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(GRAPHIC) 2004 ANNUAL REPORT L I V I N G VALUES




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Since its foundation in 1959.
Triple-S, Inc, has been a leader in the
health insurance industry in Puerto Rico. In order to keep pace with the communitys
growth and needs, the Company experienced
rapid expansion and diversification of its
products and business lines, while
maintaining its financial strength, giving
way to the creation of the Triple-S Group. Seguros de Vida Triple-S, Inc. was created
to provide disability and life insurance, as
well as annuities, to bring peace of mind.
Seguros Triple-S, Inc. was created to
provide practicing doctors with much needed
malpractice insurance, while offering a wide
variety of property and casualty products to
the general public. Interactive Systems,
Inc. works on technological solutions for
the companies in the Group, in addition to
operating the Electronic Health System that
allows more than 10,000
physicians, laboratories, dentists, and
hospitals  that are part of the Triple-S,
Inc. provider network to speedily process
their claims. Triple-C, Inc. was formed to
manage the Health Reform with the goal of
guaranteeing access to quality health
services to those without access to medical
care. It is developing its role as a
Third-Party Administrator (TPA). In order to coordinate the efforts of all
of these subsidiaries, Triple-S Management
Corporation was created in 1999 as a
holding company. This restructuring has
made it possible for Triple-S to remain the
largest insurer with 100% Puerto Rican
capital, making it possible to become the
second largest company on the island. Always committed to supporting the
well-being of our people, we will
continue to grow with Puerto Rico.




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(GRAPHIC) L I V I N G VALUES MORE THAN SIMPLE BELIEFS, VALUES ARE A REFLECTION OF OUR OWN EXISTENCE. THEY
ARE MANIFESTED IN EACH AND EVERY THING WE DO, BOTH IN OUR PERSONAL AND PROFESSIONAL
LIVES. At the Triple-S Group, we celebrate the values that guide our Corporation
each day. We promote their understanding and acceptance convinced that, by doing
so, we will get closer to our aspiration of becoming a more compassionate and
competitive company. We continuously search for different ways for values to become evident at all
levels of our organization  from corporate culture, strategy and operation to
relationship with our stakeholders  our providers, employees, shareholders, and
the people and organizations we insure. Thats how values are not mere words. At the Triple-S Group, these are deeply felt
and shown in every gesture and every action of our people until they become Living
Values.




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Triple-S Group Financial Highlights (dollar amounts in thousands)
    
    2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2001
    
    
    
    2000Gross premiums*
    
    $
    1,478,125
    
    
    
    $
    1,424,522
    
    
    
    $
    1,387,331
    
    
    
    $
    1,289,773
    
    
    
    $
    1,213,667Claims incurred*
    
    
    1,285,717
    
    
    
    
    1,217,156
    
    
    
    
    1,203,118
    
    
    
    
    1,147,319
    
    
    
    
    1,103,381Operating expenses
    
    
    171,879
    
    
    
    
    165,149
    
    
    
    
    148,539
    
    
    
    
    140,830
    
    
    
    
    130,135Net income (loss)
    
    
    45,803
    
    
    
    
    26,229
    
    
    
    
    48,249
    
    
    
    
    21,715
    
    
    
    
    (1,512
    )Assets
    
    
    919,657
    
    
    
    
    834,623
    
    
    
    
    721,892
    
    
    
    
    655,805
    
    
    
    
    575,556Capital
    
    
    301,433
    
    
    
    
    254,255
    
    
    
    
    231,664
    
    
    
    
    186,028
    
    
    
    
    159,693Return on assets (ROA)
    
    
    5.0
    %
    
    
    
    3.1
    %
    
    
    
    6.7
    %
    
    
    
    3.3
    %
    
    
    
    -0.3
    %Return on equity (ROE)
    
    
    15.2
    %
    
    
    
    10.3
    %
    
    
    
    20.8
    %
    
    
    
    11.7
    %
    
    
    
    -0.9
    %Net income (loss) to premiums
    
    
    3.1
    %
    
    
    
    1.8
    %
    
    
    
    3.5
    %
    
    
    
    1.7
    %
    
    
    
    -0.1
    %Underwriting gain
(loss) to premiums
    
    
    1.4
    %
    
    
    
    3.0
    %
    
    
    
    2.6
    %
    
    
    
    0.1
    %
    
    
    
    -1.6
    %
   *
    
    Includes amounts attributable to self-funded arrangements. 2      Living Values




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2004 TRIPLE-S GROUP Triple-S Management Corporation Letter from the Chairman of the Board ONE OF THE MOST IMPORTANT
RESPONSIBILITIES OF A CORPORATION IS TO ADD
VALUE TO THE PEOPLE AND THE MARKET IT
SERVES. In the case of Triple-S Management, the outstanding performance of 2004 is
an indication of the care we have placed in living by our values. These values
are reflected throughout this annual report as well as evident in the financial
results we achieved in 2004. Over the course of 2004, the Board of Directors has been steering the Corporation
to a position where it can continue to develop each of the companies that make up
our Group. In line with the requirements of the Sarbanes-Oxley Act, the Corporation is well
on its way to comply with all the dispositions of this federal legislation. We
are guided by our commitment to comply with the strictest dispositions of good
corporate governance. In complying with these parameters, we can offer greater
value and peace of mind to our shareholders, our health plan members and
policyholders, as well as to the marketplace we serve. (PHOTO OF FERNANDO J. YSERN BORRÁS) Fernando J. Ysern Borrás, MD These initiatives are also needed to ensure orderly growth in the
Corporation. In addition, we have been working to create the optimum conditions
to lead Triple-S Management on a geographic expansion and continue to grow our
business lines. In particular, we have supported the one-stop-shop strategy based
on the three business lines we offer: health; property and casualty; and life
insurance and affiliated products. Our first incursion into the debt capital market last year is helping us to
finance our continued growth. We obtained favorable rates on our debt issue,
while the market response could not have been better. We feel proud of being one
of the few non-bank companies in Puerto Rico that has issued $50 million in debt
and obtained an excellent classification of A- from Standard & Poors. Living Values      3




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2004 TRIPLE-S GROUP Letter, continued In the area of product development, we continue to respond to the needs of
the Puerto Rican population. We developed a new product, Medicare Óptimo, for
those 65 years old and older, the segment of the population experiencing the
greatest growth. Medicare Óptimo is the only certified Medicare Advantage Plan in
Puerto Rico that offers the beneficiary freedom of choice from an ample network
of doctors, with no gatekeepers. As to the petition from many of our shareholders that we provide them with
proposals to allow them to transfer their shares, we have continued to seek
options to liberalize the existing limitations. In that sense, we hope to propose
alternatives that are widely acceptable to our shareholders, and that allow them
greater leeway with their assets, since the current By-Laws only permit shares to
be transferred in inheritance to descendants who are physicians and dentists. Since September of 2003, we have been restricted in considering options for
corporate development due to the Sánchez lawsuit, which is pending in Federal
Court, San Juan District. This suit establishes a legal claim on the
Corporations capital. If the Court grants the motion to dismiss, we will be in a
position to analyze and recommend to our shareholders options to continue
Triple-S Managements corporate development. Meanwhile, our legal advisors have indicated that while the Sánchez case remains
active in Court, we need to be prudent in terms of the steps we take as we
address our needs for corporate development. Our responsibility in this scenario
has been to protect the Corporations assets and continue to improve its capacity
to generate value. Our increased value was also acknowledged by AM Best which
granted us an excellent qualification of A- once more. In terms of the directors who make up the Board, we deeply felt the loss of José
Davison Lampón, Esq. We will remember him and are deeply appreciative of his
numerous contributions and years of service to the Board. Before year end, Juan
Rodríguez Díaz, Esq. was selected to fill the vacancy in accordance with our
By-Laws. We thank him for accepting this mission as we welcome him to the Board.
We trust that he too will contribute greatly to the Corporations development. This is the last report that I subscribe as Chairman of the Board. It has been a
period of transition for our Corporation, marked by difficult times and
challenges in the marketplace. Nevertheless, the Triple-S Group has emerged
stronger than ever and continues to add value to the relationships we have with
all our stakeholders. Our commitment as we face the future is to continue living
by our values in every one of our undertakings. -s- Fernando J. Ysern Borrás Fernando J. Ysern Borrás,
MD Chairman of the Board 4      Living Values




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(GRAPHIC) RESPECT We believe in respecting the individual and acknowledging each persons
contributions.




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(GRAPHIC) ETHICS We act with integrity, and let
ethical decision-making guide all our
actions.




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##### 



2004 TRIPLE-S GROUP Triple-S Management Corporation Board of Directors (PHOTO OF BOARD OF DIRECTORS) (PHOTO OF BOARD OF DIRECTORS) above, left to right: Fernando L. Longo, MD; José Arturo Álvarez
Gallardo; Mario S Belaval; Ramón M. Ruiz Comas, CPA (President and CEO);
Jesús R. Sánchez Colón, DMD (Secretary); Carmen Ana Culpeper; Wilfredo López
Hernández, MD; Wilmer Rodríguez Silva, MD (Vice President); Porfirio E. Díaz
Torres, MD; Arturo Córdova López, MD (Assistant Secretary). below, left to right: Miguel Nazario; Vicente J. León Irizarry, CPA
(Treasurer); Valeriano Alicea Cruz, MD; Fernando J. Ysern Borrás, MD
(Chairman of the Board); Manuel Suárez Méndez, Eng.; Adamina Soto
Martínez, CPA (Assistant Treasurer); Manuel Figueroa Collazo, Eng; Manuel
A. Marcial Seoane, MD; Juan E. Rodríguez Díaz, Esq. Living Values      7




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(GRAPHIC) INNOVATION We promote proactivity,
creativity and innovation as
competitive advantages.




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2004 TRIPLE-S GROUP Triple-S Management Corporation Letter from the President and Chief Executive Officer OVER THE COURSE OF LAST YEAR, TRIPLE-S GROUP CONTINUED TO GENERATE EXCELLENT
RESULTS AS AN OUTCOME OF OUR STRATEGY TO DIVERSIFY OUR OPERATIONS, AS WELL AS STEER OUR
SUBSIDIARIES IN THE DIRECTION OF A ONE-STOP SHOP. Triple-S Group increased its net income from $26.2 million in 2003 to $45.8 million
in 2004. The years performance behaved as anticipated in terms of income as well as
expenses, since there was no material event reflected such as in 2003, when a special
payment in taxes was made. In spite of a persistent weakness in the economy, the
Triple-S Group maintained its focus during the year. As a Group, we made progress in the
marketplace by adding value to our products and services. We made strides with our strategy in several ways. For the first time, Triple-S, Inc.
went to the capital markets in Puerto Rico with an issue of $50 million that had an
excellent reception. Standard & Poors classified the transaction as A-, which is
considered excellent. With this classification, we became one of the few issuers of debt
in Puerto Rico to obtain an evaluation of that caliber in its first transaction of this
type. (PHOTO OF RAMÓN M. RUIZ COMAS) Ramón M. Ruiz Comas, CPA The product of this transaction served to repay short-term debt, finance the
development of new products and services, and provide continued support for our
corporate development plans. Our results for the year also show greater diversification.
For the first time, Seguros Triple-S, our property and casualty subsidiary, was
responsible for generating 24% of the Groups net income; an extraordinary achievement. The performance achieved in 2004 is a reflection of our strict adherence to the Groups
values. These values arose from a philosophy of service embraced by a visionary group of
physicians who founded the Company in 1959. These values, beginning with respect for
each individual, continue to guide our steps and have been instrumental in helping the
Group achieve its results over the past few years. Living Values      9




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2004 TRIPLE-S GROUP Letter, continued In spite of a persistent soft market for insurance products, the Group was able to
obtain important progress in each of its business lines: health, property and casualty, life
and annuities, and technology. Health In the area of health, we entered the market segment with the largest growth potential,
those aged 65 years and older. We launched Medicare Óptimo and Medicare Óptimo Plus under
the guidelines set by the Medicare Modernization Act of 2003 for Medicare Advantage
programs. Under these programs, private health insurers can offer products that compete with
Medicare. In contrast to traditional Medicare, this new plan includes dental and optical
services, hearing aides and other benefits. It is the only plan that allows the beneficiary
to access providers, with no restrictions, from the wide network of Medicare Óptimo
providers in Puerto Rico. FOR 2005, WE ARE PROJECTING THAT 12,000 TO 15,000 PEOPLE WILL CHOOSE MEDICARE ÓPTIMO.
THE PRODUCT, LAUNCHED IN DECEMBER, HAS HAD AN EXCELLENT RECEPTION AND HAS EXCEEDED OUR
PROJECTIONS. In the area of group health plans, we experienced an increase of 3%, which is
considerable in a labor market that is characterized by a lack of growth. We were able to
increase our very high retention rates from 95% to 96% and reported an increase in
underwriting income for the third year in a row. We took steps to offer our health plan customers added value through new service channels
and improved efficiency in containing rising health costs. As a result, for the second
straight year, (BAR CHART)
    
    (BAR CHART)
    
    (BAR CHART)
 10      Living Values




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2004 TRIPLE-S GROUP we were favored as the number one plan among health plans that serve federal employees
in the U.S. in a satisfaction survey. The survey is a federal requirement for plans that
serve federal employees. During the year, we invested considerable effort in launching a new version of our website
with the objective of providing greater functionality and interactivity for our health
providers, customers, producers and employers. The website was tested during 2004. Its
large-scale launch will be in 2005. We trust that once the website is widely available, it
will become yet another added value that Triple-S offers its key stakeholders. Also in 2004, its been ten years of intense work and dedication to the Health Reform. We
continue to make adjustments in the model to better care for this segment of the population,
which includes more than 600,000 people in the southwest, north and metro-north regions of
Puerto Rico. The Health Reform Program of the Commonwealth of Puerto Rico is managed by Triple-C, Inc., a
third-party administrator. More than 90 cents of every dollar of premium is paid out for
health services. The efficiency achieved in operating the Health Reform has also had a
positive impact on the operation of Triple-S, Inc., the health insurer. It has helped
Triple-S become one of most efficient health insurers in the United States. Beyond its efficiency, the programs managed by Triple-C have helped to improve the quality of
life of Health Reform beneficiaries. Since the Reforms inception, there have been
significant improvements in basic health parameters. Triple-C has contributed to establishing
the standard of care with the incentives it has provided for preventive care. Today, Puerto
Rico has the highest rate of vaccination for children under the age of 24 months in the
United States. Disease management programs, such as Cuidado Especial, have helped patients with chronic
conditions improve their health and reduce their hospitalizations and visits to emergency
rooms. The personal attention given to these patients has generated savings per every dollar
invested in the program. Through an alliance with McKesson, Triple-C continues to offer phone health services to an
increasing number of customers in Puerto Rico, as well as in Hispanic markets of the United
States. Living Values      11




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2004 TRIPLE-S GROUP Letter, continued Property and Casualty Seguros Triple-S, Inc. continued experiencing double-digit growth in 2004, exceeding the
industrys performance. The Company registered its best year in underwriting income since its
foundation in 1987. During 2004, the Company maintained its leadership in commercial packages
and became the leader in the very competitive market for mortgage insurance, once we
established alliances with some of the leading mortgage bankers in Puerto Rico. With the goal of adding more value to our products, the Company launched two innovative
products that are in line with current needs. We designed a policy to protect our customers in
the event of identity theft. For the commercial area, we designed a policy that offers
coverage in the event that information systems malfunction, in view of how much businesses
currently rely on these systems. As for service, the Company continues to invest in an extensive reengineering program of all
its information programs with the goal of providing better service to its customers, such as
in reducing the time it takes to process a claim. This program, which will have wide-ranging
effects, will take two or three more years to complete. In 2004, some of our efforts became
evident when we began to decentralize our claim processing centers so that they will be more
accessible to our customers. There are now offices located in Arecibo, Caguas and Canóvanas,
in addition to those that already operate in San Juan, Ponce and Mayagüez. Seguros Triple-S is
the only property and casualty insurance company that has a claim center in Plaza Las
Américas, the largest mall in the Caribbean. In 2005, we will open a second center in Plaza
Carolina. Soon, the Company will establish a network of affiliated auto body shops to
facilitate the claim process for customers. Life and Annuities During the course of the year, Seguros de Vida Triple-S, Inc. maintained its leadership
in group life and disability products. With the goal of increasing its productivity, Seguros
de Vida Triple-S restructured key areas within the Company including customer service, sales
and marketing. In doing so, in 2005, the Company will be better positioned to enter the
personal insurance marketplace. We will launch new products for this market in 2005. 12      Living Values




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(GRAPHIC) EXCELLENCE We believe in providing excellence in
service to all our constituents. We promote
efficiency and effectiveness. We believe in
financial soundness as a measure of success. Living Values 13




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2004 TRIPLE-S GROUP Letter, continued Technology Throughout the years, Interactive
Systems, Inc. has proved to be instrumental
in adding value to the Groups products and
services by increasing the efficiency of
more and more of its processes through the
application of technology. It has helped
each subsidiary increase the volume of
information handled, as well as the speed
and capacity of their claim processing. At the Group level, Interactive Systems is
seeking to apply technology in a uniform
manner across all of the companies that make
up the Group, in order to create a common
platform to gradually make the one-stop shop
possible. It has been and will continue to
be the subsidiary that fully participates in
the strategic planning processes of each
member of the group in order to collaborate
in finding ways to achieve greater efficacy
in the operations and greater quality of
service through the application of
technology and the simplification of
processes. INTERACTIVE SYSTEMS CONTINUES TO
PROVIDE SUPPORT FOR A COMPREHENSIVE
REENGINEERING PROJECT THAT SEEKS TO
SIMPLIFY THE COMPANYS PROCESSES TO
PROVIDE SPEEDIER CLAIM PROCESSING AND SERVICE. At the health level, Interactive
Systems is the company that allows us to
operate the health programs for our
customers, providers and employers with
great efficiency. Interactive Systems was
a key player in helping to enable Triple-S
to launch Medicare Óptimo. Equally, its
support has been important in disease
management, case management and hospital
reviews, all of these activities with the
intention of achieving greater
efficiencies in the service provided to
our customers and the speed with which
providers can obtain payment for their (BAR CHART)
    
    (BAR CHART)
    
    (BAR CHART)
 14      Living Values




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2004 TRIPLE-S GROUP services. In terms of Seguros
Triple-S, Interactive Systems continues to
provide support for a wide-ranging
reengineering project that seeks to
simplify the Companys processes in order
to provide speedier claim processing and
service. Social Responsibility Our commitment to live by our values
extends to the leadership that we exert in
the area of corporate responsibility. Over
the year, we launched the public service
campaign ¿Cuál es tu actitud?(What is your
attitude?), which highlights the importance
of having a positive attitude as a way of
improving interpersonal relations in Puerto
Rico. By being more positive, we can
improve our lives as well as the lives of
others with whom we interact in our
workplace, our family and in the community. With several other leading corporations in
Puerto Rico, we led an initiative to
support the first social responsibility
corporate center that operates in the
country, under the name of ConectaRSE
(Connecting with Social Corporate
Responsibility). We actively participated
in the Chamber of Commerces Quality of
Life Initiatives and those of the Puerto
Rico Manufacturers Association. We also
supported the efforts of Fondación
Solidaridad (Solidarity Foundation),
created by El Nuevo Día. And
we continued to provide solid support to
projects that promote education among health
professionals, child and youth education,
health, the environment, civism, sports and
the arts. We exercised our responsibility both as
corporate citizens and in our market
performance. Our success, in each of our
subsidiaries and as a Group, continues to be
closely linked to our capacity to generate
value for our shareholders, customers,
employers, providers and Puerto Ricos
health system, the economy and the general
well-being of the population. In this
manner, we reaffirm our commitment to live
our values in each of the actions that we
take, so that they can become Living Values. -s- Ramón M. Ruiz Comas Ramón M. Ruiz Comas, CPA
President and Chief Executive Officer
Triple-S Management Corporation Living Values      15




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(GRAPHIC) TEAMWORK We share information, give each other
support and motivation, and thrive together to
reach further. 16 Living Values




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##### 



2004 TRIPLE-S GROUP Triple-S Management Corporation Corporate Leadership Group (PHOTO OF CORPORATE LEADERS) Eva G. Salgado
President and Chief Executive Officer
Seguros Triple-S, Inc. Ramón M. Ruiz Comas, CPA
President and Chief Executive Officer
Triple-S Management Corporation Carlos Torres
President and Chief Executive Officer
Interactive Systems, Inc. Luis A. Marini Mir, DMD
President and Chief Executive Officer
Triple-C, Inc. Socorro Rivas, CPA
President and Chief Executive Officer
Triple-S, Inc. Roberto O. Morales, Esq.
President and Chief Executive Officer
Seguros de Vida Triple-S, Inc. Living
Values      17




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##### 



2004 TRIPLE-S GROUP Group Highlights TRIPLE-S, INC. >
    
    Solidified further its leadership
as the leading health insurance
company in Puerto Rico.>
    
    Serves 1.3 million people in
Puerto Rico.>
    
    Contracts increased by 3% in spite
of a stagnant labor market, and the
contract retention rate rose to 96%.>
    
    For the second year in a row, it
retained its number one position
as a provider of quality services
among health plans that serve
federal employees in the U.S.>
    
    Holds the first place among health
plans in the Blue Cross and Blue
Shield network in six service
categories. In Puerto Rico, the
Company is number one in 9 out
of 10 service categories.>
    
    Completed its new website,
providing greater interactivity
to its users.>
    
    Continues to be among the most
efficient companies in the
management of health plans in
the U.S. It uses 89.5 cents out of
each premium dollar to pay for
direct services to its customers
and 9.5 cents out every premium
dollar for administrative costs.>
    
    Opened a second Service Center in
Plaza Carolina. The first one opened
at Plaza Las Américas in 2003.>
    
    Maintained an A- rating from AM
Best and Standard & Poors.
 TRIPLE-C, INC. >
    
    Administrates Health Reform
services for the largest number of
beneficiaries.>
    
    It helped improve the quality of
life of many patients who suffer
from certain chronic conditions
and are part of the Cuidado
Especial program. As a result,
hospitalizations have dropped,
which has helped to control costs
and allow improvements to
service and provide better access.>
    
    Jointly operates a health information line serviced by registered
nurses with McKesson. From
Puerto Rico, it serves the island
market and 14 clients in the
continental U.S.
 (GRAPHIC) >
    
    Played a key role in
helping improve health
parameters through the
administration of regions
for the Puerto Rican
governments Health
Reform program.
 18      Living Values




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##### 



2004 TRIPLE-S GROUP SEGUROS DE VIDA
TRIPLE-S, INC. >
    
    Celebrated its
20th anniversary of
serving the Puerto Rican
market in 2004.
 (GRAPHIC) >
    
    Launched a new cancer policy
with supplementary coverage
and created a distribution channel
to market this product by
recruiting five general agencies
that specialize in the sale of these
types of insurance policies.>
    
    Began to cross-sell life insurance
to individual health plan
customers, a project that is part
of the integration strategy of
Triple-S Group.>
    
    Practically doubled its size in
the past five years.>
    
    Continues to be the leading
company in life and disability
group sales in Puerto Rico.>
    
    Restructured the Company to
better position it to enter the
consumer life and disability
insurance markets.>
    
    Maintained an A- rating
(Excellent) from AM Best.>
    
    Stationed representatives at the
Triple-S Service Center located
in Plaza Las Américas to better
service customers.
 SEGUROS
TRIPLE-S, INC. >
    
    Achieved double-digit growth
for the sixth consecutive year,
exceeding the markets average
performance.>
    
    Reported its best year in underwriting income, despite being
a year characterized by a soft
market and a catastrophic event
such as Tropical Storm Jeanne.>
    
    Became the primary property and
casualty insurer for mortgages
on the Island when it formed an
alliance with the three leading
mortgage banks in Puerto Rico.>
    
    Seguros Triple-S continues to be
the leading company in the sale
of commercial package insurance
in Puerto Rico.
 (GRAPHIC) >
    
    For the first time, it launched a
public service campaign to help
consumers reduce their losses
during the hurricane season.>
    
    Established several satellite offices
that will be inaugurated during
2005 to offer better customer
service in the areas of the sale of
policies and claim processing.>
    
    Signature Insurance Agency,
Seguros Triple-S general agency,
became the third largest general
insurance agency in Puerto Rico
during 2004.
 INTERACTIVE
SYSTEMS, INC. >
    
    Provides information technology
and innovative solutions to the
Triple-S Group.>
    
    Manages one of the largest
and most complex information
technology centers in Puerto
Rico and the Caribbean.
 (GRAPHIC) >
    
    Processed a total of 22 million
claims in 2004 for Triple-S, Inc.;
90.3% were processed electronically and 98.5% of total claims
in the health area were processed
in 30 days or less.>
    
    It is the leading provider of electronic billing applications for the
Puerto Rican health industry, with
more than 8,000 installations in
providers and participants offices.>
    
    Launched SES Total, an electronic
billing program that allows health
providers and participants to bill
health plans in Puerto Rico.>
    
    Implemented information systems
to support the launching of
Medicare Óptimo, which helped
diversify the products offered
by the Group.>
    
    Implemented applications that
support individual case management and disease management
programs to improve the quality
of life of many patients.>
    
    Continued to strengthen information security within the
Corporations information systems.
 Living Values      19




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(GRAPHIC) COMMITMENT We promote the quality of life
in the communities we serve. 20 Living Values




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##### 



2004 TRIPLE-S GROUP Triple-S Management Corporation Our Community is Our Responsibility At the Triple-S Group, we believe
in social responsibility as a key
strategy to promote business development
and improve the well-being of our
community. As always, we sponsored efforts that promote
the arts, culture, education, sports and the
environment. We also contributed to the
professional growth of our physicians,
dentists and health providers by supporting
scientific investigation and continuous
education programs. However, the Triple-S Group has adopted a
new vision which entails a greater action
ratio and more commitment than ever. We now
go beyond traditional philanthropy to
include other projects that allow us to get
involved in the search of solutions to our
problems and significantly impact the social
transformation of our Island. A case in point was our public service
campaign What is your attitude?, that calls
attention to the importance of having a
positive attitude as a way of fostering a
better social interaction among Puerto
Ricans. By asking our people to put on their
best face when facing difficult situations,
we are looking for a change in conduct that
will improve our individual lives and the
lives of all those around us. The Triple-S Groups commitment to our
community was more evident than ever
through our employees volunteer program.
They went beyond donating funds to
charitable organizations to donate their
time and effort to support a noble cause.
This included events to care for the needs
of children and their families who
spend long periods of time at the Pediatric
Hospital, fundraising campaigns for the
Muscular Dystrophy Association, Relevo por
la Vida, and Heart Walk; and collecting
Christmas presents for many needy groups around the
Island. The innovative social responsibility model
that the Triple-S Group is beginning to
adopt is vital to ensure the success of
businesses and the well-being of the
community. As more companies follow it, the
more Puerto Rico will benefit. That is precisely why we are motivating
other businesses to join this global
trend. We actively participate in the
Social Responsibility Committees of the
Chamber of Commerce and the PR
Manufacturers Association, as well as in
the Solidarity Operation Foundation, which
promotes initiatives that improve the
quality of life in Puerto Rico. Likewise, the Triple-S Group has joined
other leading companies as a founding member
of ConectarRSE, the first Social
Responsibility Center in Puerto Rico. From
here, well educate the local business
community about the benefits of this global
vision on socio-economic development, and
will contribute to redefining companies
roles as agents of change and social
transformation. Through these and many other efforts, we
want to make Puerto Rico a better place to
live and the Triple-S Group a better
corporation, where we can always feel our
Living Values. Living Values      p21




