    
    1,685
    
    
    
    4,394
    
    
    
    2,760
 28




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Cautionary Statement Regarding Forward-Looking Information
  Overview
    29




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Recent Developments
 Puerto Ricos Economy
  Healthcare Reform Business
  30




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##### Table of Contents



Recent Accounting Standards
  Significant Transactions
   Consolidated
 Three months ended September 30, 2005Comparable(Dollar amounts in thousands)
    
    TSM
    
    GA Life
    
    BasisREVENUE:Premiums earned, net
    
    $
    345,728
    
    
    
    18,555
    
    
    
    364,283Amounts attributable to self-funded arrangements
    
    
    53,424
    
    
    
    
    
    
    
    53,424Less amounts attributable to claims under
self-funded arrangements
    
    
    (50,190
    )
    
    
    
    
    
    
    (50,190
    )348,962
    
    
    
    18,555
    
    
    
    367,517Net investment income
    
    
    7,158
    
    
    
    2,779
    
    
    
    9,937Net realized investment gains
    
    
    1,857
    
    
    
    32
    
    
    
    1,889Net unrealized investment loss on trading securities
    
    
    905
    
    
    
    
    
    
    
    905Other income, net
    
    
    1,576
    
    
    
    
    
    
    
    1,576Total revenue
    
    
    360,458
    
    
    
    21,366
    
    
    
    381,824BENEFITS AND EXPENSES:Claims incurred
    
    
    299,577
    
    
    
    10,247
    
    
    
    309,824Operating expenses, net of reimbursement for services
    
    
    44,568
    
    
    
    7,948
    
    
    
    52,516Interest expense
    
    
    1,880
    
    
    
    
    
    
    
    1,880Total benefits and expenses
    
    
    346,025
    
    
    
    18,195
    
    
    
    364,220Income before taxes
    
    
    14,433
    
    
    
    3,171
    
    
    
    17,604INCOME TAX EXPENSE (BENEFIT):Current
    
    
    802
    
    
    
    
    
    
    
    802Deferred
    
    
    1,758
    
    
    
    (395
    )
    
    
    1,363Total income taxes
    
    
    2,560
    
    
    
    (395
    )
    
    
    2,165Net income
    
    $
    11,873
    
    
    
    3,566
    
    
    
    15,439Basic net income per share
    
    $
    1,333
    
    
    
    
    
    
    
    1,734
 31




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Nine months ended September 30, 2005Comparable(Dollar amounts in thousands)
    
    TSM
    
    GA Life
    
    BasisREVENUE:Premiums earned, net
    
    $
    1,018,735
    
    
    
    49,797
    
    
    
    1,068,532Amounts attributable to self-funded arrangements
    
    
    157,778
    
    
    
    
    
    
    
    157,778Less amounts attributable to claims under
self-funded arrangements
    
    
    (148,032
    )
    
    
    
    
    
    
    (148,032
    )1,028,481
    
    
    
    49,797
    
    
    
    1,078,278Net investment income
    
    
    21,439
    
    
    
    7,791
    
    
    
    29,230Net realized investment gains
    
    
    6,534
    
    
    
    4,770
    
    
    
    11,304Net unrealized investment loss on trading securities
    
    
    (5,522
    )
    
    
    
    
    
    
    (5,522
    )Other income, net
    
    
    2,066
    
    
    
    
    
    
    
    2,066Total revenue
    
    
    1,052,998
    
    
    
    62,358
    
    
    
    1,115,356BENEFITS AND EXPENSES:Claims incurred
    
    
    900,401
    
    
    
    27,605
    
    
    
    928,006Operating expenses, net of reimbursement for services
    
    
    133,787
    
    
    
    22,137
    
    
    
    155,924Interest expense
    
    
    5,524
    
    
    
    
    
    
    
    5,524Total benefits and expenses
    
    
    1,039,712
    
    
    
    49,742
    
    
    
    1,089,454Income before taxes
    
    
    13,286
    
    
    
    12,616
    
    
    
    25,902INCOME TAX EXPENSE (BENEFIT):Current
    
    
    2,781
    
    
    
    626
    
    
    
    3,407Deferred
    
    
    (569
    )
    
    
    (1,187
    )
    
    
    (1,756
    )Total income taxes
    
    
    2,212
    
    
    
    (561
    )
    
    
    1,651Net income
    
    $
    11,074
    
    
    
    13,177
    
    
    
    24,251Basic net income per share
    
    $
    1,244
    
    
    