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##### 



Triple-S Management Corporation Corporate Information TRIPLE-S MANAGEMENT CORPORATION
1441 F. D. Roosevelt Avenue
San Juan, Puerto Rico 00920
787.749.4949
www.ssspr.com TRIPLE-S, INC.
787.749.4949 TRIPLE-C, INC.
787.793.8383 SEGUROS DE VIDA TRIPLE-S, INC.
787.792.0909 SEGUROS TRIPLE-S, INC.
787.749.4600 INTERACTIVE SYSTEMS, INC.
787.749.4173 (GRAPHIC) Production: Triple-S Advertising & Public Relations Office
Design: BD&E, Inc., Pittsburgh, Pennsylvania
Photography: Tomás Gual and Getty Images
Copy: Lisette Núñez, Ivonne Brown
Printing: Model Offset Printing 22      Living Values




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##### 



Financial Information 2004 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    2Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Consolidated Financial Statements 2004
    
    
    21Report of Independent Registered Public Accounting Firm
    
    
    22Consolidated Balance Sheets
    
    
    23Consolidated Statements of Earnings
    
    
    24Consolidated Statements of Stockholders Equity and Comprehensive Income
    
    
    25Consolidated Statements of Cash Flows
    
    
    26Notes to Consolidated Financial StatementsNote 1 - Organization
    
    
    28Note 2 - Significant Accounting Policies
    
    
    30Note 3 - Segment Information
    
    
    38Note 4 - Investment in Securities
    
    
    45Note 5 - Net Investment Income
    
    
    53Note 6 - Premiums and Other Receivables, Net
    
    
    54Note 7 - Property and Equipment, Net
    
    
    54Note 8 - Claim Liabilities
    
    
    55Note 9 - Federal Employees Health Benefits Program
    
    
    55Note 10 - Short-Term Borrowings
    
    
    57Note 11 - Long-Term Borrowings
    
    
    58Note 12 - Derivative Instruments and Hedging Activities
    
    
    59Note 13 - Retained Earnings and Stockholders Equity
    
    
    60Note 14 - Comprehensive Income
    
    
    61Note 15 - Agency Contract and Expense Reimbursement
    
    
    62Note 16 - Reinsurance Activity
    
    
    63Note 17 - Income Taxes
    
    
    65Note 18 - Pension Plan
    
    
    68Note 19 - Catastrophe Loss Reserve Trust Fund
    
    
    72Note 20 - Commitments
    
    
    74Note 21 - Contingencies
    
    
    74Note 22 - Statutory Accounting
    
    
    77Note 23 - Net Income Available to Stockholders and Basic Net Income per Share
    
    
    78Note 24 - Quarterly Financial Information (Unaudited)
    
    
    80Note 25 - Reconciliation of Net Income to Net Cash Provided by Operating Activities
    
    
    82




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations. This financial discussion contains an analysis of the consolidated financial position and
financial performance as of December 31, 2004 and 2003, and consolidated results of operations for 2004, 2003 and 2002. This
analysis should be read in its entirety and in conjunction with the consolidated financial statements, notes and
tables included elsewhere in this Annual Report. General The Corporation (on a consolidated basis and for each reportable segment), along with most
insurance entities, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. The loss ratio is
the claims incurred divided by the premiums earned, net and fee revenue. The expense ratio is the operating expenses
divided by the premiums earned, net and fee revenue. The combined ratio is the sum of the loss ratio and the
expense ratio. These ratios are relative measurements that describe for every $100 of premiums earned, net and fee
revenue, the costs of claims and operating expenses, respectively. The combined ratio represents the total cost per $100
of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100
demonstrates underwriting loss. Consolidated Operating Results The analysis in this section is included to provide an overall view of certain information,
the consolidated statements of operations, and key financial information. Further details of the results of operations of each
reportable segment are included in the respective segments section. (Dollar amounts in thousands)
    
    2004
    
    
    2003
    
    
    2002Years ended December 31,Consolidated premiums earned, net and fee revenue:Health
insurance - Commercial Program
    
    $
    720,789
    
    
    
    699,365
    
    
    
    683,513Health
insurance - Reform Program
    
    
    484,742
    
    
    
    477,614
    
    
    
    487,000Property and casualty
    
    
    86,228
    
    
    
    78,334
    
    
    
    60,688Other operating segments
    
    
    16,442
    
    
    
    17,403
    
    
    
    14,992$
    1,308,201
    
    
    
    1,272,716
    
    
    
    1,246,193Consolidated claims incurred
    
    $
    1,115,793
    
    
    
    1,065,350
    
    
    
    1,061,980Consolidated operating expenses
    
    
    171,879
    
    
    
    165,149
    
    
    
    148,539Consolidated underwriting costs
    
    $
    1,287,672
    
    
    
    1,230,499
    
    
    
    1,210,519Consolidated loss ratio
    
    
    85.3
    %
    
    
    83.7
    %
    
    
    85.2
    %Consolidated expense ratio
    
    
    13.1
    %
    
    
    13.0
    %
    
    
    11.9
    %Consolidated combined ratio
    
    
    98.4
    %
    
    
    96.7
    %
    
    
    97.1
    %Consolidated net investment income
    
    $
    26,499
    
    
    
    24,679
    
    
    
    24,778Consolidated net rcalized gain on sale of securities
    
    
    10,968
    
    
    
    8,365
    
    
    
    185Consolidated net unrealized gain (loss)
on trading securities
    
    
    3,042
    
    
    
    14,893
    
    
    
    (8,322
    )$
    40,509
    
    
    
    47,937
    
    
    
    16,641Consolidated income tax expense
    
    $
    14,014
    
    
    
    65,397
    
    
    
    2,549Net income (loss) per segment:Health
insurance - Commercial Program
    
    $
    23,757
    
    
    
    49,071
    
    
    
    28,133Health
insurance - Reform Program
    
    
    9,250
    
    
    
    14,034
    
    
    
    9,770Property and casualty
    
    
    11,085
    
    
    
    9,677
    
    
    
    6,223Other operating segments and TSM
    
    
    1,711
    
    
    
    (46,553
    )
    
    
    4,123Consolidated net income
    
    $
    45,803
    
    
    
    26,229
    
    
    
    48,249
 2




---



##### 



Year ended December 31, 2004 compared with the year ended December 31, 2003 Consolidated
premiums earned, net and fee revenue increased by $35.5 million, or 2.8 %, during
the year 2004 when compared to the premiums earned, net and fee revenue during 2003. This increase is mostly due to
the fluctuation in premiums earned, net of both Health Insurance segments and the property and casualty insurance segment.  
    The premiums earned, net and fee revenue corresponding to the
Health Insurance - Commercial Program
presented an increase of $21.4 million, or 3.1%, during this period. The increase in premiums earned, net of
this segment is due to increases in premium rates and an increase in the average enrollment of Self-funded
Employers accounts.
    The premiums earned of the property and casualty insurance segment increased by $7.9 million, or 10.1%,
during the year 2004. This increase is mostly the result of the segments increased volume of business,
particularly in the Dwelling and Auto Physical Damage lines of business.
    The premiums earned, net of the Health Insurance - Reform segment presented an increase of $7.1 million,
or 1.5%, in 2004, as compared to the premiums earned, net in 2003. The increase in the
premiums earned, net of this segment is due to increases in premium rates during the contract
renegotiation process, net of a decrease in membership. The consolidated claims incurred during the year 2004 were $50.4 million, or 4.7%, higher than
the consolidated claims incurred for the year 2003. The loss ratio reflects an increase of 1.6 percentage points
during the same period. This increase is mostly driven by the fluctuations in the claims incurred and the loss ratio of
the Health Insurance  Commercial Program and Reform segments, which is basically attributable to the following:  
    During 2004, the Health Insurance  Commercial and Reform segments experienced
higher costs per service and utilization trends when compared to the prior period. The increase was mainly noted
in the cost and utilisation of prescription drugs, X-rays, and emergency room services as well as to an
increase in the cost of surgical procedures and laboratory services.
    During 2003, the claims incurred in the Health Insurance  Commercial and Reform
segments were affected by the favorable development of their claims liabilities, which were attributed to better
than expected utilization trends in that particular year. In addition, claims incurred in the Property and Casualty Insurance segment also increased during
2004. The increase in the claims incurred of this segment is mostly due to an increase in its volume of business and
to approximately $2.0 million of net losses from claims incurred
related to the passage of Tropical Storm Jeanne
through Puerto Rico. Consolidated operating expenses increased $6.7 million, or 4.1%, during 2004 when compared to
2003, which is basically attributable to the increased volume of business of its reportable segments. The
consolidated expense ratio increased 0.1 percentage points during the year 2004, from 13.0% in 2003 to 13.1% in 2004. The consolidated realized gain on sale of securities is the result of the sound and timely
management of the investment portfolio in accordance with corporate investment policies and from normal portfolio turnover of
the trading and available-for-sale securities. The consolidated realized gain during 2004 is mostly due to the
sale of common stock of Popular, Inc., which generated a realized gain of approximately $6.2 million and also to normal
portfolio turnover of the trading and available for sale securities. The unrealized gain on trading securities is related to investments held by segments in corporate
bonds and equity securities. The unrealized gain experienced during the year 2004 is mostly attributed to gains in
the portfolios held by segments in equity securities that replicate the Standard & Poors 500 Index, the Russell 1000
Growth Index and the Russell 1000 Value Index. All Indexes experienced positive returns in 2004. These segments
plan to continue their long-term strategy of passive management and diversification since historically, performance of
these types of investments has outperformed other financial instruments. The
consolidated income tax expense during the year 2004 presented a decrease of $51.4 million
when compared to 2003 and is basically attributable to the termination of TSIs tax ruling in July 2003. As a
result, TSM recognized an income tax expense in 2003 amounting to $51.8 million. Year ended December 31, 2003 compared with the year ended December 31, 2002 Consolidated premiums earned, net and fee revenue increased by $26.5 million, or 2.1 %, during
the year 2003 mostly due to the increased volume of business experienced by its reportable segments. This increase is
mostly due to the fluctuation in premiums earned, net of the Health
Insurance  Commercial Program and the property
and casualty insurance segments. 3




---



##### 




    The premiums earned, net and fee revenue corresponding to the
Health Insurance 
Commercial Program present in increase of $15.9 million, or 2.3%, during this period. The increase in premiums earned, net of
this segment is due to increases in premium rates net of a slight decrease in its average enrollment.
    The premiums earned of the property and casualty insurance segment increased by $17.6 million, or 29.1%,
during the year 2003. This increase is mostly the result of the segments increased
volume of business. The
premiums earned corresponding to the Health Insurance  Reform segment present a decrease of
$9.4 million, or
1.9%, during this period. This decrease is basically the result of a net decrease in the average
enrollment of the
segment, net of an increase in premium rates. The increase in the consolidated claims incurred during the year 2003 of $3.4 million, or 0.3%, is
due to an increase in
the volume of business. The loss ratio reflected a decline of 1.5 percentage points during the
same period. This decline
is mostly driven by declines in the loss ratio of the Health
Insurance  Commercial Program
segment and the Health
Insurance  Reform segment, which decrease was the result of better than expected utilization
trends. In addition,
management has established several cost containment measures that have allowed cost and
utilization trends to
maintain levels consistent with pricing and margin objectives thus keeping the loss ratio under
control. Consolidated
operating expenses increased $16.6 million, or 11.2%, during 2003 that is basically
attributed to the
increased volume of business of its reportable segments. The consolidated expense ratio increased
of 1.0 percentage
points during the year 2003 mostly due to the following contributing factors:  
    The property and casualty segment experienced a decrease in the reinsurance commission income from
reinsurance treaties due to the cancellation of certain reinsurance contracts and change in the mix of
reinsurance treaties. In addition, the segment had increases in certain non-recurring expenses, such as an
assessment from a guarantee association and consulting services, among others.
    The Health Insurance  Commercial Program segment recorded a non-recurring pension assessment of
$4.6 million resulting from the number of retirees selecting lump-sum benefits instead of
annuities. The consolidated realized gain on sale of securities is the result of the sound and timely
management of the investment
portfolio in accordance with corporate investment policies and from normal portfolio turnover of
the trading and
available-for-sale securities. The consolidated realized gain during the year 2003 is mostly due
to the sale of common
stock of Popular, Inc., which generated a realized gain of approximately $8.9 million and also to
normal portfolio
turnover of the trading and available for sale securities. The unrealized gain (loss) on trading securities is related to investments held by segments in
corporate bonds and
equity securities. The unrealized gain experienced during the year 2003 is mostly attributed to
gains in the portfolios
held by segments in equity securities that replicate the Standard & Poors 500 Index and the
Russell 1000 Growth
Index. Both Indexes experienced positive returns in 2003. In addition, during the first quarter of
the year the
Corporation sold certain investments with unrealized losses within such portfolios. This caused
approximately $3.0
million in realized losses and had the effect of reducing the unrealized losses within the trading
portfolio by the same
amount. These segments plan to continue their long-term strategy of passive management and diversification since
historically, performance of these types of investments has outperformed other financial instruments. Consolidated income tax expense during 2003 increased $62.8 million mostly as the result of the following:  
    On June I8, 2003, the Corporation was notified by the Puerto Rico Treasury Department (PRTD) that TSIs
tax exemption was terminated effective December 31, 2002. As a result, effective January 1, 2003 TSI was
subject to Puerto Rico income taxes, the Health Insurance  Commercial Program and the Health Insurance
Reform segments recorded $4.6 million and $6.9 million, respectively, as income tax expense for the year.
    On July 31, 2003, TSM and TSI executed a closing agreement with the PRTD that stipulated; in accordance
with the income recognition methodology determined in the income lax ruling, that the
statutory net income
accumulated while TSI operated under the tax ruling was deemed distributed to TSM. As a
result, TSM
recognised an income tax expense amounting to $51.8 million. 4




---



##### 



Health Insurance  Commercial Program Operating Results (Dollar amounts in thousands)
    
    2004
    
    
    2003
    
    
    2002Years ended December 31,Average enrollment:Corporate accounts
    
    
    302,634
    
    
    
    305,100
    
    
    
    313,557Self-funded employers
    
    
    141,009
    
    
    
    128,803
    
    
    
    123,680Individual accounts
    
    
    84,807
    
    
    
    84,407
    
    
    
    82,583Federal employees
    
    
    51,917
    
    
    
    53,993
    
    
    
    55,999Local government employees
    
    
    40,257
    
    
    
    43,177
    
    
    
    43,526Total average enrollment
    
    
    620,624
    
    
    
    615,480
    
    
    
    619,345Premiums earned, net
    
    $
    711,906
    
    
    
    691,484
    
    
    
    675,930Amount attributable to self-funded arrangements
    
    
    182,752
    
    
    
    163,175
    
    
    
    151,497Less amounts attributable to claims under
self-funded arrangements
    
    
    (169,924
    )
    
    
    (151,806
    )
    
    
    (141,138
    )Premiums earned, net and fee revenue
    
    $
    724,734
    
    
    
    702,853
    
    
    
    686,289Claims incurred
    
    $
    620,751
    
    
    
    584,448
    
    
    
    574,874Operating expenses
    
    
    94,930
    
    
    
    92,264
    
    
    
    86,321Total underwriting costs
    
    $
    715,681
    
    
    
    676,712
    
    
    
    661,195Underwriting income
    
    $
    9,053
    
    
    
    26,141
    
    
    
    25,094Loss ratio
    
    
    85.7
    %
    
    
    83.2
    %
    
    
    83.8
    %Expense ratio
    
    
    13.1
    %
    
    
    13.1
    %
    
    
    12.6
    %Combined ratio
    
    
    98.8
    %
    
    
    96.3
    %
    
    
    96.3
    %
 General The Health Insurance  Commercial Program segments total revenues are primarily generated
from premiums earned
for risk-based healthcare services provided to its members, revenues generated from self-funded
arrangements and
investment income. Claims incurred include healthcare services and other benefit expenses
consisting primarily of
payments to physicians, hospitals and other service providers. A portion of the claims incurred
for each period consists
of an actuarial estimate of claims incurred but not reported to the segment during the period.
Operating expenses arc
comprised of general, selling, commissions, depreciation, payroll and other related expenses. The
segments results of
operations depend largely on its ability to accurately predict and effectively manage healthcare costs. Year ended December 31, 2004 compared with the year ended December 31, 2003 During 2004, the Health Insurance  Commercial Program segment reported an increase of 3.1% in the amount of
premiums earned, net and fee revenue. This increase is due to the following:  
    The segment is constantly monitoring claims trends, particularly in the rated Corporate accounts and
Individual lines of business. This practice assures adequate premium rates that reflect
the actual claims trend
of each particular business. On average, this segment increased premium rates by 4.5%
during the year 2004.
    The increase in total average enrollment of 5,144 members, or 0.8%, during the year
2004 when compared to
2003 is mainly the result of flat employment levels in Puerto Rico during the last three
years. The most
significant increase in enrollment is in the Self-funded Employers, which presents an
increase of 12,206
members, or 9.5%. since during this period certain large Corporate accounts groups shifted
from the rated
business to self-funded arrangements, assuming the risk associated with insuring their
employees. The
increase experienced in this business is mitigated by the decrease experienced in 2004 in
the Local
government employees and Federal employees businesses, which present a decrease of 2,920
members, or
6.8%, and 2,076, or 3.8%, respectively. Approximately 73% on the increase in total premiums is due to increases in premium rates. The
remaining 27% is
attributable to an increase in the segments volume of business. The
claims incurred for the year 2004 were $36.3 million, or 6.2%, higher than 2003, mostly as a
consequence of an
increase in claims experience trends. The claims experience trends increased 5.7% and 3.9% during
2004 and 2003, 5




---



##### 



respectively, mostly due to higher costs per service and higher utilization levels. The segments
loss ratio reflects an increase of 2.5 percentage points during the same period. The increase in the loss ratio is the
result of the following:  
    In 2004 the segment experienced increases in the cost and utilization of prescription
drugs, emergency room
services, X-ray services and major medical services. Total claims paid during 2004 for both
medical services
and prescription drug coverage increased by 8.6% and 8.2%, respectively, when compared to
2003. Claims
paid during 2004 on major medical services present an increase S11.3 million, or 55.0%,
when compared to
2003.
    Also, in 2004 the segment experienced an unfavorable development of $2.5 million on
the 2003 estimated
claims liability mostly because of higher than expected cost per service and utilization
trends. In 2003, on the
other hand, the segment experienced a favorable development of the 2002 claim liabilities
estimate of $7.1
million. The segment continues developing and implementing cost containment initiatives to control claims
trends and to
maintain them at levels consistent with pricing and margin objectives. Operating
expenses increased by $2.7 million, or 2.9%, during 2004,
sustaining an expense ratio of 13.1%
in 2004. The increase in operating expenses is mostly due to the effect of the following:  
    The business growth experienced in 2004 resulted in an increase in payroll expenses
and commissions due to
agents and brokers by $2.3 million.
    The increase in technology related expenses of $1.5 million is directly related the
segments commitment to
continuously enhance services to its members and service providers.
    During 2004, legal expenses and professional services and
consulting fees increased by $1.3 million and
$1.5 million, respectively, mostly as a result of assistance related to legal, governmental and regulatory
matters related to the segments business.
    All of these increases in 2004 were offset by a reduction in pension expense due to non-recurring pension
settlements of $4.6 million in 2003, resulting from the number of retirees selecting lump-sum benefits instead
of annuities. Year ended December 31, 2003 compared with the year ended December 31, 2002 During 2003, the Health Insurance  Commercial Program segment reported an increase of 2.4% in the amount of
premiums earned, net and fee revenue even when experiencing a slight decrease in its average enrollment. The
increase in the amount of premiums earned, net and fee revenue is due to the following:  
    The segment is constantly monitoring claims trends, particularly in the rated Corporate accounts and
Individual lines of business. This practice assures adequate premium sales that reflect the
actual claims trend
of each particular business. On average, this segment increased premium rates by 3.9%
during the year 2003.
    In addition, management service fees increased by
$l.0 million, or 9.7%, during the
year 2003. This increase
was due to an increase in membership in the Self-funded employers accounts.
    The decrease in total average enrollment of 3,865 members, or 0.6%, during the year
2003 when compared to
2002 is the result of flat employment levels in Puerto Rico during the last three years,
employers difficulty in
coping with increased premium pricing and the segments continued elimination of
unprofitable Corporate
accounts groups. The most significant decrease in enrollment is in the Corporate accounts
business, which
decreased 8,457 members, or 2.7%, during this period. This decrease is the result of the
loss of one major
account with approximately 16,000 members, net of new groups acquired during the year.
The decrease
experienced in this business is somewhat mitigated by the increase experienced in 2003 in
the Self-funded
Employers of 5,123 members, or 4.1%, since during this period certain large Corporate
accounts groups
shifted from the rated business to self-funded arrangements, assuming the risk associated
with insuring their
employees. The increase in premiums earned, net and fee revenues is attributable primarily to increased
premium sales. The claims incurred for the year 2003 were $9.6 million, or 1.7%, higher than 2002 as a
consequence of a claims trend
increase of 3.9% during the same period. The segments loss ratio reflects a decline of 0.6
percentage points during the
same period. The improvement in the loss ratio is the result of the following:  
    The overall claims trends development for the year 2003, although higher than the
trend experienced during
the year 2002, was lower than expected.
    In addition, the segment continues with cost containment
measures that have allowed cost and utilization
trends to maintain levels consistent with pricing and margin objectives. These cost
containment initiatives 6




---



##### 



have allowed the segment to maintain better utilization controls over outpatient services
and pharmacy
benefits.
    Also, the segment experienced a favorable development of $7.1 million of the
2002 claim liabilities estimate
mostly because of better than expected utilization trends. The increase in operating expenses of $5.9 million, or 6.9%, is mostly due to the recognition of
non-recurring pension
settlements of $4.6 million resulting from the number of retirees selecting lump-sum benefits
instead of annuities. In
addition, the segment experienced slight increases in the acquisition cost of business, such as
marketing and
commission expenses, and in payroll and payroll related expenses. Health Insurance  Reform Program Operating Results (Dollar amounts in thousands)
    
    2004
    
    
    2003
    
    
    2002Years ended December 31,Average enrollment:North Area

    
    
    232,956
    
    
    
    236,766
    
    
    
    251,002Metro- North Area
    
    
    217,441
    
    
    
    224,903
    
    
    
    202,028Southwest Area
    
    
    164,357
    
    
    
    168,109
    
    
    
    162,088Northwest Area
    
    
    
    
    
    
    
    
    
    
    78,168Total average enrollment
    
    
    614,754
    
    
    
    629,778
    
    
    
    693,286Premiums earned, net
    
    $
    484,742
    
    
    
    477,614
    
    
    
    487,000Claims incurred
    
    $
    437,834
    
    
    
    428,045
    
    
    
    445,039Operating expenses
    
    
    35,777
    
    
    
    34,637
    
    
    
    36,109Total underwriting costs
    
    $
    473,611
    
    
    
    462,682
    
    
    
    481,148Underwriting income
    
    $
    11,131
    
    
    
    14,932
    
    
    
    5,852Loss ratio
    
    
    90.3
    %
    
    
    89.6
    %
    
    
    91.4
    %Expense ratio
    
    
    7.4
    %
    
    
    7.3
    %
    
    
    7.4
    %Combined ratio
    
    
    97.7
    %
    
    
    96.9
    %
    
    
    98.8
    %
 General The Health Insurance  Reform segments total revenues are primarily generated from premiums
earned according to
the provisions of the Governments Reform contracts and investment income. Claims incurred include
health services
and other benefit expenses consisting primarily of payments to physicians, hospitals and other
service providers. A
portion of the claims incurred for each period consists of an actuarial estimate of claims
incurred but not reported
during the period. Operating expenses consist of disease management program, general,
depreciation, payroll and other
related expenses. The segments results of operations depend largely on its ability to accurately
predict and effectively
manage healthcare costs. Year ended December 31, 2004 compared with the year ended December 31, 2003 The
premiums earned, net of the Reform segment increased
S7.1 million, or 1.5%, during the year
2004. This increase is the result of the following:  
    During the Reform contract renegotiation process, premium rates were increased, effective July 1, 2004, by
approximately 4.4% for a twelve-month period ending June 30, 2005 and 4.2% for the twelve
month period
ended June 30, 2004.
    The average enrollment for this segment decreased by 15,024
members, or 2.4%, during
the year 2004. This
decrease is attributed to the continuous review and screening performed by the Government
of Puerto Rico
over the lists of persons eligible to participate in the Reform. The increase experienced in premiums earned, net is attributable primarily to increases in premium
rates. The increase of $9.8 million, or 2.3%, in claims incurred during the year 2004 is attributed to
the higher utilization and
costs experienced by the segment. The segment experienced an increase in utilization and some of
the risks assumed
by TSI, particularly catastrophe risks such as cardiovascular services, dialysis and obstetrics,
among others. Also, 7




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##### 



during 2004, capitation payments to IPAs increased when compared to the prior year. The segments
loss ratio also
experienced an increase (0.7 percentage points) when comparing
the year 2004 with 2003. In
addition, during 2003 the
claims incurred of the segment were affected by the favorable development of its claim liabilities,
which was attributed
to better than expected utilization trends in that particular year. Operating expenses for the year 2004 were $1.1 million, or 3.3%, higher than the operating
expenses for the year 2003.

The expense ratio also increased, from 7.3% during 2003 to 7.4% during 2004. This fluctuation is
due to the normal
inflationary effect in operational costs. Year ended December 31, 2003 compared with the year ended December 31, 2002 The premiums earned, net of the Reform segment decreased $9.4 million, or 1.9%, during the year
2003. This decrease
is the result of the following:  
    The average enrollment for this segment decreased by 63,508 members during the year
2003. This decrease
is due to the net effect of the following: the loss of the Northwest Area, which seven
municipalities were
merged into the West Area (served by another carrier) effective
July 1, 2002, and the fact
that six new
municipalities were assigned into areas serviced by the segment
effective July 1, 2002.
In addition, the
continuous review and screening performed by the Government of Puerto Rico over the lists
of persons
eligible to participate in the Reform also contributed to the decrease in membership during
this period.
    Premium rates were increased by approximately 4.2% during the Reform contract
renegotiation process for
the twelve-month period ended June 30, 2004. In addition, the premium rates for the
areas in which the
segment has experienced an increase in its average enrollment (the Metro-North and
Southwest areas) have
higher premium rates than the areas where the segment has experienced a decrease in average
enrollment. The decrease experienced in premiums earned, net is attributable primarily to the decrease in
membership. The decrease of $17.0 million, or 3.8%, in claims incurred during the year 2003 is attributed to
the decrease in volume
of business of the segment. The loss ratio also experienced a decrease (1.8 percentage points)
during the year 2003.
The decline in the loss ratio during the year 2003 is the result of increased premiums rates that
accurately reflect the actual claims trend of each area, a change in the mix of membership within the areas served by the
segment and claims
cost containment measures established throughout the years. Operating expenses for the year 2003 were $1.5 million, or 4.1%, lower than the operating expenses
for the year 2002.
This decrease is the result of the segments decreased membership in the year 2003. The expense
ratio for the year
2003 declined by 0.1 percentage points due to a reduction in certain non-recurring expenses
incurred in the year 2002. 8




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##### 



Property And Casualty Insurance Operating Results (Dollar amounts in thousands)
    
    2004
    
    
    2003
    
    
    2002Years ended December 31,Premiums written:Commercial multiperil
    
    $
    56,506
    
    
    
    54,986
    
    
    
    48,640Dwelling
    
    
    28,323
    
    
    
    22,624
    
    
    
    17,165Auto physical damage
    
    
    18,922
    
    
    
    15,821
    
    
    
    16,918Commercial auto liability
    
    
    14,082
    
    
    
    12,753
    
    
    
    10,823Other liability
    
    
    8,485
    
    
    
    6,522
    
    
    
    5,532Medical malpractice
    
    
    6,499
    
    
    
    5,986
    
    
    
    5,857All other
    
    
    9,057
    
    
    
    9,435
    
    
    
    7,346Total premiums written
    
    
    141,874
    
    
    
    128,127
    
    
    
    112,281Premiums ceded
    
    
    (52,215
    )
    
    
    (43,771
    )
    
    
    (39,806
    )Change in unearned premiums
    
    
    (3,431
    )
    
    
    (6,022
    )
    
    
    (11,787
    )Net premiums earned
    
    $
    86,228
    
    
    
    78,334
    
    
    
    60,688Claims incurred
    
    $
    45,977
    
    
    
    43,390
    
    
    
    34,334Operating expenses
    
    
    40,182
    
    
    
    37,354
    
    
    
    25,549Total underwriting costs
    
    $
    86,159
    
    
    
    80,744
    
    
    
    59,883Underwriting income (loss)
    
    $
    69
    
    
    
    (2,410
    )
    
    
    805Loss ratio
    
    
    53.3
    %
    
    
    55.4
    %
    
    
    56.6
    %Expense ratio
    
    
    46.6
    %
    
    
    47.7
    %
    
    
    42.1
    %Combined ratio
    
    
    99.9
    %
    
    
    103.1
    %
    
    
    98.7
    %
 General The
property and casualty insurance segments total revenues are primarily generated from net
premiums earned and
investment income. Claims incurred are composed of losses and loss-adjustment expenses. A portion
of the claims
incurred for each period consists of an estimate of unreported losses to the segment during the
period. Operating
expenses consist of general, commissions, depreciation, payroll and other related expenses. Year ended December 31, 2004 compared with the year ended December 31, 2003 Total premiums written for the year ended December 31, 2004 increased by $13.7 million, or 10.7%,
when compared
to the total premiums written for the year 2003. This increase is mostly reflected in the premiums
written for the
dwelling, auto physical damage and other liability lines of business, which experienced an
increase in premiums of
$5.7 million, or 25.2%, $3.1 million, or 19.6%, and
$2.0 million, or 30.1%, during this period,
respectively. The
strengthening of business relationships with financial institutions has resulted in additional
growth in the dwelling line
of business. The commercial auto, including auto physical damage coverage, and other liability
lines of business have
been targeted for growth through new business. The increase experienced in net premiums earned is mainly attributable to an increase in the
segments volume of
business. Premiums ceded to reinsurers during the year 2004 increased by $8.4 million, or 19.3%, when
compared to 2003. The
ratio of premiums ceded to total premiums written reflects an increase of 2.6 percentage points,
from 34.2% in 2003 to
36.8% in 2004. The increase in the ratio of premiums ceded to total premiums written is the net
result of several
factors:  
    In 2004, the segment experienced increased costs for catastrophe coverage as well as
the need to compensate
for the coverage increase in the property business.
    The amount of premiums ceded in the 2003 period was reduced as a result of the
cancellation of the property
surplus treaty. This cancellation resulted in a reinsurance portfolio transfer resulting in
net incoming business
and a reduction in the amount of premiums ceded. 9




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##### 




    During 2003 the segment increased its retention in the personal lines quota share treaty
from 70% to 95%. In
addition, as a result of the increased retention, the segment received an incoming
reinsurance portfolio
transfer causing a reduction in the premiums ceded in the 2003 period. The decrease in the change in unearned premiums of $2.6 million is also primarily due to the effect
of the reinsurance
portfolio transfers done during the year 2003 as well as to the changes in the mix of the business
subscribed. Claims incurred increased by $2.6 million, or 6.0%, when comparing the claims incurred during 2004
with the claims
incurred in the year 2003. This increase is primarily due to incurred losses from the passing of
Tropical Storm Jeanne
in September 2004. Net incurred losses reported for Tropical Storm Jeanne amounted to $2.1 million.
The loss ratio,
on the other hand, experienced a decrease of 2.1 percentage points during the year 2004 as compared
to the prior year
since the segments loss experience was lower in the commercial multiperil and auto insurance lines
of business. The
auto insurance lines of business experienced an improvement in its loss ratio in both the physical
damage and liability
business. The operating expenses for the year 2004 increased by $2.8 million, or 7.6%, when compared to the
operating expenses
for the year 2003. The expense ratio however, experienced a decrease of 1.1 percentage point during the year 2004.
The fluctuation in the operating expenses and the expense ratio is, among other things:  
    The effect of an increase in commission expense due to the segments increased volume of business
    During 2004, the segment recorded a guaranty fund assessment to cover liabilities of insolvent companies.
This assessment, which amounted to $871 thousand, was charged to operations during 2004.
    The experience refund received from the Compulsory Vehicle
Liability Insurance Joint Underwriting Association increased by $202 thousand, from $633 thousand during 2003 to $840 thousand during 2004.
This refund is recorded as a decrease to the operating expenses for the period. Year ended December 31, 2003 compared with the year ended December 31, 2002 Total premiums written for the year ended December 31, 2003 were $15.8 million, or 14.1%, higher than the total
premiums written for the year 2002. This increase in total premiums written was mostly reflected in the growth
experienced by the following lines of business:  
    As planned by the segment, the line of business with the largest growth was the commercial multiple peril
line, where premiums written increased by $6.3 million, or 13.0%, during the year 2003.
This increase was
due to the production of new business since premium rates for this line have remained
consistent throughout
the year.
    Dwelling premiums also contributed to this years increase in premiums written, as the
premiums of this line
increased by $5.5 million, or 31.8%. During 2003, the property and casualty segment devoted
great efforts to
strengthen lies with its financial institution partners. As a consequence of the new
environment resulting
from the Graham, Leach, Bhley Act, financial institutions have established their presence
in the marketplace
as general agents and/or producers. The segment was actively involved with these
institutions with specific
and tailor-made initiatives that have produced positive results. Approximately 90.0% of the increase in total premiums written was due to an increase in the
segments volume of
business. The remaining 10.0% was attributable to increases in premium rates. Premiums ceded to reinsurers during the year 2003 reflect an increase of $4.0 million, or 10.0%
that was attributed to
the segments increased volume of business. The ratio of premiums ceded to total premiums written,
however, reflects
a decrease of 1.3 percentage points. The decline in the ratio of premiums ceded to total premiums
written was the net
result of several factors:  
    The segment changed its major reinsurance vehicle for its commercial property business
from a property first
surplus treaty to a quota share arrangement.
    During the 2003 reinsurance contract renewal process, the segment cancelled a
commercial surplus
reinsurance treaty. This cancellation propitiated a reinsurance portfolio transfer that resulted in the
reacquisition of business previously ceded, and, accordingly, a reduction in premiums ceded.
    The segment altered its catastrophe reinsurance program establishing, up to certain layers of protection,
separate towers for commercial and personal business.
    In addition, the segment acquired additional catastrophe protection as a result of
increased premium volume
projections. 10




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##### 



Claims incurred increased during 2003 $9.1 million, or 26.4% primarily as a result of the
segments increased volume of business. The segments loss ratio however, declined by 1.2
percentage points during the same period. The decline in the loss ratio was mostly the result of
favorable underwriting results in the commercial multiperil line of business (principally due to
the portfolio quality and maturity), a change in the mix of business subscribed and an increased
retention of the segments profitable lines of business, which
increased the premiums earned base.
Also, the auto liability line of business experienced an improvement in its loss ratio as a result
of premium rate increases and reserve releases. The operating expenses increased by $11.8 million during the year 2003. The expense ratio
experienced an increase of 5.6 percentage points in 2003. The increase in the operating expenses
and the expense ratio was, among other things, the net effect of an increase in commission expense
due to the segments increased volume of business and a decrease in the reinsurance commission
income from reinsurance treaties. In addition, during the year 2003 the segment experienced an
increase in certain non-recurring expenses, such as an assessment from a guarantee association and
consulting services, among others. Liquidity And Capital Resources Cash Flows The Corporation maintains good liquidity measures due to the quality of its assets, the
predictability of its liabilities, and the duration of its contracts. The liquidity of the
Corporation is primarily derived from the operating cash flows of its insurance subsidiaries. As of December 31, 2004 and 2003, the Corporations cash and cash equivalents amounted to $ 35.1
million and $47.7 million, respectively. Sources of funds considered in meeting the objectives of
the Corporations operations include cash provided from operations, maturities and sales of
securities classified within the trading and available-for-sale portfolios, securities sold under
repurchase agreements, and issuance of long and short-term debt. Net cash flows from
operations are expected to sustain operations for the next year and
thereafter, as long as the operations continue showing positive results. In addition, the
Corporation monitors its premium rates and its claims incurred to ascertain proper cash flows and
has the ability to increase premium rates throughout the year in the monthly renewal process. Cash Flows from Operations Most of the cash flows from
operating activities are generated from the insurance subsidiaries.
The basic components of the cash flows from operations are premium collections, claims payments
less reinsurance premiums, maturities or sales and purchases of trading securities, and payment of
operating expenses. Net cash flows provided by operating activities amounted to $8.8 million, $10.1 million and $56.8
million as of December 31, 2004, 2003 and 2002, respectively, a decrease of $1.3 million and $46.7
million in 2004 and 2003, respectively. The fluctuation in cash flows provided by operating
activities is mainly attributed to the net effect of the following:  
    Increase in collections of premiums of $35.3 million in 2004 and $30.5 million in
2003. The increase in premium collections is the result of the increased premium rates and increased volume of
business of the operating segments.
    Increase of $13.2 million in 2004 and $17.8 million in 2003 in the amount of cash
paid to suppliers and employees. This increase is basically attributed to additional commission expense
generated from the acquisition of new business and general operating expenses.
    Increase of $26.3 million and $15.5 million in 2004
and 2003, respectively, in the
amount of claims losses and benefits paid. In both years the increase in the amount of claims losses and benefits
paid is mostly the result of the segments increased volume of business as well to the Health Insurance
segments increased costs per service and higher utilization trends.
    Increase in income taxes paid of $5.4 million in 2004
and $38.9 million in 2003. The
increase in the amount of income taxes paid is mostly the result of payments to the PRTD in
accordance with the closing agreement executed in 2003. The first installment stipulated in the closing agreement, amounting to
$37.0 million was made on July 31, 2003. The second
installment of the closing agreement, amounting to $14.8
million, was made on April 15, 2004. In addition, during 2004 TSI made a payment of $17.8 million
corresponding to its income tax liability for the year 2003 and
estimated income tax payments amounting to $10.4
million. 11




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##### 




    In addition, during the year 2004 the amount of net acquisitions of
investments in the trading portfolio
decreased by $12.3 million. In 2003, the amount of net acquisitions
of investments in the trading portfolio
increased by $ 14.2 million.
    The contingency reserve funds payment from the Federal Employee Health Benefit Plan decreased by
$7.8 million in 2004. During the year 2003, the contingency reserve funds payment was $7.0 million more
than the payment received during the prior year. The amount collected
from the contingency reserve funds of
the FEHBP was $5.2 million, $13.0 million and $6.0 million during
2004, 2003 and 2002, respectively. This
fluctuation is related to the results of operations of the program
during each particular year. This excess liquidity is available, among other things, to invest in high
quality and diversified fixed income securities and, to a lesser degree,
to invest in marketable equity securities. Cash Flows from Investing Activities The basic components of the cash flows from investing activities is
derived from acquisitions and proceeds from investments in the
available-for-sale and held-to-maturity portfolios, and capital
expenditures. The Corporation monitors the duration of its investment
portfolio and executes purchases and sales of these investments with the
objective of having adequate asset allocation within different sectors and
to have funds available, when necessary, to satisfy any maturing
liability. Net cash flows used in
investing activities amounted to $45.0 million,
$90.6 million and $43.5 million as of December 31, 2004,
2003 and 2002,
respectively. The cash flows used in investing activities during these
years was mainly due to the investment of the excess cash generated from
the operations and reinvestment of securities called or matured during the
same period. Total acquisition of investments exceeded the proceeds from
investments sold or matured by $41.5 million and $87.5 million during the
years 2004 and 2003, respectively. Cash Flows from Financing Activities Net cash flows provided by (used in) financing activities amounted to
$23.5 million, $45.5 million and $(11.5) million for the years ended
December 31, 2004, 2003 and 2002, respectively. The decrease of $22.0
million during the year 2004 and the increase of $57.0 million during the
year 2003 in the cash flows from financing activities are due to the
effect of the following fluctuations:  
    The change in outstanding checks in excess of
bank balances increased by $9.5 million during the year 2004 and decreased by $1.7 during the year 2003. This represents a timing
difference between the issuance of
checks and the cash balance in the bank account at one point in time.
    Total debt repayments amounted to $39.6
million, $1.6 million and $5.6 million during the years 2004, 2003
and 2002, respectively. The increase of $38.0 million in debt
repayments during 2004 is due to the
repayment of short-term borrowings amounting to $37.0 million as well
as to the scheduled payment of $1.0
million that was done on one of the credit agreements. The decrease
of $4.0 million in debt repayments
during 2003 is due to the additional repayments made during the year
2002 over the scheduled principal
payments of the credit agreements. During the year 2003, the
Corporation made only the principal payments
scheduled in the credit agreements.
    Total debt proceeds amounted to $50.0 million
and $38.7 million during the years 2004 and 2003. There
were no debt proceeds during the year 2002. In 2004, the
Corporation received proceeds from the senior
unsecured notes amounting to $50.0 million. In 2003, the
Corporation received $38.7 million from the
issuance of short-term borrowings. This represents an increase of
$11.3 million in the amount of proceeds
received from the issuance of debt.
    The amount of net proceeds (surrenders) of
annuity contracts during the years 2004, 2003 and 2002
amounted to $6.4 million, $11,2 million and $(l.5) million,
respectively. This fluctuation is basically due to
the Corporations new deferred annuity product introduced in late
2002. Financing and Financing Capacity The Corporation has significant short-term liquidity supporting its
businesses. It also has available short-term borrowings that from time to
time address timing differences between cash receipts and disbursements.
These short-term borrowings are mostly in the form of securities sold under
repurchase agreements. As of December 31, 2004, the Corporation had $227.5
million in available credit on these agreements. Outstanding short-term
borrowings as of December 31, 2004 amount to $1.7 million. The amount due
under outstanding short-term borrowings is expected to be paid out of the
operating and investing cash flows of the Corporation. In September 30, 2004 TSI issued and sold $50.0 million of its 6.30% senior
unsecured notes due September 2019 (the notes). The notes are
unconditionally guaranteed as to payment of principal, premium, if any, and
interest by the 12




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##### 



Corporation. The notes were privately placed to various institutional investors under a note
purchase agreement among TSI, the Corporation and the investors. The notes pay interest
semiannually beginning on March 2005, until such principal becomes due and payable. The notes
contain certain covenants with which TSI and the Corporation have complied with at December 31,
2004. Most of the proceeds obtained from this issuance were used to repay $37.0 million of
short-term borrowings made by TSI. The remaining proceeds were used for general business purposes. In addition, the Corporation
has two credit agreements with a commercial bank, FirstBank Puerto
Rico. These credit agreements bear interest rates determined by the London Interbank Offered Rate
(LIBOR) plus a margin specified at the time of the agreement. As of December 31, 2004, the two
credit agreements have outstanding balances of $30.7 million and $15.0 million and average annual
interest rates of 3.30% and 3.32%, respectively. The first agreement stipulates monthly principal
repayment of $137 thousand. The second agreement stipulates repayments of principal amounts of not
less than $250 thousand and in integral multiples of $50 thousand. The aggregate principal amounts
of this credit agreement shall be reduced annually to the amounts specified on or before the dates
described below: Required PrincipalOutstandingDate
    
    Balance(amounts in thousands)August 1, 2005
    
    $
    13,500August 1, 2006
    
    
    12,000August 1, 2007
    
    
    
 These credit agreements are guaranteed by a first position on the Corporation land, building, and
substantially all leasehold improvements, as collateral for the term of the agreements under a
continuing general security agreement. These credit facilities contain certain covenants which are
normal in this type of facility. As of December 31, 2004, management believes the Corporation is
in compliance with these covenants. Failure to meet these covenants may trigger the accelerated
payment of the credit agreements outstanding balance. Principal
repayments on these loans are
expected to be paid out from the operating and investing cash flows of the Corporation. The Corporation continually
monitors existing and alternative financing sources to support its
capital and liquidity needs. Planned Capital Expenditures To provide for the future growth of its operations, the Corporation is planning the construction,
on land already owned, of a new six-floor building that will basically house the operations of
some divisions of TSI and STS and the operations of ISI, including
its mainframe facilities. ISIs
mainframe facilities are currently located in leased property that will be vacated once the
project is completed. In addition, as part of this project the Corporation is also planning the
construction of a multi-level parking building which will add approximately 500 parking spaces.
This project is expected to be completed during the year 2007-2008. The cost of this project is
estimated at approximately $22.0 million and is expected to be financed using credit facilities
available to the Corporation. Contractual Obligations The Corporations contractual obligations impact its short and long-term liquidity and capital
resource needs. However, the Corporations future cash flow prospects cannot be reasonably
assessed based on such obligations. Future cash outflows, whether contractual or not, will vary
based on our future needs. While some cash outflows are completely fixed (such as commitments to
repay principal and interest on borrowings), the reality is that most
are dependent on future
events (such as the payout pattern of claim liabilities which have been incurred but not
reported). The following table includes the aggregated information about the Corporations contractual
obligations. The information presented in the table includes payments
due under specified
contractual obligations, aggregated by type of contractual obligation, including the maturity
profile of the Corporations debt, operating leases and other long-term liabilities. The table
below excludes an estimate of the future cash outflows related to the following long-term
liabilities:  
    Annuity contracts  The cash outflows related to these
instruments are not included
since these annuities do not have defined maturities, such that the timing of payments
and withdrawals is uncertain. There are currently no annuities in paying status. 13




---



##### 




    Pension plan contributions  Pension plan contributions arc excluded
from the following table since the estimated amount of pension
contributions are subject to change in view of the fact that
contribution decisions are affected by various factors such as market
performance, regulatory and legal requirements and plan funding
policy.
    Other long-term liabilities  Due to the indeterminate nature of their
cash outflows, certain categories of other long-term liabilities are
not included in the following table. These include deferred tax
liability and other miscellaneous long-term liabilities. Contractual Obligations by year(Dollar amounts in thousands)
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong-term
borrowings (1)
    
    $
    142,193
    
    
    
    6,290
    
    
    
    6,290
    
    
    
    16,790
    
    
    
    4,790
    
    
    
    4,790
    
    
    
    103,243Operating leases
    
    
    9,029
    
    
    
    3,441
    
    
    
    2,393
    
    
    
    1 ,693
    
    
    
    481
    
    
    
    266
    
    
    
    755Purchase obligations (2)
    
    
    18,998
    
    
    
    16,271
    
    
    
    1,052
    
    
    
    984
    
    
    
    437
    
    
    
    254
    
    
    
    Claim liabilities (3)
    
    
    252,770
    
    
    
    190,278
    
    
    
    26,779
    
    
    
    11,684
    
    
    
    8,754
    
    
    
    7,768
    
    
    
    7,507$
    422,990
    
    
    
    216,280
    
    
    
    36,514
    
    
    
    31,151
    
    
    
    14,462
    
    
    
    13,078
    
    
    
    111,505
  (1)
    As of December 31, 2004, the Corporations
long-term borrowings consist of $50.0 million of the senior unsecured
notes payable and $45.7 million of loans payable to a commercial
bank. Total contractual obligations for long-term borrowings include
the current maturities of long term debt. The $50.0 million senior
unsecured notes have a fixed interest rate of 6.30%; scheduled
interest payments (amounting to $46.5 million) were included in the
total contractual obligations for long-term borrowings until the
notes due date in 2019. According to the terms of the notes,
prepayments can be made from September 2007 on; however no prepayment
is considered in this schedule. No interest payments were included
for the Corporations loans payable due to its variable interest rate
structure.(2)
    Purchase obligations represent payments required by
the Corporation under material agreements to purchase goods or
services that are enforceable and legally binding and where all
significant terms are specified, including: quantities to be
purchased, price provisions and the timing of the transaction. Other
purchase orders made in the ordinary course of business are excluded
from the table above. Any amounts for which the Corporation is liable
under purchase orders are reflected in the audited consolidated
balance sheets as accounts payable and accrued liabilities.(3)
    Claim liabilities represent the amount of claims
processed and incomplete of the Corporation as well as an estimate of
the amount of incurred but not reported claims and loss-adjustment
expenses. This amount does not include an estimate of claims to be
incurred subsequent to December 31, 2004. The expected claims payments
of the health insurance, property and casualty insurance and group
life insurance were estimated using claims payment experience. The
expected claims payments of the long-term disability insurance were
estimated using actuarial estimates of expected pay-outs of those
policies on which we already are making periodic payments. The
expected claims payments are an estimate and may not necessarily
present the actual claims payments to be made by the Corporation.
Also, the estimated claims payments included in the table above do not
include $26.6 million of reserves ceded under reinsurance contracts.
As of December 31, 2004, the Corporations ceded reserves are included
within the reinsurance recoverable balance in the consolidated
financial statements. Since reinsurance contracts do not relieve the
Corporation from its obligations to policyholders, in the event that
any of the reinsurance companies is unable to meet its obligations
under the existing reinsurance agreements, the Corporation would be
liable for such defaulted amounts. The Corporation monitors the
solvency of its reinsurance carriers and does not believe the risk of
insolvency is significant. As of December 31, 2004, the Corporation had $227.5 million in available
credit in various financial institutions, all of which expire within one
year. These short-term borrowings are mostly in the form of securities sold
under repurchase agreements. As of December 31, 2004, outstanding
short-term borrowings under these agreements amount to $ 1.7 million and
are expected to be paid out of the operating and investing cash flows of
the Corporation. Since the commitment associated with these financing
arrangements may expire unused, other than the outstanding balance as of
year-end, these amounts do not necessarily reflect actual future cash
outflow requirements. Off-Balnnce Sheet Arrangements The Corporation does not have any material off-balance sheet arrangements,
trading activities involving non-exchange related contracts accounted for
at fair value or relationships with persons or entities that derive
benefits from a non-independent relationship with the Corporation or the
Corporations related parties. 14




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##### 



Restriction on Certain Payments by the Corporation The Corporation has not distributed dividends by virtue of resolution of its shareholders.
However, on April 27, 2003, at its Annual Meeting, a resolution was approved by the Shareholders
acknowledging that the Board of Directors (the Board) may declare dividends subject to the Boards
determination that in their best judgment the payment of dividends is financially and legally
feasible. TSMs insurance subsidiaries are subject to the regulations of the Commissioner of Insurance of the
Commonwealth of Puerto Rico. These regulations, among other things, require insurance companies to
maintain certain levels of capital; therefore, restricting the amount of earnings that can be
distributed. As of December 31, 2004, the insurance subsidiaries were in compliance with such
minimum capital requirements. These regulations are not directly applicable to TSM, as a holding
company, since it is not an insurance company. The regulations applicable to insurance subsidiaries
are not expected to affect their ability to distribute dividends to TSM. The credit agreements restrict the amount of dividends that TSM and its subsidiaries can declare
or pay to stockholders. According to the credit agreements, the dividend payment cannot exceed the
accumulated retained earnings of the paying entity. None of the previously described dividend restrictions are expected to have a significant effect
on TSMs ability to meet its cash obligations. Solvency Regulation To monitor the solvency of the operations, the Blue Cross and Blue Shield Association (BCBSA)
requires TSM and TSI to comply with certain specified levels of Risk
Based Capital (RBC). RBC is
designed to identify weakly capitalized companies by comparing each companys adjusted surplus to
its required surplus (RBC ratio). The RBC ratio reflects the risk profile of insurance companies.
At December 31, 2004, both entities had a RBC ratio above the level required by BCBSA. Other Contingencies  (1)
    Legal Proceedings Various litigation claims and assessments against the Corporation
have arisen in the course of the Corporations business,
including but not limited to, its activities as an
insurer and employer. Furthermore, the Commissioner of Insurance of the Commonwealth of Puerto
Rico, as well as other Federal and Puerto Rico government authorities regularly make inquiries and
conduct audits concerning the Corporations compliance with applicable insurance and other laws and
regulations. Based on the information currently known by the Corporations management, in its
opinion, the outcomes of such pending investigations and legal proceedings are not
likely to have a material adverse effect on the Corporations financial position,
results of operations and cash flows. However, given the inherent unpredictability of
these matters, it is possible that an adverse outcome in certain matters could, from
time to time, have an adverse effect on the Corporations operating results and/or
cash flows (see Item 3. Legal Proceedings).  (2)
    Guarantee Association  To operate in Puerto Rico, insurance companies, such as
TSMs insurance subsidiaries, are required to participate in guarantee associations, which are
organized to pay policyholders contractual benefits on behalf of insurers declared to be insolvent.
These associations levy assessments, up to prescribed limits, on a proportional basis, to all member
insurers in the line of business in which the insolvent insurer was engaged. During the years 2004, 2003 and
2002, the Corporation paid assessments in connection with insurance companies declared insolvent
in the amount of $1.1 million, $500 thousand and $654 thousand, respectively. It is the opinion of
management that any possible future guarantee association assessments will not have a material
effect on the Corporations operating results and/or cash flows.(3)
    Pursuant to the Puerto Rico Insurance Code, the property and casualty insurance segment
is a member of Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de Responsabilidad
Profesional
Médico-Hospitalaria (SIMED) and of the Sindicato de
Ascguradores de Responsabilidad
Professional
para Médicos. Both syndicates were organised for the purpose of underwriting
medical-hospital
professional liability insurance. As a member, the segment shares risks with other
member companies
and, accordingly, is contingently liable in the event the previously mentioned
syndicates cannot meet their obligations. During 2004, 2003 and 2002, no assessment or payment was made for
this contingency. 15