    
    
    
    
    2,724
 Life and Disability Insurance Segment
 Three months ended September 30, 2005Comparable(Dollar amounts in thousands)
    
    SVTS
    
    GA Life
    
    BasisOperating revenues:Net premiums earned:Earned premiums
    
    $
    5,814
    
    
    
    19,088
    
    
    
    24,902Earned premiums ceded
    
    
    (1,977
    )
    
    
    (533
    )
    
    
    (2,510
    )Net earned premiums
    
    
    3,837
    
    
    
    18,555
    
    
    
    22,392Commission income on reinsurance
    
    
    77
    
    
    
    
    
    
    
    77Net premiums earned
    
    
    3,914
    
    
    
    18,555
    
    
    
    22,469Net investment income
    
    
    772
    
    
    
    2,779
    
    
    
    3,551Net realized investment gains (losses)
    
    
    (32
    )
    
    
    32
    
    
    
    Total
    
    
    4,654
    
    
    
    21,366
    
    
    
    26,020Operating costs:Policy benefits and claims incurred
    
    
    2,419
    
    
    
    10,247
    
    
    
    12,666Underwriting and other expenses
    
    
    2,011
    
    
    
    7,948
    
    
    
    9,959Total
    
    
    4,430
    
    
    
    18,195
    
    
    
    22,625Operating income
    
    $
    224
    
    
    
    3,171
    
    
    
    3,395
 32




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##### Table of Contents



Nine months ended September 30, 2005Comparable(Dollar amounts in thousands)
    
    SVTS
    
    GA Life
    
    BasisOperating revenues:Net premiums earned:Earned premiums
    
    $
    17,601
    
    
    
    51,040
    
    
    
    68,641Earned premiums ceded
    
    
    (6,003
    )
    
    
    (1,243
    )
    
    
    (7,246
    )Net earned premiums
    
    
    11,598
    
    
    
    49,797
    
    
    
    61,395Commission income on reinsurance
    
    
    350
    
    
    
    
    
    
    
    350Net premiums earned
    
    
    11,948
    
    
    
    49,797
    
    
    
    61,745Net investment income
    
    
    2,244
    
    
    
    7,791
    
    
    
    10,035Net realized investment gains
    
    
    51
    
    
    
    4,770
    
    
    
    4,821Total
    
    
    14,243
    
    
    
    62,358
    
    
    
    76,601Operating costs:Policy benefits and claims incurred
    
    
    7,563
    
    
    
    27,605
    
    
    
    35,168Underwriting and other expenses
    
    
    5,970
    
    
    
    22,137
    
    
    
    28,107Total
    
    
    13,533
    
    
    
    49,742
    
    
    
    63,275Operating income
    
    $
    710
    
    
    
    12,616
    
    
    
    13,326
 Selected Membership Data
 As of September 30,2006
    
    2005Managed care enrollment:Commercial 1
    
    
    589,785
    
    
    
    618,603Reform
    
    
    554,996
    
    
    
    626,977Medicare Advantage
    
    
    26,843
    
    
    
    8,461Stand-alone PDP
    
    
    17,582
    
    
    
    Total
    
    
    1,189,206
    
    
    
    1,254,041Managed care enrollment by funding arrangement:Fully-insured
    
    
    1,032,083
    
    
    
    1,099,473Self-insured
    
    
    157,123
    
    
    
    154,568Total
    
    
    1,189,206
    
    
    
    1,254,041
 
 1
    
    Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare
supplemental, Federal employees and local government employees. 33




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##### Table of Contents



Consolidated Operating Results
  Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Three months ended September 30,Comparable(dollar amounts in thousands)
    
    2006
    
    2005
    
    Basis 2005Operating revenues:Premiums earned, net
    
    $
    392,004
    
    
    
    345,728
    
    
    
    364,283Fee revenue
    
    
    3,725
    
    
    
    3,234
    
    
    
    3,234Net investment income
    
    
    10,509
    
    
    
    7,158
    
    
    
    9,937Net realized investment gains
    
    
    363
    
    
    
    1,857
    
    
    
    1,889Total
    
    
    406,601
    
    
    
    357,977
    
    
    
    379,343Operating costs:Claims incurred
    
    
    319,365
    
    
    
    299,577
    
    
    
    309,824Operating expenses
    
    
    55,810
    
    
    
    44,568
    
    
    
    52,516Total
    
    
    375,175
    
    
    
    344,145
    
    
    