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##### 



In addition, pursuant to Article 12 o Rule LXIX of the Insurance Code, the property
and casualty insurance segment is a member of the Compulsory Vehicle Liability Insurance
Joint Underwriting Association (the Association). The Association was organized during
1997 to underwrite insurance coverage of motor vehicle property damage liability risks
effective January 1, 1998. As a participant, the segment shares the risk, proportionally
with other members, based on a formula established by the Insurance Code. During the
three-year period ended December 31, 2004, the Association distributed experience refunds.
The segment received refunds amounting to $840, $638, and $565 in 2004, 2003, and 2002,
respectively. Critical Accounting Estimates The Corporations consolidated financial statements and accompanying notes have been prepared
in accordance with generally accepted accounting principles applied on consistent basis. The
preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. The Corporation continually evaluates the accounting policies and estimates it uses to prepare the
consolidated financial statements. In general, managements estimates are based on historical
experience and on various other assumptions that are believed to be reasonable under the facts and
circumstances. Actual results could differ from those estimates made by management. The policies discussed below are considered by management to be critical to an understanding of
the Corporations financial statements because their application places the most significant
demands on managements judgment, with financial reporting results relying on estimation about the
effect of matters that are inherently uncertain. For all these policies, management cautions that
future events may not necessarily develop as forecast, and that the best estimates routinely
require adjustment. Management believes that the amounts provided for these critical accounting
estimates are adequate. Claim Liabilities The Corporation recognizes claim liabilities for all its insurance subsidiaries as follows:  
    Claims processed and incomplete for the health insurance segments represent the estimated
amounts to be paid to providers based on experience, modified to reflect current trends,
and accumulated statistical data. Loss-adjustment expenses related to such claims are
accrued based on estimated future expenses necessary to process such claims.
    Claims processed and incomplete and loss-adjustment expenses of the property and casualty
insurance segment represents the individual case estimate for reported claims and estimates
for unreported losses, net of any salvage and subrogation as well as an estimate of expenses
for investigating and settling claims. These estimates are based on analysis of prior loss
experience modified for current trends.
    Claims processed and incomplete of the life and disability insurance segment are based on
the amount of benefits contractually determined for reported claims and on estimates for
unreported claims. These estimates are based on analysis of prior loss experience
modified for current trends. Claim liabilities amounted to $279.3 million as of December 31, 2004; of that total, $127.3
million are related to unreported losses and $14.7 million are related to unpaid loss-adjustment
expenses. The remaining balance corresponds to claims processed and incomplete. Management continually evaluates the potential for changes in its claim liabilities estimates,
both positive and negative, and uses the results of these evaluations both to adjust recorded
claim liabilities and to adjust underwriting criteria. The Corporations profitability depends in
large part on accurately predicting and effectively managing the amount of claims incurred,
particularly those of the health insurance segments and the losses arising from the property and
casualty insurance segment. Management regularly reviews its premiums and benefits structure to
reflect the Corporations underlying claims experience and revised actuarial data, however,
several factors could adversely affect the Corporations underwriting. Some of these factors are
beyond management control and could adversely affect its ability to accurately predict and
effectively control claims incurred. Examples of such factors include changes in health practices,
economic conditions, the advent of natural disasters, and malpractice litigation. Costs in excess
of those anticipated could have a material adverse effect on the Corporations results of
operations. 16




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##### 



Impairment of Investments A decline in the estimated fair value of any available for sale or held to maturity security below
cost, which is deemed to be other than temporary, results in a reduction of the carrying amount to
its fair value. The impairment is charged to operations and a new cost basis for the security is
established. Management regularly reviews each investment security for impairment based on
criteria that include the extent to which cost exceeds estimated fair value, the duration of the
estimated fair value decline and the financial health and specific prospects for the issuer.
Management regularly performs market research and monitors market conditions in order to minimize
impairment risk. Investment in securities amounted to $677.1 million as of December 31, 2004.
Gross unrealized gains and losses included in that carrying amount related to fixed maturity
securities amounted to $4.7 million and $2.5 million, respectively. Gross unrealized gains and
losses on equity securities, classified as securities held for trading and securities held as
available for sale, amounted to $38.4 million and $1.8 million, respectively. Management believes
that none of the securities whose carrying amount exceeds its estimated fair value at December 31,
2004 is permanently impaired as of that date; however, several factors are beyond managements
control such as the following: financial condition of the issuer, movement of interest rates,
among others. During the year 2002, the Corporation recognized an other than temporary impairment
on one of its available for sale securities amounting to $311 thousand. No other than temporary
impairment was recognized in during the years 2004 and 2003. A detail of the gross unrealized
losses on investment securities and the estimated fair value of the related securities, aggregated
by investment category and length of time that individual securities have been in a continuous
unrealized loss position as of December 31, 2004 and 2003 is included in note 3 to the
consolidated financial statements. Allowance for Doubtful Receivables The Corporation estimates the amount of uncollectible receivables in each period and establishes
an allowance for doubtful receivables. The amount provided is based on managements continuous
evaluation of the aging of accounts receivable and such other factors that deserve current
recognition. A change in the level of uncollectible accounts could have a significant effect on
the Corporations results of operations. The allowance for doubtful receivables amounted to $ 11.2
million and $9.0 million as of December 31, 2004 and 2003, respectively. Other Significant Accounting Policies The Corporation has other significant accounting policies that do not involve the same degree of
measurement uncertainty as those discussed above, that are nevertheless important to an
understanding of the financial statements. These significant accounting policies are disclosed in
note 2 of the notes to the audited consolidated financial statements. Recently Issued Accounting Standards FASB Statement No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No.29, was
issued in December 2004. This Statement amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges on nonmonetary assets that do not have commercial substance. The Corporation is required
to adopt this Statement on January 1, 2006. The adoption of this Statement is not expected to have
any impact on the Corporations financial statements. 
 Quantitative and Qualitative Disclosures About Market Risk. The Corporation is exposed to certain market risks that are inherent in the Corporations
financial instruments, which arise from transactions entered into in the normal course of
business. The Corporation does not enter into derivative financial instrument transactions to
manage or reduce market risk or for speculative purposes, but is subject to market risk on certain
of its financial instruments. The Corporation must effectively manage, measure, and monitor the
market risk associated with its invested assets and interest rate sensitive liabilities. It has
established and implemented comprehensive policies and procedures to minimize the effects of
potential market volatility. Market Risk Exposure The Corporation has exposure to market risk mostly in its investment activities. For purposes of
this disclosure, market risk is defined as the risk of loss resulting from changes in interest
rates and equity prices. Analytical tools and monitoring systems are in place to assess each one
of the elements of market risks. As in other insurance companies, investment activities are an integral part of the Corporations
business. Insurance statutes regulate the type of investments that the insurance segments are
permitted to make and limit the amount of funds that may be invested in some types of securities.
The Corporation has a well-diversified investment portfolio with good asset quality and a large
portion invested in Investment-grade, fixed income securities. 17




---



##### 



The Corporations investment philosophy is to maintain a largely investment-grade fixed income
portfolio, provide adequate liquidity for expected liability durations and other requirements, and
maximize total return through active investment management. The Corporation evaluates the interest rate risk of its assets and liabilities regularly, as well
as the appropriateness of investments relative to its internal investment guidelines. The
Corporation operates within these guidelines by maintaining a well-diversified portfolio, both
across and within asset classes. Investment decisions are centrally managed by investment
professionals based on the guidelines established by management. The Corporation has a Finance
Committee, composed of members of the Board of Directors, which monitors and approves investment
policies and procedures. The investment portfolio is managed following those policies and
procedures. The Corporations investment portfolio is predominantly comprised of U.S. treasury securities,
obligations of U.S. government instrumentalities, obligations of state and political subdivisions,
and obligations of the Commonwealth of Puerto Rico and its instrumentalities, which comprise
approximately 70% of the total portfolio value in the year 2004. Of this 70% of total portfolio
value, approximately 9% is composed of U. S. agency-backed mortgage backed securities and
collateralized mortgage obligations. The remaining balance of the investment portfolio consists of
an equity securities portfolio that replicates the S&P 500 Index, a large-cap growth index, a
large-cap value index, a corporate bonds portfolio, mutual funds, and investments in strong local
stocks from well-known financial institutions. The Corporation measures market risk related to its holdings of invested assets and other
financial instruments utilizing a sensitivity analysis. This analysis estimates the potential
changes in fair value of the instruments subject to market, risk. The sensitivity analysis was
performed separately for each of the Corporations market risk exposures related to its trading
and other than trading portfolios. This sensitivity analysis is an estimate and should not be
viewed as predictive of the Corporations future financial performance. The Corporation cannot
assure that its actual losses in any particular year will not exceed the amounts indicated in the
following paragraphs. Limitations related to this sensitivity analysis include:  
    The market risk information is limited by the assumptions and parameters established in
creating the related sensitivity analysis, including the impact of prepayment rates on
mortgages;
    The model assumes that the composition of assets and liabilities remains unchanged throughout
the year. Accordingly, the Corporation uses such models as tools and not as a substitute for the experience
and judgment of its management and Board of Directors. Interest Rate Risk The Corporations exposure to interest rate changes results from its significant holdings of
fixed maturity securities. Fixed maturities include U.S. and Puerto Rico government bonds,
securities issued by government agencies, corporate bonds and mortgage-backed securities.
Investments subject to interest rates risk are located within the Corporations trading and
other-than-trading portfolios. The Corporation is also exposed to interest rate risk from its two
variable interest credit agreements and from its annuity contracts. Equity Price Risk The Corporations investments in equity securities expose it to equity price risks, for which
potential losses could arise from adverse changes in the value of equity securities. Financial
instruments subject to equity prices risk are located within the Corporations trading and
other-than-trading portfolios. Risk Measurement Trading Portfolio The Corporations trading securities are a source of market risk. As of December 31, 2004, the
Corporations trading portfolio is composed of investments in publicly traded common stock
(approximately 54% of total trading portfolio value) and investments in corporate bonds
(approximately 30% of total trading portfolio value). The remaining balance of the trading
portfolio is comprised of U.S. Treasury securities and obligations of U.S. government
instrumentalities. The securities in the trading portfolio are high quality, diversified across
industries and readily marketable. Trading securities are recorded at fair value; changes in the
fair value of these securities are included in operations. The fair value of the investments in
trading securities is exposed to both interest rate risk and equity price risk. 18




---



##### 



(1)
    Interest Rate Risk  The Corporation has evaluated the net impact to the fair value
of its fixed income investments using a combination of both statistical and fundamental methodologies. From
these shocked values, a resultant market price appreciation/depreciation can be determined
after portfolio cash flows are modeled and evaluated over an instantaneous 100, 200 and 300
basis points (bp) rate shifts. Techniques used in the evaluation of cash flows include
Monte Carlo simulation through a series of probability distributions over 200 interest rate
paths. Necessary prepayment speeds are compiled using Salomon Brothers Yield Book, which
sources numerous factors in deriving speeds, including but not limited to: historical
speeds, economic indicators, street consensus speeds, etc. Securities evaluated under the
aforementioned scenarios include mostly private label structures, provided that cash flows
information is available. The following table sets forth the result of this analysis for
the years ended December 31, 2004 and 2003. (Dollar amounts in thousands)Expected
    
    
    Amount of
    
    
    %Change in Interest Rates
    
    Fair Value
    
    
    Decrease
    
    
    ChangeDecember 31, 2004:Base Scenario
    
    $
    72,423+100bp
    
    $
    68,862
    
    
    
    (3,561
    )
    
    
    (4.92
    )%+200 bp
    
    $
    65,655
    
    
    
    (6,768
    )
    
    
    (9.35
    )%+300 bp
    
    $
    62,751
    
    
    
    (9,672
    )
    
    
    (13.35
    )%December 31, 2003:Base Scenario
    
    $
    68,681+100 bp
    
    $
    65,095
    
    
    
    (3,586
    )
    
    
    (5.22
    )%+200 bp
    
    $
    61,821
    
    
    
    (6,860
    )
    
    
    (9.99
    )%+300 bp
    
    $
    58,816
    
    
    
    (9,865
    )
    
    
    (14.36
    )%
  The Corporation believes that an interest rate shift in a 12-month period of 100 bp
represents a moderately adverse outcome, while a 200 bp shift is significantly adverse and
a 300 bp shift is unlikely given historical precedents.(2)
    Equity Price Risk  The Corporations equity securities in the trading portfolio are
comprised primarily of publicly traded common stock. Assuming an immediate decrease of 10% in the market value
of these securities as of December 31, 2004 and 2003, the hypothetical loss in the fair
value of these investments is estimated to be approximately $8.7 million and $6.7 million,
respectively. Other than Trading Portfolio The Corporations available-for-sale and held-to-maturity securities are also a source of market
risk. As of December 31, 2004 approximately 88% and 100% of the Corporations investments in
available-for-sale and held-to-maturity securities, respectively, consisted of fixed income
securities. The remaining balance of the available-for-sale portfolio is comprised of equity
securities. Available-for-sale securities are recorded at fair value, changes in the market value
of these securities, net of the related tax effect, are excluded from operations and are reported
as a separate component of other comprehensive income until realized. Held-to-maturity securities
are recorded at amortized cost, adjusted for the amortization, or accretion of premiums or discounts. The fair
value of the investments in the other than trading portfolio is exposed to both interest rate risk
and equity price risk.  (1)
    Interest Rate Risk  The Corporation has evaluated the net impact to the fair value
of its fixed income investments using a combination of both statistical and fundamental methodologies. From
these shocked values a resultant market price appreciation/depreciation can be determined
after portfolio cash flows are modeled and evaluated over an instantaneous 100, 200 and
300 bp rate shifts. Techniques used in the evaluation of cash flows include Monte Carlo
simulation through a series of probability distributions over 200 interest rate paths.
Necessary prepayment speeds are compiled using Salomon Brothers Yield Book, which sources
numerous factors in deriving speeds, including but not limited to: historical speeds,
economic indicators, street consensus speeds, etc. Securities evaluated under the
aforementioned scenarios include, as it relates to the Corporation, mortgage pass-through
certificates and collateralized mortgage obligations of U.S. agencies, and private label
structures, provided that cash flows information is available. The following table sets
forth the result of this analysis for the years ended December 31, 2004 and 2003. 19




---



##### 



(Dollar amounts in thousands)Expected
    
    
    Amount of
    
    
    %Change in Interest Rates
    
    Fair Value
    
    
    Decrease
    
    
    ChangeDecember 31, 2004:Base Scenario
    
    $
    482,019+100 bp
    
    $
    465,335
    
    
    
    (16,684
    )
    
    
    (3.46
    )%+200 bp
    
    $
    446,588
    
    
    
    (35.431
    )
    
    
    (7.35
    )%+300 bp
    
    $
    428,419
    
    
    
    (53,600
    )
    
    
    (11.12
    )%December 31, 2003:Base Scenario
    
    $
    434,041+100bp
    
    $
    419,490
    
    
    
    (14,551
    )
    
    
    (3.35
    )%+200 bp
    
    $
    398,357
    
    
    
    (35,684
    )
    
    
    (8.22
    )%+300 bp
    
    $
    373,374
    
    
    
    (60,667
    )
    
    
    (13.98
    )%
  The Corporation believes that an interest rate shift in a 12-month period of 100 bp
represents a moderately adverse outcome, while a 200 bp shift is significantly adverse and
a 300 bp shift is unlikely given historical precedents. Although the Corporation
classifics 84% of its fixed income securities as available-for-sale, the Corporations
cash flows and the intermediate duration of its investment portfolio should allow it to
hold securities until their maturity, thereby avoiding the recognition of losses, should
interest rates rise significantly.(2)
    Equity Price Risk The Corporations equity securities in the available-for-sale
portfolio are comprised primarily of stock of several Puerto Rico financial institutions and mutual funds.
Assuming an immediate decrease of 10% in the market value of these securities as of
December 31, 2004 and 2003, the hypothetical loss in the fair value of these investments
is estimated to be approximately $5.9 million and $5.6 million, respectively. Other Risk Measurement The Corporation is subject to interest rate risk on its two credit agreements, its annuity
contracts and on its short-term borrowings. Shifting interest rates do not have a material effect
on the fair value of these instruments. The two credit agreements have a variable interest rate
structure, which reduces the potential exposure to interest rate risk. The annuity contracts have
short-term interest rate guarantees, which also reduce the accounts exposure to interest rate
risk. In addition, the brief maturity of the Corporations short-term borrowings reduces the
instruments exposure to interest rate risk. The Corporation has an interest-rate related derivative instrument to manage the variability
caused by interest rate changes in the cash flows of one of its credit agreements. The Corporation
does not enter into derivative instruments for any purpose other than cash flow hedging purposes.
That is, the Corporation does not speculate using derivative instruments. This swap changes the
variable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Shifting
interest rates have an effect in the fair value of the interest rate swap agreement. The Corporation assesses interest rate risk by continually identifying and monitoring changes in
interest rate exposures that may adversely impact the fair value of the interest rate swap
agreement. The Corporation monitors interest rate risk attributable to both the Corporations
outstanding or forecasted debt obligations as well as the Corporations offsetting hedge position.
As of December 31, 2004 and 2003, $142 thousand and $601 thousand, respectively, of deferred loss
on the derivative instrument was included within the accounts payable and accrued liabilities in
the consolidated balance sheets. Assuming an immediate decrease of 10% in period end rates as of
December 31, 2004 and 2003, the hypothetical loss in the fair value of the derivative instrument is
estimated to be approximately $14 thousand and $60 thousand, respectively. 20




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES 
 Consolidated Financial Statements December 31, 2004, 2003, and 2002 (With Independent Auditors Report Thereon) 21




---



##### 



(KPMG LOGO) KPMG
LLP
American
International Plaza
Suite 1100
250 Muñoz Rivera Avenue 
San Juan, PR
00918-1819 
 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Triple-S Management Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Triple-S Management Corporation
and Subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of earnings, stockholders equity and comprehensive income, and cash flows for each of
the years in the three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Triple-S Management Corporation and
Subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. March 4, 2005
San Juan, Puerto Rico (KPMG LLP) Stamp No. 1988689 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this
report. [ILLEGIBLE]




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES 
    2004
    
    
    2003AssetsInvestments and cash:Securities held for trading, at fair value:Fixed
maturities (amortized cost of $70,668 in 2004 and $66,919
in 2003)
    
    $
    72,423
    
    
    
    68,681Equity securities (cost of $74,824 in 2004 and $58,101 in 2003)
    
    
    86,596
    
    
    
    66,824Securities available for sale, at fair value:Fixed maturities (amortized cost of $444,135 in 2004 and $405,547
in 2003)
    
    
    444,637
    
    
    
    407,530Equity securities (cost of $34,309 in 2004 and $33,877 in 2003)
    
    
    59,186
    
    
    
    56,040Securities held to maturity, at amortized cost:Fixed maturities (fair value of $14,503 in 2004 and $5,591 in 2003)
    
    
    14,280
    
    
    
    5,478Cash and cash equivalents
    
    
    35,115
    
    
    
    47,743Total investments and cash
    
    
    712,237
    
    
    
    652,296Premiums and other receivables, net
    
    
    113,323
    
    
    
    93,491Deferred policy acquisition costs
    
    
    18,712
    
    
    
    16,671Property and equipment, net
    
    
    32,364
    
    
    
    34,212Other assets
    
    
    43,021
    
    
    
    37,953Total assets
    
    $
    919,657
    
    
    
    834,623Liabilities and Stockholders EquityClaim liabilities:Claims processed and incomplete
    
    $
    137,282
    
    
    
    121,015Unreported losses
    
    
    127,324
    
    
    
    112,449Unpaid loss-adjustment expenses
    
    
    14,719
    
    
    
    14,456Total claim liabilities
    
    
    279,325
    
    
    
    247,920Unearned premiums
    
    
    84,583
    
    
    
    78,704Annuity contracts
    
    
    34,071
    
    
    
    26,661Liability to Federal Employees Health Benefits Program
    
    
    9,791
    
    
    
    7,471Accounts payable and accrued liabilities
    
    
    100,388
    
    
    
    88,342Short-term borrowings
    
    
    1,700
    
    
    
    38,700Income tax payable
    
    
    1,827
    
    
    
    32,222Net deferred tax liability
    
    
    1,969
    
    
    
    1,892Additional minimum pension liability
    
    
    8,840
    
    
    
    10,081Long-term borrowings
    
    
    95,730
    
    
    
    48,375Total liabilities
    
    
    618,224
    
    
    
    580,368Stockholders equity:Common stock, $40 par value. Authorized 12,500 shares;
issued and outstanding 8,904 and 9,030 shares at December 31,
2004 and 2003, respectively
    
    
    356
    
    
    
    361Additional paid-in capital
    
    
    150,408
    
    
    
    150,407Retained earnings
    
    
    134,531
    
    
    
    88,728Accumulated other comprehensive income
    
    
    16,138
    
    
    
    14,759301,433
    
    
    
    254,255Commitments and contingenciesTotal liabilities and stockholders equity
    
    $
    919,657
    
    
    
    834,623
 See accompanying notes to consolidated financial statements. 23




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES 
    2004
    
    
    2003
    
    
    2002Revenue:Premiums earned, net
    
    $
    1,296,423
    
    
    
    1,262,234
    
    
    
    1,236,647Amounts attributable to self-funded
arrangements
    
    
    181,702
    
    
    
    162,288
    
    
    
    150,684Less amounts attributable to claims under
self-funded arrangements
    
    
    (169,924
    )
    
    
    (151,806
    )
    
    
    (141,138
    )1,308,201
    
    
    
    1,272,716
    
    
    
    1,246,193Net investment income
    
    
    26,499
    
    
    
    24,679
    
    
    
    24,778Net realized investment gains
    
    
    10,968
    
    
    
    8,365
    
    
    
    185Net unrealized investment gain (loss) on
trading securities
    
    
    3,042
    
    
    
    14,893
    
    
    
    (8,322
    )Other income, net
    
    
    3,360
    
    
    
    4,703
    
    
    
    2,075Total revenue
    
    
    1,352,070
    
    
    
    1,325,356
    
    
    
    1,264,909Benefits and expenses:Claims incurred
    
    
    1,115,793
    
    
    
    1,065,350
    
    
    
    1,061,980Operating expenses, net of reimbursement for
services
    
    
    171,879
    
    
    
    165,149
    
    
    
    148,539Interest expense
    
    
    4,581
    
    
    
    3,231
    
    
    
    3,592Total benefits and expenses
    
    
    1,292,253
    
    
    
    1,233,730
    
    
    
    1,214,111Income before taxes
    
    
    59,817
    
    
    
    91,626
    
    
    
    50,798Income tax expense:Current
    
    
    14,285
    
    
    
    70,793
    
    
    
    1,316Deferred
    
    
    (271
    )
    
    
    (5,396
    )
    
    
    1,233Total income taxes
    
    
    14,014
    
    
    
    65,397
    
    
    
    2,549Net income
    
    $
    45,803
    
    
    
    26,229
    
    
    
    48,249Net income available to stockholders and basic net
income per share (note 23):Net income available to stockholders
    
    $
    45,803
    
    
    
    26,229
    
    
    
    10,346Basic net income per share
    
    
    5,135
    
    
    
    2,857
    
    
    
    1,085
 See accompanying notes to consolidated financial statements. 24




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES 
     AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    TotalCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    stockholdersstock
    
    
    capital
    
    
    earnings
    
    
    income
    
    
    equityBalance, December 31, 2001
    
    $
    389
    
    
    
    150,405
    
    
    
    14,250
    
    
    
    20,984
    
    
    
    186,028Stock redemption
    
    
    (16
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    48,249
    
    
    
    
    
    
    
    48,249Net unrealized change in
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,986
    
    
    
    5,986Net change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,114
    )
    
    
    (8,114
    )Net change in fair value of
cash-flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (470
    )
    
    
    (470
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,651Balance, December 31, 2002
    
    
    373
    
    
    
    150,406
    
    
    
    62,499
    
    
    
    18,386
    
    
    
    231,664Stock redemption
    
    
    (12
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    26,229
    
    
    
    
    
    
    
    26,229Net unrealized change in
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,022
    )
    
    
    (6,022
    )Net change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,292
    
    
    
    2,292Net change in fair value of
cash-flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    103Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,602Balance, December 31, 2003
    
    
    361
    
    
    
    150,407
    
    
    
    88,728
    
    
    
    14,759
    
    
    
    254,255Stock redemption
    
    
    (5
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    45,803
    
    
    
    
    
    
    
    45,803Net unrealized change in
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,101
    
    
    
    1,101Net change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Net change in fair value of
cash-flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    281Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,182Balance, December 31, 2004
    
    $
    356
    
    
    
    150,408
    
    
    
    134,531
    
    
    
    16,138
    
    
    
    301,433
 See accompanying notes to consolidated financial statements. 25




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES 
    2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Premiums collected
    
    $
    1,302,383
    
    
    
    1,267,127
    
    
    
    1,236,667Cash paid to suppliers and employees
    
    
    (182,333
    )
    
    
    (169,160
    )
    
    
    (151,376
    )Claim losses and benefits paid
    
    
    (1,092,817
    )
    
    
    (1,066,527
    )
    
    
    (1,051,019
    )Interest received
    
    
    27,065
    
    
    
    25,139
    
    
    
    23,069Income taxes paid
    
    
    (44,680
    )
    
    
    (39,287
    )
    
    
    (499
    )Proceeds from trading securities sold or matured:Fixed maturities
    
    
    50,330
    
    
    
    77,582
    
    
    
    103,012Equity securities
    
    
    26,523
    
    
    
    28,924
    
    
    
    11,804Acquisition of investments in trading portfolio:Fixed maturities
    
    
    (54,550
    )
    
    
    (96,237
    )
    
    
    (112,879
    )Equity securities
    
    
    (38,700
    )
    
    
    (38,956
    )
    
    
    (16,471
    )Interest paid
    
    
    (3,578
    )
    
    
    (2,866
    )
    
    
    (4,220
    )Expense reimbursement from Medicare
    
    
    13,980
    
    
    
    11,387
    
    
    
    12,743Contingency reserve funds from FEHBP
    
    
    5,217
    
    
    
    13,023
    
    
    
    5,976Net cash provided by operating activities
    
    
    8,840
    
    
    
    10,149
    
    
    
    56,807Cash flows from investing activities:Proceeds from investments sold or matured:Securities available for sale:Fixed maturities sold
    
    
    86,112
    
    
    
    129,868
    
    
    
    64,465Fixed maturities matured
    
    
    69,258
    
    
    
    196,961
    
    
    
    173,853Equity securities
    
    
    8,436
    
    
    
    16,778
    
    
    
    3,681Securities held to maturity:Fixed maturities matured
    
    
    1,322
    
    
    
    1,010
    
    
    
    1,458Acquisition of investments:Securities available for sale:Fixed maturities
    
    
    (194,016
    )
    
    
    (416,759
    )
    
    
    (270,104
    )Equity securities
    
    
    (2,435
    )
    
    
    (14,824
    )
    
    
    (7,991
    )Securities held to maturity:Fixed maturities
    
    
    (10,154
    )
    
    
    (537
    )
    
    
    (3,621
    )Capital expenditures
    
    
    (3,494
    )
    
    
    (3,205
    )
    
    
    (6,601
    )Proceeds from sale of property and equipment
    
    
    15
    
    
    
    63
    
    
    
    1,376Net cash used in investing activities
    
    $
    (44,956
    )
    
    
    (90,645
    )
    
    
    (43,484
    )
 26
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years ended December 31, 2004, 2003, and 2002
(Dollar amounts in thousands, except per share data) 2004
    
    
    2003
    
    
    2002Cash flows from financing activities:Change in outstanding checks in excess of
bank balances
    
    $
    6,730
    
    
    
    (2,739
    )
    
    
    (4,416
    )Repayments of short-term borrowings
    
    
    (37,000
    )
    
    
    
    
    
    
    Proceeds from short-term borrowings
    
    
    
    
    
    
    38,700
    
    
    
    Repayments of long-term borrowings
    
    
    (2,645
    )
    
    
    (1,640
    )
    
    
    (5,635
    )Proceeds from long-term borrowings
    
    
    50,000
    
    
    
    
    
    
    
    Redemption of common stock
    
    
    (4
    )
    
    
    (11
    )
    
    
    (15
    )Proceeds from annuity contracts
    
    
    11,002
    
    
    
    13,471
    
    
    
    2,809Surrenders of annuity contracts
    
    
    (4,595
    )
    
    
    (2,318
    )
    