    362,340Operating income
    
    
    31,426
    
    
    
    13,832
    
    
    
    17,003Net unrealized gains on trading securities
    
    
    3,407
    
    
    
    905
    
    
    
    905Interest expense
    
    
    (4,089
    )
    
    
    (1,880
    )
    
    
    (1,880
    )Other income, net
    
    
    1,295
    
    
    
    1,576
    
    
    
    1,576Income before taxes
    
    
    32,039
    
    
    
    14,433
    
    
    
    17,604Income tax expense
    
    
    7,209
    
    
    
    2,560
    
    
    
    2,165Net income
    
    $
    24,830
    
    
    
    11,873
    
    
    
    15,439
 Operating revenues
   Operating costs
   Net unrealized investment gains
  34




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Interest expense
  Income tax expense
  Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Nine months ended September 30,Comparable(dollar amounts in thousands)
    
    2006
    
    2005
    
    Basis 2005Operating revenues:Premiums earned, net
    
    $
    1,163,318
    
    
    
    1,018,735
    
    
    
    1,068,532Fee revenue
    
    
    10,356
    
    
    
    9,746
    
    
    
    9,746Net investment income
    
    
    31,325
    
    
    
    21,439
    
    
    
    29,230Net realized investment gains
    
    
    1,324
    
    
    
    6,534
    
    
    
    11,304Total
    
    
    1,206,323
    
    
    
    1,056,454
    
    
    
    1,118,812Operating costs:Claims incurred
    
    
    980,235
    
    
    
    900,401
    
    
    
    928,006Operating expenses
    
    
    170,472
    
    
    
    133,787
    
    
    
    155,924Total
    
    
    1,150,707
    
    
    
    1,034,188
    
    
    
    1,083,930Operating income
    
    
    55,616
    
    
    
    22,266
    
    
    
    34,882Net unrealized gains on trading securities
    
    
    3,718
    
    
    
    (5,522
    )
    
    
    (5,522
    )Interest expense
    
    
    (11,175
    )
    
    
    (5,524
    )
    
    
    (5,524
    )Other income, net
    
    
    1,208
    
    
    
    2,066
    
    
    
    2,066Income before taxes
    
    
    49,367
    
    
    
    13,286
    
    
    
    25,902Income tax expense
    
    
    10,537
    
    
    
    2,212
    
    
    
    1,651Net income
    
    $
    38,830
    
    
    
    11,074
    
    
    
    24,251
 Operating revenues
     35




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##### Table of Contents



Operating costs
    Interest expense
  Income tax expense
  36




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Managed Care Operating Results
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(dollar amounts in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues:Medical
premiums earned:Commercial
    
    $
    179,922
    
    
    
    182,134
    
    
    
    540,677
    
    
    
    549,516Reform
    
    
    118,920
    
    
    
    129,933
    
    
    
    366,683
    
    
    
    377,270Medicare Advantage
    
    
    43,606
    
    
    
    8,856
    
    
    
    111,630
    
    
    
    17,438PDP
    
    
    4,904
    
    
    
    
    
    
    
    11,593
    
    
    
    Medical earned premiums
    
    
    347,352
    
    
    
    320,923
    
    
    
    1,030,583
    
    
    
    944,224Fee revenue
    
    
    4,376
    
    
    
    3,443
    
    
    
    12,449
    
    
    
    10,534Net investment income
    
    
    4,770
    
    
    
    4,092
    
    
    
    13,842
    
    
    
    12,405Net realized investment gains (losses)
    
    
    (466
    )
    
    
    1,761
    
    
    
    443
    
    
    
    5,284Total
    
    
    356,032
    
    
    
    330,219
    
    
    
    1,057,317
    
    
    
    972,447Operating costs:Medical claims incurred
    
    
    295,604
    
    
    
    286,332
    
    
    
    909,436
    
    
    
    860,392Operating expenses
    
    
    38,517
    
    
    
    33,997
    
    
    
    114,273
    
    
    
    102,772Total
    
    
    334,121
    
    
    
    320,329
    
    
    
    1,023,709
    
    
    
    963,164Operating income
    
    $
    21,911
    
    
    
    9,890
    
    
    
    33,608
    
    
    
    9,283Member months enrollment:Commercial
    
    
    1,304,709
    
    
    
    1,402,758
    
    
    
    3,995,532
    
    
    
    4,250,772Reform
    
    
    1,673,229
    
    
    
    1,871,709
    
    
    
    5,211,531
    
    
    
    5,575,698Self-funded employers
    
    
    469,320
    
    
    
    466,728
    
    
    
    1,387,341
    
    
    
    1,379,187Medicare Advantage
    
    
    78,435
    
    
    
    18,831
    
    
    
    193,239
    
    
    
    37,530PDP
    
    
    53,772
    
    
    
    
    
    
    
    134,046
    
    
    
    Member months enrollment
    
    
    3,579,465
    
    
    
    3,760,026
    
    
    
    10,921,689
    
    
    
    11,243,187Additional data:Medical loss ratio
    
    
    85.1
    %
    
    
    89.2
    %
    
    
    88.2
    %
    
    
    91.1
    %Operating expense ratio
    
    
    11.0
    %
    
    
    10.5
    %
    
    
    11.0
    %
    
    
    10.8
    %
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Operating revenues
  
    
    Medical premiums generated by the segments Medicare Advantage business increased by
$34.8 million, or 392.4%, to $43.6 million in 2006 primarily due to the increase in the
member months enrollment of 59,604 members, or 316.5%. This increase reflects the initial
ramp-up of this business, which commenced in 2005, as well as the introduction of
additional Medicare Advantage policies during this year. In January 2006 we expanded our
Medicare Advantage business with the introduction of Medicare Platinofor the
dual-eligible population. We expect the Medicare Advantage enrollment will continue to
grow, but not at the same pace as in this initial period.
    
    In January 2006, we introduced a new stand-alone PDP, called FarmaMedthat had 53,772
member months and medical premiums earned of $4.9 million.
    
    The medical premiums earned of the Reform business decreased by $11.0 million, or 8.5%,
to $118.9 million, principally attributed to a reduction in the member months enrollment
of this
 37




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##### Table of Contents



business by 198,480 members, or 10.6%. This business has experienced a decrease
in its enrollment as a result of a shift in membership by the dual eligibles to Medicare
Advantage policies offered by us and our competitors and a tightening of eligibility
requirements by the Puerto Rico government. The effect of the decrease in member months
enrollment was mitigated by an increase in average premium rates by approximately 5%.
    
    Medical premiums generated by the commercial business presented a decrease of $2.2
million, or 1.2%, to $179.9 million in 2006. This decrease is due to a decrease in the
member months enrollment of 98,049 members, or 7.0%. The decrease in member months
enrollment is primarily the result of the loss of several fully-insured accounts due to
aggressive marketing and pricing by our competitors as well as qualified enrollees
transferring to our or our competitors Medicare Advantage policies and fully-insured
groups changing to self-funded arrangements. The decrease in enrollment was partially
offset by an average increase in premium rates of approximately 4.1%.
 Operating costs
    Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Operating revenues
  
    
    Medical premiums generated by the segments Medicare Advantage business, increased by
$94.2 million, or 540.2%, primarily due to an increase in member months enrollment of
155,709, or 414.9%, reflecting the initial ramp-up of this business, which commenced in
2005, and the
introduction of additional Medicare Advantage policies during this year. In January 2006,
we expanded our Medicare Advantage business with the introduction of Medicare Platinofor
the dual-eligible population. We expect that the Medicare Advantage enrollment will
continue to grow, but not at the same pace as in this initial period.
    
    In January 2006 we introduced a new stand-alone prescription drug plan, called
FarmaMed,that had 134,046 member months and medical premiums earned amounting to $11.6
million.
    
    In 2006 member months of the Reform business decreased by 364,167, or 6.5%, and medical
earned premiums decreased by $10.6 million, or 2.8%, to $366.7 million in 2006. This
business has experienced a decrease in its member months enrollment as a result of a shift
in membership by the dual eligibles to Medicare Advantage policies offered by us and our
competitors and tightening of eligibility requirements by the Puerto Rico government. The
effect of this decrease
 38




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##### Table of Contents



in member months enrollment was mitigated by an average increase
in premium rates, effective August 1, 2005, of approximately 5%.
    