    
    (4,260
    )Net cash provided by (used
in) financing activities
    
    
    23,488
    
    
    
    45,463
    
    
    
    (11,517
    )Net (decrease) increase in
cash and cash equivalents
    
    
    (12,628
    )
    
    
    (35,033
    )
    
    
    1,806Cash and cash equivalents, beginning of year
    
    
    47,743
    
    
    
    82,776
    
    
    
    80,970Cash and cash equivalents, end of year
    
    $
    35,115
    
    
    
    47,743
    
    
    
    82,776
 See accompanying notes to consolidated financial statements. 27




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES 
    
  (1)
    Organization  (a)
    Nature of BusinessTriple-S Management Corporation (the Company or TSM) was incorporated under the
laws of the Commonwealth of Puerto Rico on January 17, 1997 to engage, among other
things, as the holding company of entities primarily involved in the insurance industry.The Company has the following wholly owned subsidiaries that are subject to the
regulations of the Commissioner of Insurance of the Commonwealth of Puerto Rico (the
Commissioner of Insurance): (1) Triple-S, Inc. (TSI) which provides hospitalization and
health benefits to subscribers through contracts with hospitals, physicians, dentists,
laboratories, and other organizations located mainly in Puerto Rico; (2) Seguros de Vida
Triple-S, Inc. (SVTS), which is engaged in the underwriting of life and disability
insurance policies and the administration of annuity contracts; and (3) Seguros
Triple-S, Inc. (STS), which is engaged in the underwriting of property and casualty
insurance policies. The Company and TSI are members of the Blue Cross and Blue Shield
Association (BCBSA).The Company also has two other wholly owned subsidiaries, Interactive Systems, Inc.
(1SI) and Triple-C, Inc. (TC). ISI is mainly engaged in providing data processing
services to the Company and its subsidiaries. TC is mainly engaged as a third-party
administrator for TST in the administration of the Commonwealth of Puerto Rico Health
Care Reforms business (the Reform). Also, TC provides health care advisory services to
TSI and other health insurance-related services to the health insurance industry.TSI is engaged in three principal underwriting activities, which are its Regular
Commercial Plan, the Reform Program, and the Federal Employees Health Benefits Program
(FEHBP). The operations of FEHBP do not result in any excess or deficiency of revenue or
expenses as this program has a special account available to compensate any excess or
deficiency on its operations accruing to the benefit or detriment of the federal
government (see note 9). TSI also processes and pays claims as fiscal intermediary for
the Medicare  Part B Program in Puerto Rico and is reimbursed for operating expenses
(see note 15).A substantial majority of the Companys business activity is with insureds located
throughout Puerto Rico, and as such, the Company is subject to the risks associated with
the Puerto Rico economy.(b)
    Reorganization of the BusinessOn December 6, 1996, the Commissioner of Insurance issued an order to annul the
sale of 1,582 shares of common stock that TSI repurchased from the estate of deceased
stockholders. TSI contested such order through administrative and judicial review
processes. Consequently, the sale of 1,582 shares was cancelled and the amounts paid
returned to each former stockholder. During the year 2000, the Commissioner of Insurance
issued a pronouncement providing further clarification of the content and effect of the
order. This order also required that all corporate decisions undertaken by TSI through
the vote of its stockholders of record, be ratified in a stockholders meeting or in a
subsequent referendum. In November 2000, TSM, as the sole stockholder of TSI, ratified
all such 28
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollar
amounts in thousands, except per share data) decisions.
Furthermore, on November 19, 2000, TSM held a special
stockholders meeting,
where a ratification of these decisions was undertaken except for the resolutions related to the
approval of the reorganization of TSI and its subsidiaries. This
resolution did not reach the
two-thirds majority required by the order because the number of shares that were present and
represented at the meeting was below such amount (total shares present and represented in the
stockholders meeting was 64%). As stipulated in the order, TSM began the process to conduct a
referendum among its stockholders in order to ratify such resolution. The process was later
suspended because upon further review of the scope of the order, the Commissioner of Insurance
issued an opinion in a letter dated January 8, 2002, which indicated that the ratification of the
corporate reorganization was not required. In another letter to TSI dated March 14, 2002, the Commissioner of Insurance stated that the
ratification of the corporate reorganization was not required and that TSI had complied with the
Commissioner of Insurances order of December 6, 1996 related to the corporate reorganization.
Thereafter, two of TSMs stockholders filed a petition for review of the Commissioner of
Insurances determination before the Puerto Rico Circuit Court of Appeals. Such petition was
opposed by TSI and by the Commissioner of Insurance. Pursuant to that review, on September 24, 2002, the Puerto Rico Circuit Court of Appeals issued an
order requiring the Commissioner of Insurance to order that a meeting of shareholders be held to
ratify TSIs corporate reorganization and the change of name of
TSI from Seguros de Servicios de
Salud de Puerto Rico, Inc. to Triple-S, Inc. The Puerto Rico Circuit Court of Appeals based its
decision on administrative and procedural issues directed at the Commissioner of Insurance. The
Commissioner of Insurance filed a motion of reconsideration with the Puerto Rico Circuit Court of
Appeals on October 11, 2002. TSM and TSI also filed a motion of reconsideration. On
October 25, 2002, the Puerto Rico Circuit Court of Appeals dismissed the Commissioner of
Insurances Motion for Reconsideration. In addition, the Puerto Rico Circuit Court of Appeals
ordered the two stockholders who filed the petition for review to reply within 20 days to TSIs
and TSMs Motion of Reconsideration. On May 18, 2003, the Puerto Rico Circuit Court of Appeals granted TSIs and TSMs Motion of
Reconsideration. The Puerto Rico Circuit Court of Appeals held that the Commissioner of Insurance
had the authority to waive the celebration of a referendum to ratify TSIs reorganization and that
therefore the reorganization of TSI, inasmuch as the 1,582 shares annulled were not decisive, was
approved by the stockholders. On June 26, 2003, the two shareholders presented a writ of certiorari before the Supreme Court of
Puerto Rico. TSI and TSM filed a motion opposing the issuance of the writ. The Supreme Court of
Puerto Rico issued the writ on August 22, 2003, when it ordered that the Puerto Rico Circuit Court
of Appeals transmit the record of the case. Notice of the receipt of the record by the Supreme
Court of Puerto Rico was issued. On December 1, 2003, the two shareholders filed a motion
submitting their case on the basis of their original petition. TSI filed its brief on December 30,
2003, while the Commissioner of Insurance, in turn, filed a separate brief on December 31, 2003.
On June 24, 2004, the Supreme Court of Puerto Rico ordered the plaintiffs to file a brief in
support of their allegations. 29
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  The outcome of the case is pending before the Supreme Court of Puerto Rico. It is the
opinion of the management and its legal counsels that the corporate reorganization as
approved is in full force and effect. 
  (2)
    Significant Accounting PoliciesThe following are the significant accounting policies followed by the Company and its
subsidiaries:  (a)
    Basis of PresentationThe accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP). These
principles are established primarily by the Financial Accounting Standards Board (FASB)
and the American Institute of Certified Public Accountants. The preparation of the
consolidated financial statements in conformity with GAAP requires the Company to make
estimates when recording transactions resulting from business operations, based on
information currently available.The consolidated financial statements include the financial statements of the Company
and its subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.(b)
    Cash EquivalentsCash equivalents of $3.617 and $620 at Deccmber31, 2004 and 2003, respectively, consist
principally of certificates of deposit, securities purchased under agreements to resell
and obligations of the Commonwealth of Puerto Rico and the U.S. Treasury with an initial
term of less than three months. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents.(c)
    InvestmentsInvestment in securities at December 31, 2004 and 2003 consists mainly of U.S. Treasury
securities and obligations of U.S. government instrumentalities, obligations of the
Commonwealth of Puerto Rico and its instrumentalities, obligations of state and
political subdivisions, mortgage-backed securities, collateralized mortgage obligations,
corporate debt, and equity securities. The Company classifies its debt and equity
securities in one of three categories: trading, available for sale, or held to maturity.
Trading securities are bought and held principally for the purpose of selling them in
the near term. Securities classified as held to maturity are those securities in which
the Company has the ability and intent to hold the security until maturity. All other
securities not included in trading or held to maturity are classified as available for
sale.Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
debt securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums and discounts. Unrealized holding gains and losses on trading
securities are included in operations. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from operations and
are reported as a separate component of other comprehensive income until realized.
Transfers of securities between categories are recorded at fair value at the date of
transfer.  30
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003. and 2002 (Dollar amounts in thousands, except per share data)  Unrealized holding gains and losses are recognized in operations for transfers into trading
securities. Unrealized holding gains or losses associated with transfers of securities from
held to maturity to available for sale are recorded as a separate component of other
comprehensive income. The unrealized holding gains or losses included in the separate
component of other comprehensive income for securities transferred from available for sale to
held to maturity, are maintained and amortized into operations over the remaining life of the
security as an adjustment to yield in a manner consistent with the amortization or accretion
of premium or discount on the associated security.A decline in the fair value of any available-for-sale or held-to-maturity security below
cost, that is deemed to be other than temporary, results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost basis for the security is
established. To determine whether an impairment is other than temporary, the Company
considers whether it has the ability and intent to hold the investment until a market price
recovery and considers whether evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. Evidence considered in this assessment includes the
reasons for the impairment, the security and duration of the impairment, market conditions,
changes in value subsequent to period-end and forecasted performance of the investee.Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.Realized gains and losses from the sale of available-for-sale securities are included in
operations and are determined on a specific-identification basis.(d)
    Revenue RecognitionSubscriber premiums on health and life insurance policies are billed in advance of their
respective coverage period and the related revenue is recorded as earned during the coverage
period. The premiums of TSI and SVTS are billed in the month prior to the effective date of
the policy with a grace period of one month. If the insured fails to pay, the policy can be
canceled at the end of the grace period at the option of the companies. Health and life
insurance premiums are reported as earned when due.Certain groups have health insurance contracts that provide for the group to be at risk for
all or a portion of their claims experience. Most of these self-funded groups purchase
aggregate and/or specific stop-loss coverage. In exchange for a premium, the groups
aggregate liability or the groups liability on any one episode of care is capped for the
year. Premiums for the stop-loss coverage are actuarially determined based on experience and
other factors and are recorded as earned over the period of the contract in proportion to the
coverage provided. Under the Companys self-funded arrangements, revenue and amounts due are
recognized based on incurred claims plus administrative and other fees and any slop-loss
premiums. In addition, accounts for certain self-insured groups are charged or credited with
interest expense or income as provided by the groups contracts.  31
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  Premiums on property and casualty contracts are recognized as earned on a pro rata basis over
the policy term. The portion of premiums related to the period prior to the end of coverage
is recorded in the consolidated balance sheets as unearned premiums and is transferred to
premium revenue as earned.(e)
    Allowance for Doubtful ReceivablesThe allowance for doubtful receivables is based on managements evaluation of the aging of
accounts and such other factors, which deserve current recognition. Actual results could
differ from these estimates. Receivables are charged against their respective allowance
accounts when deemed to be uncollectible.(f)
    Deferred Policy Acquisition CostsCertain costs for acquiring property and casualty, and life and disability insurance business
are deferred by the Company. In the property and casualty business these costs mainly relate
to commissions incurred during the production of business and are deferred and amortized
ratably over the terms of the policies. In the life and disability insurance business these
costs mainly relate to the production of annuity contracts and are deferred and amortized in
a constant relationship over the expected GAAP profit margins emerging over the life of the
policies.The method used in calculating deferred policy acquisition costs limits the amount of such
deferred costs to actual costs or their estimated realizable value, whichever is lower. In
determining estimated realizable value, the method considers the premiums to be earned,
losses and loss-adjustment expenses, and certain other costs expected to be incurred as the
premiums are earned.Amortization of deferred policy acquisition costs in 2004, 2003, and 2002 was $22,454,
$19,580, and $13,728, respectively.Acquisition costs related to health insurance policies are expensed as incurred.(g)
    Property and EquipmentProperty and equipment are stated at cost. Maintenance and
repairs are expensed as incurred.
Depreciation is calculated on the straight-line method over the estimated useful lives of the
assets. Costs of computer equipment, programs, systems,
installations, and enhancements are
capitalized. Costs of systems in operation are amortized over their estimated useful lives.(h)
    Claim LiabilitiesClaims processed and incomplete and unreported losses for health insurance policies represent
the estimated amounts to be paid to providers based on experience and accumulated statistical
data. Loss-adjustment expenses related to such claims are accrued currently based on
estimated future expenses necessary to process such claims.TSIs Reform business division contracts with various independence practice associations
(IPAs) for certain medical care services provided to the Reforms subscribers. The IPAs are
compensated based  32
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  on a capitation basis. TSI retains a portion of the capitation payments to provide for
incurred but not reported losses. At December 31, 2004 and 2003, total withholdings and
capitation payable amounted to $27,924 and $27,312, respectively, which are recorded as part
of the liability for claims processed and incomplete in the accompanying consolidated balance
sheets.The liability for losses and loss-adjustment expenses for STS represents individual case
estimates for reported claims and estimates for unreported losses, net of any salvage and
subrogation based on past experience modified for current trends and estimates of expenses
for investigating and settling claims.The liability for policy and contract claims of SVTS is based on the amount of benefits
contractually determined for reported claims, and on estimates, based on past experience
modified for current trends, for unreported claims.The above liabilities are necessarily based on estimates and, while management believes that
the amounts are adequate, the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing the resulting liability
are continually reviewed, and any adjustments are reflected in the consolidated statements of
earnings in the period determined.(i)
    Annuity ContractsAmounts received for annuity contracts are considered deposits and recorded as a liability.
Interest accrued on such annuities, which amounted to $1,004, $721, and $711 during the years
ended December 31, 2004, 2003, and 2002, respectively, is recorded as interest expense in the
accompanying consolidated statements of earnings.(j)
    ReinsuranceIn the normal course of business, the insurance-related subsidiaries seek to limit their
exposure that may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers.Reinsurance premiums, commissions, and expense reimbursements, related to reinsured business
are accounted for on bases consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts. Accordingly, reinsurance premiums are
reported as prepaid reinsurance premiums and amortized over the remaining contract period in
proportion to the amount of insurance protection provided.Premiums ceded and recoveries of losses and loss-adjustment expenses have been reported as a
reduction of premiums earned and losses and loss-adjustment expenses incurred, respectively.
Commission and expense allowances received by STS in connection with reinsurance ceded have
been accounted for as a reduction of the related policy acquisition costs and are deferred
and amortized accordingly. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policy.  33
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  (k)
    Derivative Instruments and Hedging ActivitiesThe Company accounts for derivative instruments and hedging activities in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities,and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities,an Amendment to SFAS No. 133.
SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the
balance sheet at their respective fair values.On the date the derivative contract is entered into, the Company designates the derivative as
either a hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment (fair-value hedge), a hedge of a forecasted transaction or the variability of
cash flows to be received or paid related to a recognized asset or liability (cash-flow
hedge), a foreign currency fair value or cash-flow hedge (foreign-currency hedge), or a hedge
of a net investment in a foreign operation. For all hedging relationships the Company
formally documents the hedging relationship and its risk-management objective and strategy
for undertaking the hedge, the hedging instrument, the item, the nature of the risk being
hedged, how the hedging instruments effectiveness in offsetting the hedged risk will be
assessed, and a description of the method of measuring ineffectiveness. This process includes
linking all derivatives that are designated as fair-value, cash-flow, or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally assesses, both at the
hedges inception and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of
hedged items.Changes in the fair value of a derivative that is highly effective and that is designated and
qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability
or unrecognized firm commitment of the hedged item that is attributable to the hedged risk,
are recorded in earnings. Changes in the fair value of a derivative that is highly effective
and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive
income to the extent that the derivative is effective as hedge, until earnings are affected by
the variability in cash flows of the designated hedged item. Changes in the fair value of
derivatives that are highly effective as hedges and that are designated and qualify as
foreign-currency hedges are recorded in either earnings or other comprehensive income,
depending on whether the hedge transaction is a fair-value hedge or a cash-flow hedge.
However, if a derivative is used as a hedge of a net investment in a foreign operation, its
changes in fair value, to the extent effective as a hedge, are recorded in the cumulative
translation adjustments account within other comprehensive income. The ineffective portion of
the change in fair value of a derivative instrument that qualifies as either a fair-value
hedge or a cash-flow hedge is reported in earnings. Changes in the fair value of derivative
trading instruments are reported in current period earnings.The Company discontinues hedge accounting prospectively when it is determined that the
derivative is no longer effective in offsetting changes in the fair value or cash flows of the
hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is
de-designated as a hedging instrument, because it is unlikely that a forecasted transaction
will occur, a hedged firm commitment  34
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  no longer meets the definition of a firm commitment, or management determines that
designation of the derivative as a hedging instrument is no longer appropriate.When hedge accounting is discontinued because it is determined that the derivative no longer
qualifies as an effective fair value hedge, the Company continues to carry the derivative on
the balance sheet at its fair value, and no longer adjusts the hedged asset or liability for
changes in fair value. The adjustment of the carrying amount of the hedged asset or liability
is accounted for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the Company continues to carry the derivative on the
balance sheet at its fair value, removes any asset or liability that was recorded pursuant to
recognition of the firm commitment from the balance sheet, and recognizes any gain or loss in
earnings. When hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the Company continues to carry the derivative on the balance sheet
at its fair value with subsequent changes in fair value included in earnings, and gains and
losses that were accumulated in other comprehensive income are recognized immediately in
earnings. In all other situations in which hedge accounting is discontinued, the Company
continues to carry the derivative at its fair value on the balance sheet and recognizes any
changes in its fair value in earnings.(l)
    Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statements of earnings in the period that includes the enactment date.(m)
    Insurance-Related AssessmentsThe Company accounts for insurance-related assessments in accordance with the provisions of
Statement of Position (SOP) No. 97-3, Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments.This SOP prescribes liability recognition when the following
three conditions are met: (l) the assessment has been imposed or the information available
prior to the issuance of the financial statements indicates it is probable that an assessment
will be imposed; (2) the event obligating an entity to pay (underlying cause of) an imposed
or probable assessment has occurred on or before the date of the financial statements; and
(3) the amount of the assessment can be reasonably estimated. Also, this SOP provides for the
recognition of an asset when the paid or accrued assessment is recoverable through either
premium taxes or policy surcharges.(n)
    Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed OfIn accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets,long-lived assets, such as property, plant, and equipment, and purchased intangibles
subject to  35
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the balance sheets and
reported at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group classified as held for
sale would be presented separately in the appropriate asset and liability sections of the
balance sheets.Goodwill and intangible assets not subject to amortization are tested annually for impairment
and are tested for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the assets fair value.(o)
    Use of EstimatesManagement of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities to prepare these consolidated financial statements in
conformity with GAAP. Actual results could differ from those estimates. The most significant
items on the consolidated balance sheets that involve a greater degree of accounting
estimates and actuarial determinations subject to changes in the future are the claim
liabilities and the allowance for doubtful receivables. As additional information becomes
available (or actual amounts are determinable), the recorded estimates will be revised and
reflected in operating results. Although some variability is inherent in these estimates, the
Company believes the amounts provided are adequate.(p)
    Fair Value of Financial InstrumentsFinancial instruments that potentially subject the Company to concentrations of credit risk
consist principally of investments in corporate bonds, premiums receivable, accrued interest
receivable, and other receivables.The fair value information of financial instruments in the accompanying consolidated
financial statements was determined as follows:  (i)
    Cash and Cash EquivalentsThe carrying amount approximates fair value because of the short-term nature of such
instruments.(ii)
    Investment in SecuritiesThe 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.  36
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  (iii)
    Receivables, Accounts Payable, and Accrued LiabilitiesThe carrying amount of receivables, accounts payable and accrued liabilities
approximates fair value because they mature and should be collected or paid within 12
months after December 31.(iv)
    Annuity ContractsThe fair value of annuity contracts is the amount payable on demand at the reporting
date, and accordingly, the carrying value amount approximates fair value.(v)
    Short-Term BorrowingsThe carrying amount of securities sold under agreements to repurchase is a reasonable
estimate of fair value due to its short-term nature.(vi)
    Long-Term BorrowingsThe carrying amounts and fair value of the Companys long-term borrowings are as
follows: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    valueLoans payable to bank
    
    $
    45,730
    
    
    
    45,730
    
    
    
    48,375
    
    
    
    48,375Senior unsecured notes payable
    
    
    50,000
    
    
    
    50,000
    
    
    
    
    
    
    
    Totals
    
    $
    95,730
    
    
    
    95,730
    
    
    
    48,375
    
    
    
    48,375
  The carrying amount of the loans payable to bank approximates fair value due to its
floating interest-rate structure. The fair value of the senior unsecured notes payable
was determined using market quotations. Additional information pertinent to long-term
borrowings is included in note 11.(vii)
    Interest-Rate SwapsCurrent market pricing models were used to estimate fair value of interest-rate
swap agreement.  (q)
    Earnings Per ShareThe Company calculates and presents earnings per share in accordance with SFAS No. 128,
Earnings per Share.Basic earnings per share exclude dilution and are computed by dividing
the net income available to common stockholders by the weighted average number of common
shares outstanding for the period (see note 23). There is no potential dilution that could
affect basic earnings per share.  37
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  (r)
    Recently Issued Accounting StandardsSFAS No. 153, Exchanges of Nonmonetary Assets,an Amendment of APB Opinion No. 29, was
issued in December 2004. This statement amends APB Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges on nonmonetary assets that do not have commercial
substance. The Company is required to adopt SFAS No. 153 on January 1, 2006. The
adoption of SFAS No. 153 is not expected to have any impact on the Companys
consolidated financial statements.(s)
    ReclassificationsCertain amounts in the 2003 and 2002 financial statements were reclassified to conform
with the 2004 presentation. 
  (3)
    Segment InformationThe operations of the Company are conducted principally through three business segments.
Business segments were identified according to the type of insurance products offered. These
segments and a description of their respective operations are as follows:  
    Health Insurance  Commercial ProgramThis type of insurance is provided by TSI
and comprises the health insurance coverage subscribed to all commercial groups and some government
entities. The Commercial Program offers a fee-for-service type plan through five distinct markets:
corporate sector; individual sector; local government sector, covering the employees of the
Commonwealth of Puerto Rico; federal government program, covering federal government
employees within Puerto Rico; and the Medicare supplement plan (Medigap). The premiums for this
segment are mainly originated through TSIs internal sales force and a network of brokers and
independent agents. TSI is a qualified contractor to provide health insurance coverage to federal
government employees within Puerto Rico. The contract with the U.S. Office of Personnel
Management (OPM) is subject to termination in the event of noncompliance not corrected to the
satisfaction of OPM (see note 9). Under its Commercial Program, TSI provides health insurance
coverage to certain employees of the Commonwealth of Puerto Rico and its instrumentalities.
Earned premium revenue related to such health plans amounted to $67,082, $65,947, and $64,578
for the three-year period ended December 31, 2004, 2003, and 2002, respectively.
    Health Insurance  Reform ProgramThis type of insurance is also provided by TSI and the
business subscribed within this segment is awarded periodically by the Commonwealth of Puerto
Ricos central government. The Reform program provides health coverage to medically indigent
citizens in Puerto Rico, as defined by the laws of the Commonwealth of Puerto Rico. The Reform
consists of a single policy with the same benefits for each qualified medically indigent citizen. The
government segregates Puerto Rico by areas or regions. Each area is awarded to an insurance
company through a bidding process. On June 30, 2002, the government redistributed the
geographical areas, merging two of the existing areas with the remaining ones, thus reducing
geographical areas to eight. Commencing on July 1, 2002, TSI was awarded three of the eight
geographical areas; North, Metro-North, and Southwest. All Reform contracts are subject to
termination, with a prior written notice of 90 days, in the event of noncompliance not corrected or  38
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  cured to the satisfaction of the Commonwealth of Puerto Rico or in the event the government
determines that there are not enough funds for the payment of premiums. In addition, the
Reform contracts stipulate that in the event that the net income for any given contract year,
as defined, exceeds 2.5% of the premiums collected for the related contract year, TSI,
through the Reform program, would need to return 75% of this excess to the Government of
Puerto Rico.
    Property and Casualty InsuranceThis type of insurance is provided by STS. The predominant
insurance lines of business of this segment are commercial multiple peril, auto physical
damage, auto liability, and dwelling. The premiums for this segment are originated through a
network of independent insurance agents and brokers. Agents or general agencies collect the
premiums from the insureds, which are subsequently remitted to STS, net of commissions.
Remittances are due 60 days after the closing date of the general agents account current.  The Companys Life and Disability Insurance segment did not meet any of the quantitative
thresholds determined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information,that require separate disclosure of an operating segment. Thus, the Life and
Disability Insurance segment is no longer presented as a reportable segment in the year ended
December 31, 2004. The segment information for the years ended December 31, 2003 and 2002 has
been restated to present the results of operations and financial position of the Life and
Disability operating segment within the Companys other nonreportable operating segments.The accounting policies for the segments are the same as those described in the summary of
significant accounting policies included in the notes to consolidated financial statements. The
Company evaluates performance based primarily on the net income of each segment. Services provided
between reportable segments are done at transfer prices which approximate fair value. The
financial data of each segment is accounted for separately; therefore no segment allocation is
necessary. However, certain operating expenses are centrally managed, therefore requiring an
allocation to each segment. Most of these expenses are distributed to each segment based on
different parameters, such as payroll hours, processed claims, or square footage, among others. In
addition, some depreciable assets are kept by one segment, while allocating the depreciation
expense to other segments. The allocation of the depreciation expense is based on the proportion
of asset use by each segment. Certain expenses are not allocated to the segments and are kept
within TSMs operations.The following tables summarize the operations by operating segment for the three-year period ended
December 31, 2004, 2003, and 2002.  39
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(Dollar amounts in thousands, except per share data) 2004Operating segmentHealth
    
    
    HealthInsurance
    
    
    Insurance
    
    
    PropertyCommercial
    
    
    Reform
    
    
    and CasualtyProgram
    
    
    Program
    
    
    Insurance
    
    
    Other*
    
    
    TotalPremiums earned, net
    
    $
    709,011
    
    
    
    484,742
    
    
    
    86,228
    
    
    
    16,442
    
    
    
    1,296,423Amounts attributable to self-funded
arrangements
    
    
    181,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,702Less amounts attributable to claims under
self-funded arrangements
    
    
    (169,924
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169,924
    )Intersegment premiums/service revenue
    
    
    3,945
    
    
    
    
    
    
    
    
    
    
    
    47,971
    
    
    
    51,916724,734
    
    
    
    484,742
    
    
    
    86,228
    
    
    
    64,413
    
    
    
    1,360,117Net investment income
    
    
    12,590
    
    
    
    3,109
    
    
    
    7,668
    
    
    
    2,778
    
    
    
    26,145Net realized investment gains
    
    
    9,040
    
    
    
    128
    
    
    
    1,087
    
    
    
    713
    
    
    
    10,968Net unrealized investment gain on trading
securities
    
    
    1,879
    
    
    
    
    
    
    
    801
    
    
    
    362
    
    
    
    3,042Other income, net
    
    
    269
    
    
    
    (30
    )
    
    
    2,675
    
    
    
    240
    
    
    
    3,154Total revenue
    
    $
    748,512
    
    
    
    487,949
    
    
    
    98,459
    
    
    
    68,506
    
    
    
    1,403,426Net income
    
    $
    23,757
    
    
    
    9,250
    
    
    
    11,085
    
    
    
    1,359
    
    
    
    45,451Claims incurred
    
    
    620,751
    
    
    
    437,834
    
    
    
    45,977
    
    
    
    11,231
    
    
    
    1,115,793Operating expenses, net of reimbursment for
services
    
    
    94,930
    
    
    
    35,777
    
    
    
    40,182
    
    
    
    54,203
    
    
    
    225,092Depreciation expense, included in operating
expenses
    
    
    2,841
    
    
    
    789
    
    
    
    418
    
    
    
    177
    
    
    
    4,225Interest expense
    
    
    1,928
    
    
    
    428
    
    
    
    4
    
    
    
    1,004
    
    
    
    3,364Income tax expenses
    
    
    7,146
    
    
    
    4,660
    
    
    
    1,211
    
    
    
    709
    
    
    
    13,726Segment assets
    
    
    443,710
    
    
    
    84,627
    
    
    
    282,393
    
    
    
    90,713
    
    
    
    901,443Significant noncash items:Net change in unrealized gain on securities
available for sale
    
    
    523
    
    
    
    (151
    )
    
    
    867
    
    
    
    (156
    )
    
    
    1,083Net change in minimum pension liability
    
    
    313
    
    
    
    
    
    
    
    (60
    )
    
    
    (314
    )
    
    
    (61
    )
   *
    
    Includes segments which are not required to be reported separately. These
segments include the life and disability insurance segment, the data processing
services organization as well as the third-party administrator of health
insurance services.  40
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2003Operating segmentHealth
    
    
    HealthInsurance
    
    
    Insurance
    
    
    PropertyCommercial
    
    
    Reform
    
    
    and CasualtyProgram
    
    
    Program
    
    
    Insurance
    
    
    Other*
    
    
    TotalPremiums earned, net
    
    $
    688,883
    
    
    
    477,614
    
    
    
    78,334
    
    
    
    17,403
    
    
    
    1,262,234Amounts attributable to self-funded
arrangements
    
    
    162,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,288Less amounts attributable to claims
under self-funded
arrangements
    
    
    (151,806
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151,806
    )Intersegment premiums/service revenue
    
    
    3,488
    
    
    
    
    
    
    
    
    
    
    
    45,989
    
    
    
    49,477702,853
    
    
    
    477,614
    
    
    
    78,334
    
    
    
    63,392
    
    
    
    1,322,193Net investment income
    
    
    10,734
    
    
    
    4,476
    
    
    
    6,824
    
    
    
    2,345
    
    
    
    24,379Net realized investment gains
    
    
    6,345
    
    
    
    53
    
    
    
    722
    
    
    
    595
    
    
    
    7,715Net unrealized investment gain (loss)
on trading securities
    
    
    11,157
    
    
    
    1,848
    
    
    
    2,045
    
    
    
    (157
    )
    
    
    14,893Other income, net
    
    
    196
    
    
    
    (30
    )
    
    
    4,154
    
    
    
    74
    
    
    
    4,394Total revenue
    
    $
    731,285
    
    
    
    483,961
    
    
    
    92,079
    
    
    
    66,249
    
    
    
    1,373,574Net income
    
    $
    49,071
    
    
    
    14,034
    
    
    
    9,677
    
    
    
    4,954
    
    
    
    77,736Claims incurred
    
    
    584,448
    
    
    
    428,045
    
    
    
    43,390
    
    
    
    9,467
    
    
    
    1,065,350Operating expenses, net of
reimbursement for services
    
    
    92,264
    
    
    
    34,637
    
    
    
    37,354
    
    
    
    50,574
    
    
    
    214,829Depreciation expense, included in
operating expenses
    
    
    3,106
    
    
    
    945
    
    
    
    423
    
    
    
    125
    
    
    
    4,599Interest expense
    
    
    862
    
    
    
    366
    
    
    
    
    
    
    
    721
    
    
    
    1,949Income tax expense
    
    
    4,640
    
    
    
    6,879
    
    
    
    1,658
    
    
    
    533
    
    
    
    13,710Segment assets
    
    
    407,031
    
    
    
    86,535
    
    
    
    239,478
    
    
    
    74,530
    
    
    
    807,574Significant noncash items:Net change in unrealized gain on
securities
available for sale
    
    
    (5,226
    )
    
    
    
    
    
    
    (527
    )
    
    
    220
    
    
    
    (5,533
    )Net change in minimum pension liability
    
    
    2,385
    
    
    
    
    
    
    
    (23
    )
    
    
    (55
    )
    
    
    2,307
   *
    
    Includes segments which are not required to be reported separately. These
segments include the life and disability insurance segment, the data
processing services organization as well as the third-party administrator of
health insurance services.  41
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2002Operating segmentHealth
    
    
    HealthInsurance
    
    
    Insurance
    
    
    PropertyCommercial
    
    
    Reform
    
    
    and CasualtyProgram
    
    
    Program
    
    
    Insurance
    
    
    Other*
    
    
    TotalPremiums earned, net
    
    $
    673,967
    
    
    
    487,000
    
    
    
    60,688
    
    
    
    14,992
    
    
    
    1,236,647Amounts attributable to self-funded
arrangements
    
    
    150,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,684Less amounts attributable to claims under
self-funded
arrangements
    
    
    (141,138
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,138
    )Intersegment premiums/service revenue
    
    
    2,776
    
    
    
    
    
    
    
    
    
    
    
    46,308
    
    
    
    49,084686,289
    
    
    
    487,000
    
    
    
    60,688
    
    
    
    61,300
    
    
    
    1,295,277Net investment income
    
    
    10,577
    
    
    
    5,106
    
    
    
    6,579
    
    
    
    2,253
    
    
    
    24,515Net realized investment (losses) gains
    
    
    (313
    )
    
    
    77
    
    
    
    243
    
    
    
    67
    
    
    
    74Net unrealized investment loss on trading
securities
    
    
    (6,533
    )
    
    
    (495
    )
    
    
    (1,294
    )
    
    
    
    
    
    
    (8,322
    )Other income, net
    
    
    136
    
    
    
    (38
    )
    
    
    1,475
    
    
    
    114
    
    
    
    1,687Total revenue
    
    $
    690,156
    
    
    
    491,650
    
    
    
    67,691
    
    
    
    63,734
    
    
    
    1,313,231Net income
    
    $
    28,133
    
    
    
    9,770
    
    
    
    6,223
    
    
    
    4,279
    
    
    
    48,405Claims incurred
    
    
    574,874
    
    
    
    445,039
    
    
    
    34,334
    
    
    
    7,733
    
    
    
    1,061,980Operating expenses, net of reimbrusement
for services
    
    
    86,321
    
    
    
    36,109
    
    
    
    25,549
    
    
    
    50,298
    
    
    
    198,277Depreciation expense, included in operating
expenses
    
    
    3,376
    
    
    
    1,385
    
    
    
    397
    
    
    
    78
    
    
    
    5,236Interest expense
    
    
    829
    
    
    
    731
    
    
    
    
    
    
    
    711
    
    
    
    2,271Income tax expense
    
    
    
    
    
    
    
    
    
    
    1,585
    
    
    
    713
    
    
    
    2,298Segment assets
    
    
    324,628
    
    
    
    115,499
    
    
    
    201,967
    
    
    
    52,987
    
    
    
    695,081Significant noncash items:Net change in unrealized gain on securities
available for sale
    
    
    3,928
    
    
    
    598
    
    
    
    652
    
    
    
    613
    
    
    
    5,791Net change in minimum pension liability
    
    
    (6,961
    )
    
    
    
    
    
    
    (231
    )
    
    
    (735
    )
    
    
    (7,927
    )
   *
    
    Includes segments which are not required to be reported separately. These
segments include the life and disability insurance segment, the data processing
services organization as well as the third-party administrator of health
insurance services.  42
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Reconciliation of Reportable Segment Totals with Financial Statements Total revenue
    
    2004
    
    
    2003
    
    
    2002Revenue for reportable segments
    
    $
    1,334,920
    
    
    
    1,307,325
    
    
    
    1,249,497Revenue for other segments
    
    
    68,506
    
    
    
    66,249
    
    
    
    63,7341,403,426
    
    
    
    1,373,574
    
    
    
    1,313,231Elimination of intersegment earned premiums
    
    
    (3,945
    )
    
    
    (3,488
    )
    
    
    (2,776
    )Elimination of intersegment service revenue
    
    
    (47,971
    )
    
    
    (45,989
    )
    
    
    (46,308
    )Unallocated amount:Revenue from external sources
    
    
    560
    
    
    
    1,259
    
    
    
    762(51,356
    )
    
    
    (48,218
    )
    
    
    (48,322
    )Total consolidated revenue
    
    $
    1,352,070
    
    
    
    1,325,356
    
    
    
    1,264,909
 Net income
    
    2004
    
    
    2003
    
    
    2002Net income for reportable segments
    
    $
    44,092
    
    
    
    72,782
    
    
    
    44,126Net income for other segments
    
    
    1,359
    
    
    
    4,954
    
    
    
    4,27945,451
    
    
    
    77,736
    
    
    
    48,405Elimination of TSM charges:Rent expense
    
    
    6,084
    
    
    
    6,283
    
    
    
    6,203Interest expense
    
    
    734
    
    
    
    658
    
    
    
    8296,818
    
    
    
    6,941
    
    
    
    7,032Unallocated amounts related to TSM:General and administrative expenses
    
    
    (4,787
    )
    
    
    (6,080
    )
    
    
    (5,549
    )Income tax expense
    
    
    (288
    )
    
    
    (51,687
    )
    
    
    (251
    )Interest expense
    
    
    (1,951
    )
    
    
    (1,940
    )
    
    
    (2,150
    )Other revenue from external sources
    
    
    560
    
    
    
    1,259
    
    
    
    762(6,466
    )
    
    
    (58,448
    )
    
    
    (7,188
    )Consolidated net income
    
    $
    45,803
    
    
    
    26,229
    
    
    
    48,249
 43




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Assets
    
    2004
    
    
    2003Total assets for reportable segments
    
    $
    810,730
    
    
    
    733,044Total assets for other segments
    
    
    90,713
    
    
    
    74,530901,443
    
    
    
    807,574Elimination entries intersegment receivables and others
    
    
    (21,717
    )
    
    
    (9,565
    )Unallocated amounts related to TSM:Cash, cash equivalents, and investments
    
    
    12,236
    
    
    
    9,665Property and equipment, net
    
    
    25,577
    
    
    
    26,656Other assets
    
    
    2,118
    
    
    
    29339,931
    
    
    
    36,614Consolidated assets
    
    $
    919,657
    
    
    
    834,623
 2004Segment
    
    
    
    
    
    
    ConsolidatedOther Significant Items
    
    totals
    
    
    Adjustments (*)
    
    
    totalsClaims incurred
    
    $
    1,115,793
    
    
    
    
    
    
    
    1,115,793Operating expenses
    
    
    225,092
    
    
    
    (53,213
    )
    
    
    171,879Depreciation expense
    
    
    4,225
    
    
    
    1,118
    
    
    
    5,343Interest expense
    
    
    3,364
    
    
    
    1,217
    
    
    
    4,581Income taxes
    
    
    13,726
    
    
    
    288
    
    
    
    14,014Significant noncash items:Net change in unrealized gain on securities
available for sale
    
    
    1,083
    
    
    
    18
    
    
    
    1,101Net change in minimum pension liability
    
    
    (61
    )
    
    
    58
    
    
    
    (3
    )
 2003Segment
    
    
    
    
    
    
    Consolidatedtotals
    
    
    Adjustments (*)
    
    
    totalsClaims incurred
    
    $
    1,065,350
    
    
    
    
    
    
    
    1,065,350Operating expenses
    
    
    214,829
    
    
    
    (49,680
    )
    
    
    165,149Depreciation expense
    
    
    4,599
    
    
    
    1,110
    
    
    
    5,709Interest expense
    
    
    1,949
    
    
    
    1,282
    
    
    
    3,231Income taxes
    
    
    13,710
    
    
    
    51,687
    
    
    
    65,397Significant noncash items:Net change in unrealized gain on securities
available for sale
    
    
    (5,533
    )
    
    
    (489
    )
    
    
    (6,022
    )Net change in minimum pension liability
    
    
    2,307
    
    
    
    (15
    )
    
    
    2,292
 2002Segment
    
    
    
    
    
    
    Consolidatedtotals
    
    
    Adjustments (*)
    
    
    totalsClaims incurred
    
    $
    1,061,980
    
    
    
    
    
    
    
    1,061,980Operating expenses
    
    
    198,277
    
    
    
    (49,738
    )
    
    
    148,539Depreciation expense
    
    
    5,236
    
    
    
    2,359
    
    
    
    7,595Interest expense
    
    
    2,271
    
    
    
    1,321
    
    
    
    3,592Income taxes
    
    
    2,298
    
    
    
    251
    
    
    
    2,549Significant noncash items:Net change in unrealized gain on securities
available for sale
    
    
    5,791
    
    
    
    195
    
    
    
    5,986Net change in minimum pension liability
    
    
    (7,927
    )
    
    
    (187
    )
    
    
    (8,114
    )
   *
    
    Adjustments represent principally TSM operations and eliminations of intersegment charges.  44
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 
  (4)
    Investment in SecuritiesThe amortized cost for debt and equity securities, gross unrealized gains, gross unrealized
losses, and estimated fair value for trading, available-for-sale, and held-to-maturity
securities by major security type and class of security at December 31, 2004 and 2003, were
as follows: 2004Gross
    
    
    GrossAmortizedcost
    
    

unrealizedgains
    
    

unrealizedlosses
    
    

Estimatedfair valueTrading securities:U.S. Treasury securities
and obligations of U.S.
government
instrumentalities
    
    $
    23,978
    
    
    
    601
    
    
    
    (41
    )
    
    
    24,538Corporate debt securities
    
    
    46,690
    
    
    
    1,444
    
    
    
    (249
    )
    
    
    47,885Total
fixed
maturities
    
    
    70,668
    
    
    
    2,045
    
    
    
    (290
    )
    
    
    72,423Equity securities
    
    
    74,824
    
    
    
    13,496
    
    
    
    (1,724
    )
    
    
    86,596Totals
    
    $
    145,492
    
    
    
    15,541
    
    
    
    (2,014
    )
    
    
    159,019
 2003Gross
    
    
    GrossAmortized cost
    
    
    unrealizedgains
    
    
    unrealized losses
    
    
    Estimated fair valueTrading securities:U.S. Treasury securities
and obligations of U.S.
government
instrumentalities
    
    $
    1,370
    
    
    
    9
    
    
    
    (1
    )
    
    
    1,378Corporate debt securities
    
    
    65,549
    
    
    
    2,255
    
    
    
    (501
    )
    
    
    67,303Total fixed
maturities
    
    
    66,919
    
    
    
    2,264
    
    
    
    (502
    )
    
    
    68,681Equity securities
    
    
    58,101
    
    
    
    9,823
    
    
    
    (1,100
    )
    
    
    66,824Totals
    
    $
    125,020
    
    
    
    12,087
    
    
    
    (1,602
    )
    
    
    135,505
  45
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2004Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair valueSecurities available for sale:U.S. Treasury securities and
obligations of U.S.
government instrumentalities
    
    $
    337,045
    
    
    
    1,012
    
    
    
    (967
    )
    
    
    337,090Obligations of the Commonwealth of Puerto
Rico and its instrumentalities
    
    
    62,331
    
    
    
    1,231
    
    
    
    (971
    )
    
    
    62,591Obligations of state and political
subdivisions
    
    
    500
    
    
    
    2
    
    
    
    
    
    
    
    502Corporate bonds
    
    
    5,771
    
    
    
    48
    
    
    
    (3
    )
    
    
    5,816Mortgage-backed securities
    
    
    12,430
    
    
    
    160
    
    
    
    (43
    )
    
    
    12,547Collateralized mortgage obligations
    
    
    26,058
    
    
    
    206
    
    
    
    (173
    )
    
    
    26,091Total fixed
maturities
    
    
    444,135
    
    
    
    2,659
    
    
    
    (2,157
    )
    
    
    444,637Equity securities
    
    
    34,309
    
    
    
    24,913
    
    
    
    (36
    )
    
    
    59,186Totals
    
    $
    478,444
    
    
    
    27,572
    
    
    
    (2,193
    )
    
    
    503,823
  46
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2003Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair valueSecurities available for sale:U.S. Treasury securities and
obligations of U.S.
government
instrumentalities
    
    $
    290,348
    
    
    
    1,860
    
    
    
    (926
    )
    
    
    291,282Obligations of the
Commonwealth of Puerto
Rico and its instrumentalities
    
    
    61,539
    
    
    
    1,278
    
    
    
    (709
    )
    
    
    62,108Obligations of state and
political subdivisions
    
    
    10,069
    
    
    
    34
    
    
    
    (114
    )
    
    
    9,989Corporate debt
    
    
    1,765
    
    
    
    40
    
    
    
    (3
    )
    
    
    1,802Mortgage-backed securities
    
    
    17,055
    
    
    
    280
    
    
    
    (33
    )
    
    
    17,302Collateralized mortgage
obligations
    
    
    24,771
    
    
    
    439
    
    
    
    (163
    )
    
    
    25,047Total fixed
maturities
    
    
    405,547
    
    
    
    3,931
    
    
    
    (1,948
    )
    
    
    407,530Equity securities
    
    
    33,877
    
    
    
    22,203
    
    
    
    (40
    )
    
    
    56,040Totals
    
    $
    439,424
    
    
    
    26,134
    
    
    
    (1,988
    )
    
    
    463,570
 2004Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair valueSecurities held to maturity:U.S. Treasury securities
and obligations of U.S.
government
instrumentalities
    
    $
    5,991
    
    
    
    24
    
    
    
    
    
    
    
    6,015Mortgage-backed securities
    
    
    5,126
    
    
    
    4
    
    
    
    (22
    )
    
    
    5,108Corporate bonds
    
    
    2,007
    
    
    
    
    
    
    
    (2
    )
    
    
    2,005Certificates of deposit
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    156Index, linked certificate of
deposit
    
    
    1,000
    
    
    
    219
    
    
    
    
    
    
    
    1,219Totals
    
    $
    14,280
    
    
    
    247
    
    
    
    (24
    )
    
    
    14,503
  47
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2003Amortizedcost
    
    

Grossunrealizedgains
    
    

Grossunrealizedlosses
    
    

EstimatedfairvalueSecurities held to
maturity:Mortgage-backed
securities
    
    $
    3,766
    
    
    
    11
    
    
    
    (5
    )
    
    
    3,772Collateralized mortgage
obligations
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175Certificates of deposit
    
    
    537
    
    
    
    
    
    
    
    
    
    
    
    537Index linked certificate of
deposit
    
    
    1,000
    
    
    
    107
    
    
    
    
    
    
    
    1,107Totals
    
    $
    5,478
    
    
    
    118
    
    
    
    (5
    )
    
    
    5,591
 Fair values for debt securities were determined using market quotations provided by outside
securities consultants or prices provided by market makers. The fair values for equity securities
were determined using market quotations on the principal public exchange markets.  48
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Gross unrealized losses on investment securities and the estimated fair value of the related
securities, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position as of December 31, 2004 and 2003 were as follows: 2004Less than 12 months
    
    
    12 months or longer
    
    
    TotalGrass
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    unrealized
    
    
    Estimated
    
    
    unrealized
    
    
    Estimated
    
    
    unrealizedfair value
    
    
    losses
    
    
    fair value
    
    
    losses
    
    
    fair value
    
    
    lossesSecurities available for sale:U.S. Treasury securities and obligations of U.S.
government instrumentalities
    
    $
    79,145
    
    
    
    (368
    )
    
    
    70,249
    
    
    
    (599
    )
    
    
    149,394
    
    
    
    (967
    )Obligations of the
Commonwealth of Puerto
Rico and its instrumentalities
    
    
    15,648
    
    
    
    (415
    )
    
    
    19,129
    
    
    
    (556
    )
    
    
    34,777
    
    
    
    (971
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    497
    
    
    
    (3
    )
    
    
    497
    
    
    
    (3
    )Mortgage-backed securities
    
    
    4,649
    
    
    
    (32
    )
    
    
    3,311
    
    
    
    (11
    )
    
    
    7,960
    
    
    
    (43
    )Collateralized mortgage obligations
    
    
    9,493
    
    
    
    (94
    )
    
    
    6,997
    
    
    
    (79
    )
    
    
    16,490
    
    
    
    (173
    )Total fixed maturities
    
    
    108,935
    
    
    
    (909
    )
    
    
    100,183
    
    
    
    (1,248
    )
    
    
    209,118
    
    
    
    (2,157
    )Equity securities
    
    
    2,416
    
    
    
    (20
    )
    
    
    2,734
    
    
    
    (16
    )
    
    
    5,150
    
    
    
    (36
    )Totals for securities available for sale
    
    $
    111,351
    
    
    
    (929
    )
    
    
    102,917
    
    
    
    (1,264
    )
    
    
    214,268
    
    
    
    (2,193
    )Securities held to maturity:Mortgage-backed securities
    
    $
    2,138
    
    
    
    (13
    )
    
    
    2,131
    
    
    
    (9
    )
    
    
    4,269
    
    
    
    (22
    )Corporate bonds
    
    
    2,005
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    2,005
    
    
    
    (2
    )Totals for securities held to maturity
    
    $
    4,143
    
    
    
    (15
    )
    
    
    2,131
    
    
    
    (9
    )
    
    
    6,274
    
    
    
    (24
    )
  49
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2003Less than 12 months
    
    
    12 months or longer
    
    
    TotalGrass
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    unrealized
    
    
    Estimated
    
    
    unrealized
    
    
    Estimated
    
    
    unrealizedfair value
    
    
    losses
    
    
    fair value
    
    
    losses
    
    
    fair value
    
    
    lossesSecurities available for
sale:U.S. Treasury securities
and
obligations of U.S.
government
instrumentalities
    
    $
    91,971
    
    
    
    (926
    )
    
    
    
    
    
    
    
    
    
    
    91,971
    
    
    
    (926
    )Obligations of the
Commonwealth of
Puerto
Rico and its
instrumentalities
    
    
    31,069
    
    
    
    (712
    )
    
    
    
    
    
    
    
    
    
    
    31,069
    
    
    
    (712
    )Obligations
of state and
political
subdivisions
    
    
    4,683
    
    
    
    (114
    )
    
    
    
    
    
    
    
    
    
    
    4,683
    
    
    
    114
    )Mortgage-backed securities
    
    
    6,709
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    6,709
    
    
    
    (33
    )Collateralized mortgage
obligations
    
    
    10,880
    
    
    
    (159
    )
    
    
    1,256
    
    
    
    (4
    )
    
    
    12,136
    
    
    
    (163
    )Total fixed
maturities
    
    
    145,312
    
    
    
    (1,944
    )
    
    
    1,256
    
    
    
    (4
    )
    
    
    146,568
    
    
    
    (1,948
    )Equity securities
    
    
    8,581
    
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    8,581
    
    
    
    (40
    )Totals for
securities
available
for sale
    
    $
    153,893
    
    
    
    (1,984
    )
    
    
    1,256
    
    
    
    (4
    )
    
    
    155,149
    
    
    
    (1,988
    )Securities held to maturity:Mortgage-backed securities
    
    $
    
    
    
    
    
    
    
    
    2,318
    
    
    
    (5
    )
    
    
    2,318
    
    
    
    (5
    )
 The Company regularly monitors and evaluates the difference between the cost and estimated
fair value of investments. For investments with a fair value below cost, the process includes
evaluating the length of time and the extent to which cost exceeds fair value, the prospects and
financial condition of the issuer, and the Companys intent and ability to retain the investment to
allow for recovery in fair value, among other factors. This process is not exact and further
requires consideration of risks such as credit and interest rate risks. Consequently, if an
investments cost exceeds its fair value solely due to changes in interest rates, impairment may
not be appropriate. If after monitoring and analyzing, the Company determines that a decline in the
estimated fair value of any available-for-sale or held-to-maturity security below cost is other
than temporary, the carrying amount of the security is reduced to its fair value. The impairment is
charged to operations and a new cost basis for the security is established. During the year ended
December 31, 2002, the Company recognized an other-than-temporary impairment amounting to $311 on
one of its equity securities classified as available for sale. No impairments were identified nor
recognized by the Company during the years 2004 and 2003. The unrealized losses on investments were mainly caused by interest rate increases. Because
the Company has the ability and intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily impaired.  50
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Maturities of investment securities classified as available for sale and held to maturity were as
follows at December 31,2004: Amortized
    
    
    Estimatedcost
    
    
    fair valueSecurities available for sale:Due in one year or less
    
    $
    3,350
    
    
    
    3,453Due after one year through five years
    
    
    189,530
    
    
    
    189,472Due after five years through ten years
    
    
    188,279
    
    
    
    188,855Due after ten years
    
    
    24,488
    
    
    
    24,219Collateralized mortgage obligations
    
    
    26,058
    
    
    
    26,091Mortgage-backed securities
    
    
    12,430
    
    
    
    12,547$
    444,135
    
    
    
    444,637Securities held to maturity:Due in one year or less
    
    $
    156
    
    
    
    156Due after five years through ten years
    
    
    8,998
    
    
    
    9,239Mortgage-backed securities
    
    
    5,126
    
    
    
    5,108$
    14,280
    
    
    
    14,503
 Expected maturities may differ from contractual maturities because some issuers have the right to
call or prepay obligations with or without call or prepayment penalties. Investments
with an amortized cost of $2,763 and $2,516 (fair value of $2,967 and
$2,747) at
December 31, 2004 and 2003, respectively, were deposited with the Commissioner of Insurance to
comply with the deposit requirements of the Insurance Code the Commonwealth of Puerto Rico (the
Insurance Code). The following investments were held as collateral by financial institutions:  
    Investments with a face value of $1,800 and $40,070 (fair value of $1,792 and $40,336)
at December 31, 2004 and 2003, respectively, were held as collateral for the short-term
borrowings of the Company (note 10).
    Investments with a face value of $2,010 and $2,722 (fair value of $1,979
and $2,772) at Decembcr31, 2004 and 2003, respectively, were held as collateral for the Companys
interest-rate swap agreement (see note 11).  51
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Information regarding realized and unrealized gains and losses from investments for the years ended
December 31, 2004, 2003, and 2002 is as follows: 2004
    
    
    2003
    
    
    2002Realized gains (losses):Fixed maturity securities:Trading securities:Gross gains from sales
    
    $
    594
    
    
    
    1,480
    
    
    
    1,492Gross losses from sales
    
    
    (492
    )
    
    
    (257
    )
    
    
    (1,058
    )102
    
    
    
    1,223
    
    
    
    434Available for sale:Gross gains from sales
    
    
    123
    
    
    
    971
    
    
    
    110Gross losses from sales
    
    
    (241
    )
    
    
    (632
    )
    
    
    (118
    )
    
    
    339
    
    
    
    110Total debt securities
    
    
    (16
    )
    
    
    1,562
    
    
    
    544Equity securities:Trading securities:Gross gains from sales
    
    
    5,608
    
    
    
    2,739
    
    
    
    1,594Gross losses from sales
    
    
    (1,056
    )
    
    
    (6,529
    )
    
    
    (2,026
    )4,552
    
    
    
    (3,790
    )
    
    
    (432
    )Available for sale:Gross gains from sales
    
    
    6,432
    
    
    
    10,593
    
    
    
    391Gross losses from sales
    
    
    