    Medical premiums earned generated by the commercial business decreased by $8.8 million,
or 1.6%, to $540.7 million in 2006 due to a decrease in member months. This decrease is
the result of a decrease in the member months enrollment by 255,240 members that is
primarily due to the loss of several full-risk accounts due to aggressive marketing and
pricing by our competitors as well as to qualified enrollees transferring to our or our
competitors Medicare Advantage policies and full-risk accounts changing to self-funded
arrangements. The decrease in enrollment is partially offset by an average increase in
premium rates of 3.7%.
  Operating costs
    39




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Life and Disability Insurance Operating Results
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Three months ended September 30,Comparable(dollar amounts in thousands)
    
    2006
    
    2005
    
    Basis 2005Operating revenues:Net
premiums earnedPremiums
earned
    
    $
    25,923
    
    
    
    5,814
    
    
    
    24,902Premiums
earned ceded
    
    
    (2,230
    )
    
    
    (1,977
    )
    
    
    (2,510
    )Net premiums
earned
    
    
    23,693
    
    
    
    3,837
    
    
    
    22,392Commission income on reinsurance
    
    
    (105
    )
    
    
    77
    
    
    
    77Net
premiums earned
    
    
    23,588
    
    
    
    3,914
    
    
    
    22,469Net investment income
    
    
    3,285
    
    
    
    772
    
    
    
    3,551Net realized investment gains (losses)
    
    
    1
    
    
    
    (32
    )
    
    
    Total
    
    
    26,874
    
    
    
    4,654
    
    
    
    26,020Operating costs:Policy benefits and claims incurred
    
    
    13,207
    
    
    
    2,419
    
    
    
    12,666Underwriting and other expenses
    
    
    10,981
    
    
    
    2,011
    
    
    
    9,959Total
    
    
    24,188
    
    
    
    4,430
    
    
    
    22,625Operating income
    
    $
    2,686
    
    
    
    224
    
    
    
    3,395Additional data:Loss ratio
    
    
    56.0
    %
    
    
    61.8
    %
    
    
    56.4
    %Operating expense ratio
    
    
    46.6
    %
    
    
    51.4
    %
    
    
    44.3
    %
 Operating revenues
  Operating costs
   40




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Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Nine months ended September 30,Comparable(dollar amounts in thousands)
    
    2006
    
    2005
    
    Basis 2005Operating revenues:Net
premiums earned:Premiums
earned
    
    $
    71,884
    
    
    
    17,601
    
    
    
    68,641Premiums
earned ceded
    
    
    (7,053
    )
    
    
    (6,003
    )
    
    
    (7,246
    )Assumed
premiums earned
    
    
    4,413
    
    
    
    
    
    
    
    Net premiums
earned
    
    
    69,244
    
    
    
    11,598
    
    
    
    61,395Commission income on reinsuarance
    
    
    144
    
    
    
    350
    
    
    
    350Net premiums earned
    
    
    69,388
    
    
    
    11,948
    
    
    
    61,745Net investment income
    
    
    10,117
    
    
    
    2,244
    
    
    
    10,035Net realized investement gains
    
    
    23
    
    
    
    51
    
    
    
    4,821Total
    
    
    79,528
    
    
    
    14,243
    
    
    
    76,601Operating costs:Policy benefits and claims incurred
    
    
    38,303
    
    
    
    7,563
    
    
    
    35,168Underwriting and other expenses
    
    
    33,345
    
    
    
    5,970
    
    
    
    28,107Total
    
    
    71,648
    
    
    
    13,533
    
    
    
    63,275Operating income
    
    $
    7,880
    
    
    
    710
    
    
    
    13,326Additional data:Loss ratio
    
    
    55.2
    %
    
    
    63.3
    %
    
    
    57.0
    %Operating expense ratio
    
    
    48.1
    %
    
    
    50.0
    %
    
    
    45.5
    %
 Operating revenues
    Operating costs
   41




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Property and Casualty Insurance Operating Results
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(dollar amounts in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues:Net premiums earned:Premiums written
    
    $
    41,494
    
    
    
    40,705
    
    
    
    112,672
    
    
    
    110,516Premiums ceded
    
    
    (17,330
    )
    
    
    (14,831
    )
    
    
    (46,709
    )
    
    
    (43,896
    )Change in unearned premiums
    
    
    (2,183
    )
    
    
    (4,112
    )
    
    
    188
    
    
    
    (1,660
    )Net premiums earned
    
    
    21,981
    
    
    
    21,762
    
    
    
    66,151
    
    
    
    64,960Net investment income
    
    
    2,340
    
    
    
    2,176
    
    
    
    7,020
    
    
    
    6,461Net realized investment gains
    
    
    828
    
    
    
    128
    
    
    
    858
    
    
    
    1,199Total
    
    
    25,149
    
    
    
    24,066
    
    
    
    74,029
    
    
    
    72,620Operating costs:Claims incurred
    
    
    10,554
    
    
    
    10,826
    
    
    