    
    
    
    
    
    
    
    (318
    )6,432
    
    
    
    10,593
    
    
    
    73Total equity securities
    
    
    10,984
    
    
    
    6,803
    
    
    
    (359
    )Net realized gains on securities
    
    $
    10,968
    
    
    
    8,365
    
    
    
    185
  52
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2004
    
    
    2003
    
    
    2002Changes in unrealized gains (losses):Recognized in income:Fixed
maturities - trading
    
    $
    (7
    )
    
    
    (1,068
    )
    
    
    2,036Equity
securities - trading
    
    
    3,049
    
    
    
    15,961
    
    
    
    (10,358
    )$
    3,042
    
    
    
    14,893
    
    
    
    (8,322
    )Recognized in accumulated other comprehensive income:Fixed
maturities - available for sale
    
    
    (1,481
    )
    
    
    (3,783
    )
    
    
    1,094Equity
securities - available for sale
    
    
    2,714
    
    
    
    (4
    )
    
    
    5,195$
    1,233
    
    
    
    (3,787
    )
    
    
    6,289Not recognized in the consolidated financial statements:Fixed
maturities - held to maturity
    
    $
    110
    
    
    
    119
    
    
    
    50
 Deferred tax expense on unrealized gains and losses recognized in accumulated other comprehensive
income during the years 2004, 2003, and 2002 aggregated $3,330, $3,198, and $963,
respectively. As of December 31, 2004, investments in obligations that are payable from and secured by the
same source of revenue or taxing authority, other than investment instruments of the U.S. and the
Commonwealth of Puerto Rico governments, did not exceed 10% of stockholders equity. As of December
31, 2004, no investment in equity securities individually exceeded 10% of stockholders
equity. 
 (5) Net Investment Income Components of net investment income were as follows: Year ended December 312004
    
    
    2003
    
    
    2002Mortgage -backed securities
    
    $
    1,023
    
    
    
    1,495
    
    
    
    937Zero coupons
    
    
    428
    
    
    
    731
    
    
    
    736Bonds and notes
    
    
    20,108
    
    
    
    16,443
    
    
    
    17,394Securities purchased under agreement
to resell
    
    
    
    
    
    
    72
    
    
    
    814Collateralized mortgage obligations
    
    
    930
    
    
    
    2,367
    
    
    
    2,519Common and preferred stocks
    
    
    2,799
    
    
    
    2,385
    
    
    
    1,895Others
    
    
    1,532
    
    
    
    1,434
    
    
    
    716Subtotal
    
    
    26,820
    
    
    
    24,927
    
    
    
    25,011Less investment expenses
    
    
    321
    
    
    
    248
    
    
    
    233Total
    
    $
    26,499
    
    
    
    24,679
    
    
    
    24,778
  53
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 
  (6)
    Premiums and Other Receivables, NetPremiums and other receivables as of December 31 were as follows: 2004
    
    
    2003Premiums
    
    $
    45,451
    
    
    
    37,936Self-funded group receivables
    
    
    17,717
    
    
    
    15,790FEHBP
    
    
    9,346
    
    
    
    7,832Accrued interest
    
    
    5,080
    
    
    
    5,098Reinsurance recoverable on paid losses
    
    
    30,496
    
    
    
    22,067Other
    
    
    16,406
    
    
    
    13,783124,496
    
    
    
    102,506Less allowance for doubtful receivables:Premiums
    
    
    6,456
    
    
    
    4,300Other
    
    
    4,717
    
    
    
    4,71511,173
    
    
    
    9,015Premiums and other receivables, net
    
    $
    113,323
    
    
    
    93,491
 
  (7)
    Property and Equipment, NetProperty and equipment as of December 31 are composed of the following: 2004
    
    
    2003Land
    
    $
    6,531
    
    
    
    6,531Buildings and leasehold improvements
    
    
    33,272
    
    
    
    32,228Office furniture and equipment
    
    
    10,298
    
    
    
    16,394Computer equipment
    
    
    24,867
    
    
    
    29,307Automobiles
    
    
    250
    
    
    
    27475,218
    
    
    
    84,734Less accumulated depreciation and
amortization
    
    
    42,854
    
    
    
    50,522Property and equipment, net
    
    $
    32,364
    
    
    
    34,212
  54
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 
  (8)
    Claim Liabilities The activity in the total claim liabilities during 2004, 2003, and 2002 is as follows: 2004
    
    
    2003
    
    
    2002Claim liabilities at beginning of year
    
    $
    247,920
    
    
    
    244,582
    
    
    
    229,440Reinsurance recoverable on claim liabilities
    
    
    (19,357
    )
    
    
    (13,589
    )
    
    
    (10,062
    )Net claim liabilities at beginning of year
    
    
    228,563
    
    
    
    230,993
    
    
    
    219,378Incurred claims and loss-adjustment
expenses:Current period insured events
    
    
    1,112,325
    
    
    
    1,081,570
    
    
    
    1,079,237Prior period insured events
    
    
    3,468
    
    
    
    (16,220
    )
    
    
    (17,257
    )Total
    
    
    1,115,793
    
    
    
    1,065,350
    
    
    
    1,061,980Payments of losses and loss-adjustnient
expenses:Current period insured events
    
    
    920,173
    
    
    
    906,098
    
    
    
    894,945Prior period insured events
    
    
    171,413
    
    
    
    161,682
    
    
    
    155,420Total
    
    
    1,091,586
    
    
    
    1,067,780
    
    
    
    1,050,365Net claim liabilities at end of year
    
    
    252,770
    
    
    
    228,563
    
    
    
    230,993Reinsurance recoverable on claim liabilities
    
    
    26,555
    
    
    
    19,357
    
    
    
    13,589Claim liabilities at end of year
    
    $
    279,325
    
    
    
    247,920
    
    
    
    244,582
 As a result of changes in estimates of insured events in prior years, the amounts
included as incurred claims for prior period insured events differ from anticipated claims
incurred. The amount in the incurred claims and loss-adjustment expenses for prior period insured
events for the year 2004 is due to an unfavorable development of the claim liabilities
attributed to higher than expected cost per service and utilization trends. The credits in
the incurred claims and loss-adjustment expenses for prior period insured events for the
years 2003, and 2002 are due to a favorable development of the claim liabilities attributed
to better than expected utilization trends. Reinsurance recoverable on unpaid claims is reported as other assets in the accompanying
consolidated financial statements. 
  (9)
    Federal Employees Health Benefits Program TSI entered into a contract, renewable annually, with OPM as authorized by the Federal
Employees Health Benefits Act of 1959, as amended, to provide the FEHBP. The FEHBP covers
postal and federal employees resident in the Commonwealth of Puerto Rico as well as retirees
and eligible dependents. The FEHBP is financed through a negotiated contribution made by the
federal government and employees payroll deductions.  55
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The accounting policies for the FEHBP are the same as those described in the summary of
significant accounting policies. Premium rates are determined annually by TSI and approved by the
federal government. Claims are paid to providers based on the guidelines determined by the federal
government. Operating expenses are allocated from TSIs operations to the FEHBP based on
applicable allocation guidelines (such as, the number of claims processed for each program). The operations of the FEHBP do not result in any excess or deficiency of revenue or expense as
this program has a special account available to compensate any excess or deficiency on its
operations to the benefit or detriment of the federal government. The contract with OPM allows for the payment of service fees as negotiated between TSI and OPM.
Service fees, which are included within the other income, net in the accompanying consolidated
statements of earnings, amounted to $778, $626, and $625, respectively, for each of the years in
the three-year period ended December 31, 2004. The following summarizes the operations of the FEHBP for each of the years in the three-year
period ended December 31, 2004: 2004
    
    
    2003
    
    
    2002Premiums earned:Billed
    
    $
    105,246
    
    
    
    91,241
    
    
    
    92,616Transfer from special account
    
    
    2,897
    
    
    
    12,618
    
    
    
    11,040108,143
    
    
    
    103,859
    
    
    
    103,656Underwriting costs:Claims incurred
    
    
    102,126
    
    
    
    97,428
    
    
    
    97,911Operating expenses
    
    
    5,521
    
    
    
    6,054
    
    
    
    5,505Total underwriting costs
    
    
    107,647
    
    
    
    103,482
    
    
    
    103,416Underwriting gain
    
    $
    496
    
    
    
    377
    
    
    
    240Interest income
    
    $
    282
    
    
    
    249
    
    
    
    385Other expense
    
    
    (778
    )
    
    
    (626
    )
    
    
    (625
    )Total interest income and
other expense, net
    
    $
    (496
    )
    
    
    (377
    )
    
    
    (240
    )
  56
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The changes in the special account during 2004 and 2003 are as follows: 2004
    
    
    2003Funds payable at beginning of year
    
    $
    7,471
    
    
    
    7,066Transfer to premiums earned by the FEHBP
    
    
    (2,897
    )
    
    
    (12,618
    )Contingency reserve payments
    
    
    5,217
    
    
    
    13,023Funds payable at end of year
    
    $
    9,791
    
    
    
    7,471
 The account for the FEHBP is related to the following accounts in the consolidated balance
sheets as of December 31, 2004 and 2003: 2004
    
    
    2003Cash, cash equivalents, and investments
    
    $
    17,154
    
    
    
    19,018Premiums, accrued interest and other receivables
    
    
    9,381
    
    
    
    7,855Claim liabilities, including related unpaid
loss-adjustment expenses
    
    
    (9,920
    )
    
    
    (9,708
    )Due to TSI
    
    
    (6,824
    )
    
    
    (9,694
    )$
    9,791
    
    
    
    7,471
 A contingency reserve is maintained by the OPM at the U.S. Treasury, and is
available to the Company under certain conditions as specified in government regulations.
Accordingly, such reserve is not reflected in the accompanying balance sheets. The balance of
such reserve as of December 31, 2004 and 2003 was $18,415 and $18,584, respectively. The
Company received $5,217, $13,023, and $5,976, of payments made from the contingency reserve
fund of OPM during 2004, 2003, and 2002, respectively. The claim payments and operating expenses charged to the FEHBP are subject to audit by the
U.S. government. Management is of the opinion that an adjustment, if any, resulting from such
audits will not have a significant effect on the accompanying financial statements. The claim
payments and operating expenses reimbursed in connection with the FEHBP have been audited
through 1998 by OPM. 
 (10) Short-Term Borrowings Short-term
borrowings of $1,700 and $38,700 at December 31, 2004 and 2003, respectively,
represent securities sold under agreements to repurchase. The agreement outstanding at
December 31, 2004 matures in March 2005 and accrues interest at London Interbank Offered Rate
(LIBOR) (interest rate of 2.6% at December 31,2004). The investment securities underlying such agreements were delivered to the dealers with whom
the agreements were transacted. The dealers may have sold, loaned, or otherwise disposed of
such securities in the normal course of business operations, but have agreed to resell to the
Company substantially the same securities on the maturity dates of the agreements.  57
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) At December 31, 2004 and 2003, investment securities available for sale with fair value of
$1,792 and $40,336 (amortized cost of $1,800 and $40,070) were pledged as collateral under
these agreements. 
  (11)
    Long-Term Borrowings A summary of long-term borrowings entered by the Company at December 31, 2004 and 2003 is as
follows: 2004
    
    
    2003Secured note 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 L1BOR selected
(which was 3.32% and 2.45% at December 31, 2004 and 2003,
respectively).
    
    $
    15,000
    
    
    
    16,005Senior unsecured notes payable of $50,000 due
September 2019. Interest is payable semiannually at a
fixed rate of 6.30%.
    
    
    50,000
    
    
    
    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 3.30% and 2.17% at December 31, 2004
and 2003, respectively).
    
    
    30,730
    
    
    
    32,370Total long-term borrowings
    
    $
    95,730
    
    
    
    48,375
 Aggregate maturities of the Companys long-term borrowings as of December 31, 2004 are
summarized as follows: 2005
    
    $
    3,1402006
    
    
    3,1402007
    
    
    13,6402008
    
    
    1,6402009
    
    
    1,640Thereafter
    
    
    72,530$
    95,730
 On September 30, 2004, TS1 issued and sold $50,000 of its 6.30% senior unsecured notes
due September 2019 (the notes). The notes are unconditionally guaranteed as to payment of
principal, premium, if any, and interest by the Company. The notes were privately placed to
various institutional investors under a note purchase agreement among TSI, the Company and the
investors. The notes pay interest semiannually beginning on March 2005, until such principal
becomes due and payable. The notes contain certain covenants with which TSI and the Company
have complied with at December 31, 2004.  58
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Debt issuance costs amounting to $600 were deferred and will be amortized over the term of
the notes and are reported as other assets in the accompanying consolidated balance sheets. The proceeds of the $41,000 loan and of the $20,000 note payable were used by the Company for
the purchase of real estate properties from subsidiaries and for working capital needs. The credit agreement related to the $20,000 secured note payable calls for repayments of
principal amount of not less than $250 and in integral multiples of $50. The aggregate
principal amounts shall be reduced annually to the amounts specified on or before the dates
described below: RequiredprincipaloutstandingDate
    
    balanceAugust 1,2005
    
    $
    13,500August 1,2006
    
    
    12,000August 1, 2007
    
    
    
 The loan and note payable previously described are guaranteed by a first position held
by the bank on the Companys land, building, and substantially all leasehold improvements, as
collateral for the term of the loans under a continuing general security agreement. These
credit facilities contain certain covenants, which are normal in this type of credit
facility, which the Company has complied with at December 31, 2004 and 2003. Interest expense on the above long-term borrowings amounted to $2,005, $1,302, and $2,150 for
the years ended December 31, 2004, 2003, and 2002, respectively. 
  (12)
    Derivative Instruments and IIedging Activities The Company has invested in an interest-rate related derivative instruments to manage
its exposure on Its debt instruments. The Company does not enter into derivative instruments
for any purpose other than cash flow hedging purposes. That is, the Company does not
speculate using derivative instruments. By using derivative financial instruments to hedge exposures to changes in interest rates,
the Company exposes itself to credit risk and market risk. Credit risk is the failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty is obligated to the Company, which creates
credit risk for the Company. When the fair value of a derivative contract is negative, the
Company owes the counterparty and, therefore, it does not possess credit risk. The Company
minimizes the credit risk in derivative instruments by entering into transactions with
high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a
change in interest rates, currency exchange rates, or commodity prices. The market risk
associated with interest-rate contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken.  59
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The Company assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future cash flows and
by evaluating hedging opportunities. The Company maintains risk management control systems to
monitor interest rate cash flow risk attributable to both the Companys outstanding or
forecasted debt obligations as well as the Companys offsetting hedge positions. The risk
management control systems involve the use of analytical techniques to estimate the expected
impact of changes in interest rates on the Companys future cash flows. The Company has a variable-rate debt that was used to finance the acquisition of real estate
from subsidiaries (see note 11). The debt obligations expose the Company to variability in
interest payments due to changes in interest rates. Management believes it is prudent to
limit the variability of a portion of its interest payments. To meet this objective, on
December 6, 2002, management entered into an interest-rate swap agreement, with effective
date of April 1, 2003, to manage fluctuations in cash flows resulting from interest rate
risk. This swap economically changes the variable-rate cash flow exposure on the debt
obligations to fixed cash flows. Under the terms of the interest-rate swap, the Company
receives variable interest rate payments and makes fixed interest rate payments, thereby
creating the equivalent of fixed-rate debt. Changes in the fair value of the interest-rate swap, designated as a hedging instrument that
effectively offsets the variability of cash flows associated with the variable-rate of the
long-term debt obligation, are reported in accumulated other comprehensive income, net of the
related tax effect. This amount is subsequently reclassified into interest expense as a yield
adjustment of the hedged debt obligation in the same period in which the related interest
affects earnings. During the years ended December 31, 2004 and 2003, the Company reclassified
$734 and $639 into interest expense, not including any amount representing cash-flow hedge
ineffectiveness since the terms of the swap agreement allow the Company to assume no
ineffectiveness in the agreement. As of December 31, 2004, $142 of deferred loss on the derivative instrument was included
within the accounts payable and accrued liabilities in the accompanying consolidated balance
sheets and is expected to be reclassified to earnings during the next 12 to 18 months.
Transactions and events expected to occur over the next 12 months that will necessitate
reclassifying the derivatives loss to earnings is the repricing of variable-rate debt. There
were no cash-flow hedges discontinued during 2004. 
  (13)
    Retained Earnings and Stockholders Equity As members of the BCBSA, the Company and TSI are required by membership standards of the
association to maintain liquidity as defined by BCBSA. That is, to maintain net worth
exceeding the Company Action Level as defined in the National Association of Insurance
Commissioners (NAIC) Risk-Based Capital for Insurers Model Act. The companies are in
compliance with this requirement.  60
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 
  (14)
    Comprehensive Income The accumulated balances for each classification of comprehensive income are as
follows: AccumulatedUnrealized
    
    
    Minimum
    
    
    
    
    
    
    othergains on
    
    
    pension
    
    
    Cash-flow
    
    
    comprehensivesecurities
    
    
    liability
    
    
    hedges
    
    
    incomeBeginning balance
    
    $
    20,948
    
    
    
    (5,822
    )
    
    
    (367
    )
    
    
    14,759Net current period change
    
    
    7,998
    
    
    
    (3
    )
    
    
    281
    
    
    
    8,276Reclassification
adjustments for gains and losses
reclassified in income
    
    
    (6,897
    )
    
    
    
    
    
    
    
    
    
    
    (6,897
    )Ending balance
    
    $
    22,049
    
    
    
    (5,825
    )
    
    
    (86
    )
    
    
    16,138
 The related deferred tax effects allocated to each component of other comprehensive
income in the accompanying consolidated statements of stockholders equity and comprehensive
income in 2004 and 2003 are as follows: 2004Deferred taxBefore-tax
    
    
    (expense)
    
    
    Net-of-taxamount
    
    
    benefit
    
    
    amountUnrealized holding gains on securities arising during
the period
    
    $
    7,547
    
    
    
    451
    
    
    
    7,998Less reclassification adjustment for gains and
losses realized in income
    
    
    (6,314
    )
    
    
    (583
    )
    
    
    (6,897
    )Net change in unrealized gain
    
    
    1,233
    
    
    
    (132
    )
    
    
    1,101Minimum pension liability adjustment
    
    
    35
    
    
    
    (38
    )
    
    
    (3
    )Cash-flow hedges
    
    
    459
    
    
    
    (178
    )
    
    
    281Net current period change
    
    $
    1,727
    
    
    
    (348
    )
    
    
    1,379
  61
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2003Deferred taxBefore-tax
    
    
    (expense)
    
    
    Net-of-taxamount
    
    
    benefit
    
    
    amountUnrealized holding gains on securities arising during
the period
    
    $
    7,145
    
    
    
    (3,575
    )
    
    
    3,570Less reclassification adjustment for gains and
losses realized in income
    
    
    (10,932
    )
    
    
    1,340
    
    
    
    (9,592
    )Net change in unrealized gain
    
    
    (3,787
    )
    
    
    (2,235
    )
    
    
    (6,022
    )Minimum pension liability adjustment
    
    
    (681
    )
    
    
    2,973
    
    
    
    2,292Cash-flow hedges
    
    
    81
    
    
    
    22
    
    
    
    103Net current period change
    
    $
    (4,387
    )
    
    
    760
    
    
    
    (3,627
    )
 2002Deferred taxBefore-tax
    
    
    (expense)
    
    
    Net-of-taxamount
    
    
    benefit
    
    
    amountUnrealized holding gains on securities arising during
the period
    
    $
    6,472
    
    
    
    (365
    )
    
    
    6,107Less reclassification adjustment for gains and
losses realized in income
    
    
    (183
    )
    
    
    62
    
    
    
    (121
    )Net change in unrealized gain
    
    
    6,289
    
    
    
    (303
    )
    
    
    5,986Minimum pension liability adjustment
    
    
    (8,755
    )
    
    
    641
    
    
    
    (8,114
    )Cash-flow hedges
    
    
    (682
    )
    
    
    212
    
    
    
    (470
    )Net current period change
    
    $
    (3,148
    )
    
    
    550
    
    
    
    (2,598
    )
 Deferred tax expenses or benefits are related to the unrealized holding gains on
investments classified as available for sale held by the Company and its wholly owned
subsidiaries. A deferred tax benefit was also recognized for the deferred loss related to the
Companys cash-flow hedges (see note 12) and the minimum pension liability adjustment (see
note 18). 
 (15) Agency Contract and Expense Reimbursement TSI processes and pays claims as fiscal intermediary for the Medicare  Part B Program.
Claims from this program, which are excluded from the accompanying consolidated statements of
earnings, amounted to $625,841, $579,300, and $574,720 for each of the years in the
three-year period ended December 31, 2004. TSI is reimbursed for administrative expenses incurred in performing this service. For the
years ended December 31, 2004, 2003, and 2002, TSI was reimbursed by $13,980, $11,387, and
S12,743, respectively,  62
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) for such services which are deducted from operating expenses in the accompanying consolidated
statements of earnings. The operating expense reimbursements in connection with processing Medicare claims have been
audited through 1997 by federal government representatives. Management is of the opinion that
no significant adjustments will be made affecting cost reimbursements through December 31,
2004. 
  (16)
    Reinsurance Activity STS and SVTS, in accordance with general industry practices, annually purchase reinsurance to
protect them from the impact of large unforeseen losses and prevent sudden and unpredictable
changes in net income and stockholders equity of the Company. Reinsurance contracts do not
relieve any of the subsidiaries from their obligations to policyholders. In the event that
all or any of the reinsuring companies might be unable to meet their obligations under
existing reinsurance agreements, the subsidiaries would be liable for such defaulted amounts. STS has a number of pro rata and excess of loss reinsurance treaties whereby the subsidiary
retains for its own account all loss payments for each occurrence that does not exceed the
stated amount in the agreements and a catastrophe cover, whereby it protects itself from a
loss or disaster of a catastrophic nature. During 2004 and 2003, STS placed 9% and 11%,
respectively, of its reinsurance business with one reinsurance company. Under these treaties,
STS ceded premiums of $52,214, $43,770, and $39,806 in 2004, 2003, and 2002, respectively. Reinsurance cessions are made on excess of loss and on a proportional basis. Principal
reinsurance agreements are as follows:  
    Property quota share treaty covering for a maximum of $20,000 for any one risk.
Only 37.5% of this treaty was placed with reinsurers. The remaining exposure was covered by a property per risk excess
of loss treaty, which provides reinsurance in excess of $500 up to a maximum of $12,500 or the
remaining 62.5% for any one risk. STS also has an additional property catastrophe excess of loss
contract, which provides protection for losses in excess of $5,000 resulting from any catastrophe,
subject to a maximum loss of $10,000.
    Personal property catastrophe excess of loss. This treaty provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $110,000.
    Commercial property catastrophe excess of loss. This treaty provides protection for losses in excess of $5,000 resulting from any catastrophe, subject to a maximum loss of $180,000.
    Property catastrophe excess of loss. This treaty provides protection for losses in excess of $110,000 and $180,000 with respect to personal and commercial lines, respectively, resulting from any catastrophe, subject to a maximum loss of $75.000,
    Personal lines quota share. This treaty provides protection of 7.5% on all ground-up losses, subject to a limit of $1,000 for any one risk.  63
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data)  
    Reinstatement Premium Protection. This treaty provides a maximum limit of $2,400 in personal lines and $5,500 in commercial lines to cover the necessity of reinstating the catastrophe program in
the event it is activated.
    Casualty excess of loss treaty. This treaty provides reinsurance for losses in excess of $150 up to a maximum of $11,850.
    Medical malpractice excess of loss. This treaty provides reinsurance in excess of $150 up to a maximum of $1,500 per incident.
    Builders risk quota share and first surplus covering contractors risk. This treaty provides protection on a 20/80-quota share basis for the initial $2,500 and a first surplus of $5,000 for a maximum of
$7,500 for any one risk.
    Surety quota share treaty covering contract and miscellaneous surety bond business. This treaty provides reinsurance of up to $3,000 for contract surety bonds, subject to an aggregate of
$7,000 per contractor and $2,000 per miscellaneous surety bond. Facultative reinsurance is obtained when coverage per risk is required, on a proportional basis.
All reinsurance contracts are for a period of one year on a calendar basis and arc subject to
modifications and negotiations in each renewal. SVTS cedes insurance with seven reinsurers. Insurance is ceded on pro rata, facultative excess of
loss and catastrophic bases. Under the pro rata agreement, SVTS reinsures 50% of the risk up to
$250 on the life of any participating individual of certain groups insured. Under this treaty,
SVTS ceded premiums of $2,291 in 2004, $2,236 in 2003, and $2,085 in 2002. The life insurance facultative excess of loss agreements provide for SVTS to retain a portion of
the losses on the life of any participating individual of certain groups insured. Any excess will
be recovered from the reinsurer. This agreement provides for various retentions ($25, $50, and
$75) of the losses. Under this facultative treaty, SVTS ceded premiums of approximately $908 in
2004, $756 in 2003, and $661 in 2002. SVTS also has facultative pro rata agreements for the long-term disability insurance risk as follows:  
    A long-term disability insurance treaty where SVTS reinsures 65% of the risk. Premiums ceded under this agreement amount to $4,521 and $4,507 in 2004 and 2003, respectively. No premiums
were ceded under this agreement during the year 2002.
    A long-term disability insurance treaty where SVTS reinsures 75% of the risk. Premiums ceded under this agreement amounted to $118, $133, and $3,594 during the years 2004, 2003, and 2002,
respectively. The accidental death catastrophic reinsurance covers each and every accident arising out of one
event or occurrence resulting in the death or dismemberment of five or more persons. SVTSs
retention for each event is $250 with a maximum of $1,000 for each event and $2,000 per year.
Under this treaty, the Company ceded premiums of $82 in 2004, $90 in 2003, and $68 in 2002.  64
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT
CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The ceded unearned reinsurance premiums on STS arising from these reinsurance transactions
amounted to $13,751 and $12,114 at December 31, 2004 and 2003, respectively and are reported
as other assets in the accompanying consolidated balance sheets. The effect of reinsurance on premiums earned and claims incurred is as follows: Premiums earned
    
    
    Claims incurred2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Gross
    
    $
    1,356,604
    
    
    
    1,313,820
    
    
    
    1,285,459
    
    
    
    1,133,238
    
    
    
    1,080,207
    
    
    
    1,071,751Ceded
    
    
    (60,181
    )
    
    
    (51,586
    )
    
    
    (48,812
    )
    
    
    (17,445
    )
    
    
    (14,857
    )
    
    
    (9,771
    )Net
    
    $
    1,296,423
    
    
    
    1,262,234
    
    
    
    1,236,647
    
    
    
    1,115,793
    
    
    
    1,065,350
    
    
    