    32,496
    
    
    
    32,446Operating expenses
    
    
    10,011
    
    
    
    10,479
    
    
    
    32,729
    
    
    
    29,928Total
    
    
    20,565
    
    
    
    21,305
    
    
    
    65,225
    
    
    
    62,374Operating income
    
    $
    4,584
    
    
    
    2,761
    
    
    
    8,804
    
    
    
    10,246Additional data:Loss ratio
    
    
    48.0
    %
    
    
    49.7
    %
    
    
    49.1
    %
    
    
    49.9
    %Operating expense ratio
    
    
    45.5
    %
    
    
    48.2
    %
    
    
    49.5
    %
    
    
    46.1
    %Combined ratio
    
    
    93.5
    %
    
    
    97.9
    %
    
    
    98.6
    %
    
    
    96.0
    %
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Operating revenues
   Operating costs
   42




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Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Operating revenues
   Operating costs
   43




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flows
  Nine months endedSeptember 30,(dollar amounts in thousands)
    
    2006
    
    2005Sources of cash:Cash provided by operating activities
    
    $
    49,581
    
    
    
    83,272Proceeds from long-term borrowings
    
    
    35,000
    
    
    
    Net proceeds from short-term borrowings
    
    
    
    
    
    
    2,905Net proceeds from annuity contracts
    
    
    
    
    
    
    5,236Other
    
    
    490
    
    
    
    1,151Total sources of cash
    
    
    85,071
    
    
    
    92,564Uses of cash:Acquisition of GA Life, net of cash aquired
    
    
    (27,793
    )
    
    
    Acquisition of investments, net of proceeds
    
    
    (17,641
    )
    
    
    (85,710
    )Capital expenditures
    
    
    (9,462
    )
    
    
    (5,031
    )Dividends
    
    
    (6,231
    )
    
    
    Payments of long-term borrowings
    
    
    (2,093
    )
    
    
    (4,730
    )Net payments of short-term borrowings
    
    
    (1,740
    )
    
    
    Net surrenders of annuity contracts
    
    
    (5,824
    )
    
    
    Other
    
    
    (508
    )
    
    
    Total uses of cash
    
    
    (71,292
    )
    
    
    (95,471
    )Net increase (decrease) in cash and cash equivalents
    
    $
    13,779
    
    
    
    (2,907
    )
       44




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##### Table of Contents



Financing and Financing Capacity
   
    
    On January 23, 2006, the Corporation issued and sold $35.0 million of its 6.7% senior
unsecured notes payable due January 2021 (the 6.7% notes). The 6.7% notes were privately
placed to various accredited institutional investors. The notes pay interest each month
beginning on March 1, 2006, until such principal becomes due and payable. These notes can
be prepaid after five years at par, in full or in part, as determined by the Corporation.
The proceeds obtained from this issuance were used to finance the acquisition of 100% of
the common stock of GA Life effective January 31, 2006.
    
    On December 21, 2005, TSM issued and sold $60.0 million of its 6.6% senior unsecured
notes due December 2020 (the 6.6% notes). The 6.6% notes were privately placed to various
institutional accredited investors. The notes pay interest each month beginning on
January 2006, until such principal becomes due and payable. These notes can be prepaid
after five years at par, in full or in part, as determined by the Corporation. Proceeds
were used to enter into a modified coinsurance with funds withheld reinsurance agreement
with GA Life.
    
    On September 30, 2004, TSI issued and sold $50.0 million of its 6.3% senior unsecured
notes due September 2019 (the 6.3% notes). The 6.3% notes are unconditionally guaranteed
as to payment of principal, premium, if any, and interest by the Corporation. The notes
were privately placed to various institutional accredited investors. The notes pay
interest semiannually beginning on March 2005, until such principal becomes due and
payable. These notes can be prepaid after five years at par, in total or partially, as
determined by the Corporation.
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  45




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##### Table of Contents



Item 4. Controls and Procedures
  
 Part II  Other Information
 
 Item 1. Legal Proceedings
  
 Item IA. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
        46




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##### Table of Contents



SIGNATURES
  Triple-S Management Corporation
RegistrantDate: November 13, 2006
    
    
    
    By:
    
    /s/ Ramón M. Ruiz-ComasRamón M. Ruiz-Comas, CPAPresident andChief Executive OfficerDate: November 13, 2006
    
    
    
    By:
    
    /s/ Juan J. RománJuan J. Román, CPAVice President of Financeand Chief Financial Officer
 47