    1,061,980
 
  (17)
    Income Taxes Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax
returns with its subsidiaries. TSI was exempt through 2002 from Puerto Rico income taxes under a ruling issued by the
Department of the Treasury. On June 18, 2003, the Department of the Treasury notified the
Company that the ruling recognizing TSIs tax exemption was terminated effective December 31,
2002. The termination of the ruling responds to a new public policy set by the Department of
the Treasury according to which tax exemptions under Section 1101(6) of the Puerto Rico Code
(P.R. Code) will not apply to corporations organized as for-profit,
which is TSIs case. On July 31, 2003, TSM and TSI executed a closing agreement with the Department of the
Treasury. In general, the terms of the closing agreement established the termination of TSIs
tax exemption effective December 31, 2002. Accordingly, since TSIs tax status changed
effective January 1, 2003, TSI is subject to Puerto Rico income taxes as an other-than-life
insurance entity, as defined in the P.R. Code. The closing agreement also stipulates that TSM will pay taxes (Department of the Treasury tax
assessment) on TSIs accumulated statutory net income, in accordance with the income
recognition methodology applied by the Secretary of the Treasury in the closing agreement and
the ruling mentioned above. This tax ruling established the following methodology for TSM to
determine its tax liability:  
    TSIs accumulated statutory net income while operating under the tax exemption,
amounting to $132,763, was deemed distributed to TSM.
    For tax purposes, TSM recognized the exempt accumulated statutory net income as gross income.
On this amount, TSM recognized an income tax liability amounting to $51,774, which was
determined by applying a tax rate of 39% to the exempt accumulated statutory net income deemed
distributed to TSM. The income tax was recorded by TSM within the current income tax expense
presented in the consolidated statements of earnings. Of this tax, $37,000 was paid on July 31, 2003,
the date of the closing agreement, and $14,774 on April 15, 2004. 65
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) STS is taxed essentially the same as other corporations, with taxable income 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. TSI, STS, and SVTS are also subject to federal income taxes for foreign source dividend income. No
federal income taxes were recognized for 2004, 2003, and 2002. SVTS operates as a qualified domestic life insurance company and is subject to the alternative
minimum tax and taxes on its capital gains. TSM, TCI, and
ISI are subject to Puerto Rico income taxes as a regular corporation, as defined in
the P.R. Code, as amended. 66
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The income tax expense differs from the amount computed by applying the Puerto Rico statutory
income tax rate to the income before income taxes as a result of the following: 2004
    
    
    2003
    
    
    2002Income before taxes
    
    $
    59,817
    
    
    
    91,626
    
    
    
    50,798Less net
income corresponding to TSI
operations, which were exempt from
Puerto Rico income taxes until
December 31, 2002
    
    
    
    
    
    
    
    
    
    
    37,90359,817
    
    
    
    91,626
    
    
    
    12,895Statutory tax rate
    
    
    39
    %
    
    
    39
    %
    
    
    39
    %Income tax expense at
statutory rate of 39%
    
    
    23,329
    
    
    
    35,734
    
    
    
    5,029Increase (decrease) in taxes resulting from:Exempt interest income
    
    
    (6,322
    )
    
    
    (5,689
    )
    
    
    (2,723
    )Alternative minimum tax
    
    
    
    
    
    
    320
    
    
    
    264Excess of regular tax over capital
gain tax on SVTS
    
    
    (327
    )
    
    
    
    
    
    
    Excess of regular tax over alternative
minimum tax on SVTS
    
    
    
    
    
    
    (1,164
    )
    
    
    (1,095
    )Effect of using earnings under statutory
accounting principles instead of
GAAP earnings for TSI and STS
tax computations
    
    
    (658
    )
    
    
    (7,026
    )
    
    
    900Effect of taxing capital gains at a
preferential rate
    
    
    (2,594
    )
    
    
    (1,897
    )
    
    
    Department of the Treasury tax
assessment
    
    
    
    
    
    
    51,774
    
    
    
    Dividends received deduction
    
    
    (498
    )
    
    
    (145
    )
    
    
    (68
    )Effect of change in TSI tax status
    
    
    1,172
    
    
    
    (5,023
    )
    
    
    Other disallowances, net
    
    
    956
    
    
    
    369
    
    
    
    149Other
    
    
    (1,044
    )
    
    
    (1,856
    )
    
    
    93Total income tax expense
    
    $
    14,014
    
    
    
    65,397
    
    
    
    2,549
 67
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Deferred income taxes reflect the tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and income tax purposes.
The net deferred tax liability at December 31, 2004 and 2003 of the Company and its
subsidiaries is composed of the following: 2004
    
    
    2003Deferred tax assets:Allowance for doubtful receivables
    
    $
    4,258
    
    
    
    3,368Cash-flow hedges
    
    
    56
    
    
    
    234Nondeductible depreciation
    
    
    423
    
    
    
    468Employee benefits plan
    
    
    2,759
    
    
    
    2,749Postretirement benefits
    
    
    1,447
    
    
    
    1,299Deferred compensation
    
    
    2,071
    
    
    
    1,314Contingency reserves
    
    
    133
    
    
    
    367Additional minimum pension liability
    
    
    3,576
    
    
    
    3,614Other
    
    
    419
    
    
    
    80Total gross deferred tax assets
    
    
    15,142
    
    
    
    13,493Deferred tax liabilities:Deferred policy acquisition costs
    
    
    (5,347
    )
    
    
    (4,854
    )Unamortized bond issue costs
    
    
    (230
    )
    
    
    Unrealized gain on securities available for sale
    
    
    (3,330
    )
    
    
    (3,198
    )Unrealized gain on trading securities
    
    
    (3,331
    )
    
    
    (2,659
    )Catastrophe loss reserve trust fund
    
    
    (4,873
    )
    
    
    (4,674
    )Gross deferred tax liabilities
    
    
    (17,111
    )
    
    
    (15,385
    )Net deferred tax liability
    
    $
    (1,969
    )
    
    
    (1,892
    )
 In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become
deductible. Management believes that it is more likely than not that the Company will realize
the benefits of these deductible differences. 
  (18)
    Pension Plan The Company sponsors a noncontributory defined-benefit pension plan for all of its employees
and for the employees of its subsidiaries who are age 21 or older and have completed one year
of service. Pension benefits begin to vest after five years of vesting service, as defined,
and are based on years of service and final average salary, as defined. The funding policy is
to contribute to the plan as necessary to meet the minimum funding requirements set forth in
the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts
as the Company may determine to be appropriate from time to time. The measurement date used
to determine pension benefit measures for the pension plan is December 31. 68
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The following table sets forth the plans benefit obligations, fair value of plan assets, and
funded status as of December 31, 2004 and 2003, accordingly: 2004
    
    
    2003Change in benefit obligation:Projected benefit obligation at beginning of year
    
    $
    61,336
    
    
    
    53,993Service cost
    
    
    4,100
    
    
    
    3,631Interest cost
    
    
    3,843
    
    
    
    3,778Benefit payments
    
    
    (4,266
    )
    
    
    (215
    )Actuarial losses
    
    
    6,065
    
    
    
    10,568Settlements
    
    
    
    
    
    
    (10,419
    )Projected benefit obligation at end of year
    
    $
    71,078
    
    
    
    61,336Accumulated benefit obligation at end of year
    
    $
    51,412
    
    
    
    44,847
 At December 31, 2004 and 2003, the Company recognized an additional minimum pension liability
of $9,999 and $10,081, respectively, in order to bring the accrued pension liability up to the
level of the plans unfunded accumulated benefit obligation. This amount is offset by an
intangible asset amounting to $598 and $645 as of December 31, 2004 and 2003, respectively that is
based on the outstanding unrecognized prior service cost. The net amount of the additional minimum
pension liability and the intangible asset was recorded through a charge to accumulated other
comprehensive income, net of a deferred tax asset of $3,576 and $3,614 at December 31, 2004 and
2003, respectively. 2004
    
    
    2003Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    32,142
    
    
    
    25,275Actual return on assets (net of expenses)
    
    
    3,765
    
    
    
    5,501Employer contributions
    
    
    10,931
    
    
    
    12,000Benefit payments
    
    
    (4,266
    )
    
    
    (215
    )Settlements
    
    
    
    
    
    
    (10,419
    )Fair value of plan assets at end of year
    
    $
    42,572
    
    
    
    32,142Reconciliation of funded status:Funded status
    
    $
    (28,507
    )
    
    
    (29,193
    )Unrecognized prior service cost
    
    
    598
    
    
    
    645Unrecognized actuarial loss
    
    
    29,068
    
    
    
    25,924Prepaid (accrued) benefit cost
    
    $
    1,159
    
    
    
    (2,624
    )
 69
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The components of net periodic benefit cost for 2004, 2003, and 2002 were as follows: 2004
    
    
    2003
    
    
    2002Components of net periodic benefit cost:Service cost
    
    $
    4,100
    
    
    
    3,631
    
    
    
    3,115Interest cost
    
    
    3,843
    
    
    
    3,778
    
    
    
    3,369Expected return on assets
    
    
    (2,549
    )
    
    
    (2,494
    )
    
    
    (2,754
    )Amortization of prior service cost
    
    
    48
    
    
    
    48
    
    
    
    57Amortization of actuarial loss
    
    
    1,706
    
    
    
    1,569
    
    
    
    392Settlement loss
    
    
    
    
    
    
    4,404
    
    
    
    Net periodic benefit cost
    
    $
    7,148
    
    
    
    10,936
    
    
    
    4,179
 Net periodic pension expense may include settlement charges as a result of retirees selecting
lump-sum distributions. Settlement charges may increase in the future if the number of eligible
participants deciding to receive distributions and the amount of their benefits increases. The following assumptions were used on a weighted average basis to determine benefit obligations
of the plan as of December 31, 2004, 2003, and 2002: 2004
    
    
    2003
    
    
    2002Discount rate
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    6.75
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Rate of compensation increase
    
    Graded; 3.00%
    
    Graded; 3.00%
    
    Graded; 3.00%to 6.50
    %
    
    
    to 6.50
    %
    
    
    to 6.50
    %
 The assumptions used in computing net periodic benefit cost-for the years ended December 31,
2004, 2003, and 2002 were as follows: 2004
    
    
    2003
    
    
    2002Assumptions used in computing net
periodic benefit cost:Discount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    9.00
    %Rate of compensation increase
    
    Graded; 3.00%
    
    Graded; 3.00%
    
    Graded; 3.00%to 6.5
    %
    
    
    to 6.5
    %
    
    
    to 6.5
    %
 The basis used to determine the overall expected long-term rate of return on assets
assumption was an analysis of the historical rate of return for a portfolio with a similar asset
allocation. The assumed long-term asset allocation for the plan is as follows: 53%-67% equity
securities; 26%-36% debt securities; 4%-12% real estate; and 0%-4% cash. 70
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Using historical investment returns, the plans expected asset mix, and adjusting for the
difference between expected inflation and historical inflation, the 25th to 75th percentile range
of annual rates of return is 7.1%-8.9%. The Company selected a rate from within this range of 8.50%, which reflects our best estimate for
this assumption based on the historical data described above, information on the historical
returns on assets invested in the pension trust, and expected future conditions. This rate is net
of both investment related expenses and a 0.25% reduction for other administrative expenses
charged to the trust.  (a)
    Plan AssetsThe Companys weighted average asset allocations at
December 31, 2004 and 2003 by asset
category were as follows: Asset category
    
    2004
    
    
    2003Equity securities
    
    
    62
    %
    
    
    62
    %Debt securities
    
    
    28
    
    
    
    29Real estate
    
    
    8
    
    
    
    4Other
    
    
    2
    
    
    
    5Total
    
    
    100
    %
    
    
    100
    %
  The Companys plan assets are invested in the National Retirement Trust. The National
Retirement Trust was formed to provide financial and legal resources to help members of the
Blue Cross Blue Shield Association offer retirement benefits to their employees.The investment program for the National Retirement Trust is based on the precepts of capital
market theory that are generally followed by institutional investors and who by definition,
are long-term oriented investors. This philosophy holds that:  
    Increasing risk is rewarded with compensating returns over time, and therefore,
prudent risk taking is justifiable for long-term investors.
    Risk can be controlled through diversification of assets classes and investment approaches, as
well as diversification of individual securities.
    Risk is reduced by time, and over time the relative performance of different asset classes is
reasonably consistent. Over the long-term, equity investments have provided and should
continue to provide superior returns over other security types. Fixed-income securities can
dampen volatility and provide liquidity in periods of depressed economic activity.
    The strategic or long-term allocation of assets among various asset classes is an important
driver of long-term returns.
    Relative performance of various asset classes is unpredictable in the short-term
and attempts to shift tactically between asset classes are unlikely
to be rewarded. 71
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Investments will be made for the sole interest of the participants and beneficiaries
of the programs participating in the National Retirement Trust. Accordingly, the
assets of the National Retirement Trust shall be invested in accordance with these
objectives:  
    Ensure assets are available to meet current and future obligations
of the participating programs when due.
    Earn a minimum rate of return no less than the actuarial
interest rate.
    Earn the maximum return that can be realistically achieved in the
markets over the long-term at a specified and controlled level of risk in order to minimize future contributions.
    Invest the assets with the care, skill, and diligence that a prudent person acting in a like
capacity would undertake. The Committee acknowledges that, in the process, it has
the objective of controlling the costs involved with administering and managing the
investments of the National Retirement Trust. The target asset allocation for the Company is as follows: 53%-67% equity securities;
26%-36% debt securities; 4%-12% real estate; and 0%-4% cash.  (b)
    Cash FlowsThe Company expects to contribute $7,900 to its pension program in 2005.The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid: 2005
    
    $
    2,2882006
    
    
    2,5192007
    
    
    3,0422008
    
    
    3,2922009
    
    
    4,088Years 2010 -2014
    
    
    27,902$
    43,131
 
  (19)
    Catastrophe Loss Reserve Trust FundIn accordance with the Act No. 73 of August 12, 1994, and Chapter 25 of the
Insurance Code, STS is required to establish and maintain a trust fund for the payment of
catastrophe losses. The establishment of this trust fund will increase the financial
capacity in order to offer protection for those insurers exposed to catastrophe losses.
This trust may invest its funds in securities authorized by the Insurance Code, but not in
investments whose value may be affected by hazards covered by the catastrophic insurance
losses. The interest earned on these investments and any realized gain (loss) on investment
transactions becomes part of the reserve for catastrophic insurance losses and income
(expense) of the Company. The assets in this fund, which are reported as other assets in
the accompanying consolidated balance sheets, will be used solely and exclusively to pay
catastrophe losses covered under policies written in Puerto Rico. 72
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The retained earnings of STS are restricted in the accompanying consolidated balance sheets by the
total catastrophe loss reserve balance. In addition,
pursuant to Article 8 of Rule LXXII of October 15, 1999, of the Insurance Code, STS
is required to make a current year deposit to the fund, if any, on or before January 30 of the
following year. Contributions are determined by a rate (1.0% for 2004 and 2003), imposed by the
Commissioner of Insurance for the catastrophe policies written in that year. The amount deposited
in the trust fund is deductible for income tax purposes. In
January 2005 and 2004, the Company deposited to the trust fund $663 and $621, respectively,
corresponding to the contributions for catastrophic policies written in 2004 and 2003,
respectively. The amount deposited in the trust fund may be reimbursed in the case that STS ceases
to underwrite risks subject to catastrophe losses. As of December 31, 2004 and 2003, the movement of the catastrophe loss reserve is as follows: 2004
    
    
    2003Catastrophe loss reserve at beginning of year
    
    $
    22,418
    
    
    
    20,824Investment income
    
    
    1,042
    
    
    
    973Catastrophe loss reserve trust fund at end of year
    
    
    23,460
    
    
    
    21,797Contribution payable
    
    
    663
    
    
    
    621Restricted retained earnings
    
    $
    24,123
    
    
    
    22,418
 The trust fund assets are composed of the following: 2004
    
    
    2003U.S. Treasury securities, at
amortized cost (fair value of $376
in 2003)
    
    $
    
    
    
    
    370Federal Home Loan Bank notes,
at amortized cost (fair value of
$16,269 and $18,991 in 2004 and
2003, respectively)
    
    
    16,598
    
    
    
    19,273Federal Farm Credit Bank
note, at amortized cost (fair value
of $5,035 in 2004)
    
    
    5,035
    
    
    
    Obligations of the Commonwealth
of Puerto Rico and its
instrumentalities, at amortized cost
(fair value of $1,575 and $1,553 in
2004 and 2003, respectively)
    
    
    1,500
    
    
    
    1,500Accrued interest receivable
    
    
    219
    
    
    
    277Cash and cash equivalents
    
    
    108
    
    
    
    377$
    23,460
    
    
    
    21,797
 73
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Maturities of investments held in the catastrophe loss reserve trust fund were as follows at
December 31, 2004: Amortized
    
    
    Estimatedcost
    
    
    fair valueDue after one year through five years
    
    $
    7,829
    
    
    
    7,941Due after five years through ten years
    
    
    10,276
    
    
    
    10,226Due after ten years
    
    
    5,028
    
    
    
    4,712$
    23,133
    
    
    
    22,879
 
  (20)
    Commitments The Company leases its regional offices, certain equipment, and warehouse facilities
under noncancelable operating leases. Minimum annual rental commitments at December 31, 2004
under existing agreements are summarized as follows: Year ending December 31 :2005
    
    $
    3,4412006
    
    
    2,3932007
    
    
    1,6932008
    
    
    4812009
    
    
    266Thereafter
    
    
    755Total
    
    $
    9,029
 Rental expense for 2004, 2003, and 2002 was $1,653, $1,460, and $1,459, respectively,
after deducting the amount of $489, $689, and $441, respectively, reimbursed by Medicare (see
note 15). 
  (21)
    Contingencies  (a)
    Legal Proceedings  (i)
    At December 31, 2004, the Company is defendant in various lawsuits arising in
the ordinary course of business. In the opinion of management, with the advice of
its legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the consolidated financial position and results of
operations of the Company.(ii)
    The Company and others are defendants in a class action complaint
alleging violations under the Racketeer Influenced and Corrupt Organizations Act.
The suit, among other allegations, alleges a scheme to defraud the plaintiffs by
acquiring control of TSI through illegally capitalizing TSI and later converting it
into a for-profit organization and depriving the shareholders of TSI of their
ownership rights. The plaintiffs base their later allegations on the supposed
decisions of TSls board of directors and shareholders, allegedly made in 1979, to 74
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) operate with certain restrictions in order to turn TSI into a charitable corporation,
basically forever. While the case is still in the very early stages of litigation and the
case has not been certified as a class action, a motion to dismiss was filed by defendants.
On March 15, 2004, plaintiffs filed a response to this motion. On April 30, 2004, defendants
filed a reply in support of motion to dismiss. On March 4, 2005, the Court issued an Opinion
and Order. In this Opinion and Order, of the twelve counts included in the complaint, eight
counts were dismissed for failing to assert an actionable injury; six for lack of standing;
and two for failing to plead with sufficient particularity in compliance with the Rules. All
shareholder allegations, including those described above, were dismissed in the Opinion and
Order. The remaining four counts were found standing, in a limited way, in the Opinion and
Order. Finally, the Court ordered that by March 24, 2005 one of the counts left standing be
replead to conform to the Rules and that by March 28, 2005 a proposed schedule for discovery
and other submissions be filed. This case is still pending before the United States District
Court for the District of Puerto Rico. In the opinion of management, with the advice of its
legal counsel, the ultimate disposition of these matters will not have a material adverse
effect on the consolidated financial position and results of operations of the Company.  (iii)
    TSM, TSI and others are defendants in a complaint where the plaintiffs allege that the
defendants, among other things, violated provisions of the Insurance Code, anti-monopolistic
practices and unfair business practices. After a preliminary review of the complaint, it
appears that many of the allegations brought by the plaintiffs have been resolved in favor of
TSM and TSI in previous cases brought by the same plaintiffs in the U.S. District Court for
the District of Puerto Rico and by most of the plaintiffs in the local courts. The
defendants, including TSM and TSI answered the complaint, filed a counter-claim and filed
several motions to dismiss this claim. The case has recently been reassigned to a new judge.
In the opinion of management, with the advice of its legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the consolidated financial position and
results of operations of the Company.(iv)
    On May 22, 2003, a class action suit was filed by Kenneth A. Thomas, MD and Michael Kutell,
MD, on behalf of themselves and all other similarly situated and the Connecticut State
Medical Society against the BCBSA and multiple other insurance companies including TSI. 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 Blue Cross and Blue
Shield 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 BCBSA. However, on June 18, 75
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2004, the Plaintiffs moved to amend the complaint to include the Colegio de Medicos
Cirujanos de Puerto Rico (a compulsory association grouping all physicians in Puerto
Rico), Marissel Velazquez, MD, President of the Colegio de Medicos y Cirujanos de
Puerto Rico, and Andres Melendez, MD, as plaintiffs against TSI. Later Marissel
Velazquez, MD) voluntarily dismissed her complaint against TSI. TSI, along with the
other defendants, moved to dismiss the complaint under multiple grounds, including but
not limited to arbitration and applicability of the McCarran Ferguson Act. In the
opinion of management, with the advice of its legal counsel, the ultimate disposition
of these matters will not have a material adverse effect on the consolidated financial
position and results of operations of the Company.  (v)
    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, all members of the BCBSA. The
individual plaintiffs bring this action on behalf of themselves and a class of similarly
situated physicians seeking redress for alleged illegal acts of the defendants, which
are alleged to have resulted in a loss of Plaintiffs property and a detriment to their
business, and for declaratory and injunctive relief to end those practices and prevent
further losses. Plaintiffs alleged that the defendants, on their own and as part of a
common scheme, systematically deny, delay and diminish the payment due to the doctors so that they are not paid in a timely manner for the covered, medically necessary
services they render. The class action complaint alleges that 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. On June 25, 2004, plaintiffs amended the complaint but the
allegations against TSI did not vary. Management believes that TSI was made a party to
this litigation for the sole reason that TSI is associated with the BCBSA. TSI, along
with the other defendants, moved to dismiss the complaint under multiple grounds,
including but not limited to arbitration and applicability of the McCarran Ferguson Act.
In the opinion of management, with the advice of its legal counsel, the ultimate
disposition of these matters will not have a material adverse effect on the consolidated
financial position and results of operations of the Company.  (b)
    Guarantee Associations Pursuant to the Insurance Code, STS is a member of Sindicato de Aseguradores para la
Suscripcion Conjunta de Seguros de Responsabilidad Profesional Medico-Hospitalaria (SIMED)
and of the Sindicato de Aseguradores de Responsabilidad Profesional para Medicos. Both
syndicates were organized for the purpose of underwriting medical-hospital professional
liability insurance. As a member, the subsidiary shares risks with other member companies
and, accordingly, is contingently liable in the event that the above-mentioned syndicates
cannot meet their obligations. During 2004 and 2003, no assessments or payments were made for
this contingency. 76
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) Additionally, pursuant to Article 12 of Rule LXIX of the Insurance Code, STS is a member
of the Compulsory Vehicle Liability Insurance Joint Underwriting Association (the
Association). The Association was organized during 1997 to underwrite insurance coverage
of motor vehicle property damage liability risks effective January 1, 1998. As a
participant, STS shares the risk, proportionately with other members, based on a formula
established by the Insurance Code. During the three-year period ended December 31, 2004,
the Association distributed experience refunds. STS received refunds amounting to $840,
$638, and $565 in 2004, 2003, and 2002, respectively. STS is a member of the Asociación de Garantia de Seguros de Todas Clases, excepto Vida,
Incapacidad y Salud and TSI and SVTS are members of the Asociación de Garantia de Seguros
de Vida, Incapacidad y Salud. As members, they are required to provide funds for the
payment of claims and unearned premiums reimbursements for policies issued by insurance
companies declared insolvent. At December 31, 2003, STS had accrued $250 for future
assessments. No accrual was made at December 31, 2004, since STS has not been informed of
any further assessments. During 2004, 2003, and 2002, STS paid assessments of $1,121,
$500, and $654, respectively. Moreover, no assessments were attributable to TSI and SVTS
during 2004, 2003, and 2002. 
  (22)
    Statutory Accounting TSI, SVTS, and STS (collectively known as the regulated subsidiaries) are regulated by
the Commissioner of Insurance. The regulated subsidiaries are required to prepare financial
statements using accounting practices prescribed or permitted by the Commissioner of
Insurance, which differ from GAAP. The principal differences resulting between the financial statements of the regulated
subsidiaries under statutory accounting practices with GAAP are as follows:  
    The accounting basis of investments in debt and equity securities are based upon the
rules promulgated by NAIC Statutory Accounting Principles (SAP).
    Certain assets (primarily prepaid expenses, furniture and equipment, and premiums balances not
collected within 90 days) are classified as nonadmitted and are excluded from the balance sheets by
a charge to unassigned capital and surplus.
    Certain notes payable are classified as surplus notes under statutory accounting practices.
    Policy acquisitions costs (mainly commissions) are not deferred over the periods in which the
premiums are earned but charged to operations as incurred. The NAIC recodified SAP to promote standardization throughout the industry and effective
January 1, 2001, the Company adopted these new statutory accounting principles. The
Commissioner of Insurance adopted NAIC SAP as long as it does not contradict the provisions of
the Insurance Code. This results in the situation that various accounting practices prescribed
or permitted by the Commissioner of Insurance depart from NAIC SAP. In terms of permitted accounting practices, the Commissioner of Insurance through a circular
letter dated September 14, 2001, permits property and casualty insurance companies in Puerto
Rico to not record the tax liability that otherwise would have resulted from the contributions
made to the catastrophe reserve fund 77
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) (see notes 17 and 19). The use of this permitted statutory accounting practice relieves STS in 2004
and 2003 of recording a charge to operations of approximately $ 199 and $ 186, respectively, and a
charge to the statutory surplus of approximately $4,900 and $4,700 in 2004 and 2003, respectively,
which otherwise would have been recorded under the prescribed statutory accounting practices. The accumulated earnings of TSI, SVTS, and STS are restricted as to the payment of dividends by
statutory limitations applicable to domestic insurance companies. Such limitations restrict the
payment of dividends by insurance companies generally to unrestricted unassigned surplus funds
reported for statutory purposes. As more fully described in note 19, a portion of the accumulated
earnings of STS are also restricted by the catastrophe loss reserve balance (amounting to $24,123
and $22,418 as of December 31, 2004 and 2003, respectively) as required by the Insurance Code. The net admitted assets, unassigned surplus, and capital and surplus of the insurance
subsidiaries at December 31, 2004 and 2003 are as follows: 2004 ( Unaudited)TSI
    
    
    STS
    
    
    SVTSNet admitted assets
    
    $
    494,199
    
    
    
    225,684
    
    
    
    71,551Unassigned surplus
    
    
    164,698
    
    
    
    36,831
    
    
    
    20,045Capital and surplus
    
    
    191,239
    
    
    
    69,455
    
    
    
    21,245
 2003TSI
    
    
    STS
    
    
    SVTSNet admitted assets
    
    $
    467,153
    
    
    
    195,030
    
    
    
    60,616Unassigned surplus
    
    
    149,393
    
    
    
    28,102
    
    
    
    19,872Capital and surplus
    
    
    175,934
    
    
    
    59,020
    
    
    
    21,072
 The net income of the insurance subsidiaries for the years ended December 31, 2004, 2003, and 2002 is as followss: TSI
    
    
    STS
    
    
    SVTS2004 (unaudited)
    
    $
    31,045
    
    
    
    9,589
    
    
    
    6072003
    
    
    41,321
    
    
    
    6,207
    
    
    
    3,9902002
    
    
    36,988
    
    
    
    3,481
    
    
    
    3,442
 
  (23)
    Net Income Available to Stockholders and Basic Net Income per Share The Company presents only basic earnings per share, which is comprised of the net income that could
be available to common stockholders divided by the weighted average number of common shares
outstanding for the period. 78
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) The following table sets forth the net income available for distribution to stockholders for the
three-year period ended December 31, 2004. The amount presented as available for distribution to
stockholders for the year 2002 exclude TSIs results of
operations due to TSIs prohibition to
declare dividends, as required in its tax exemption ruling. Due to
TSIs change in tax status
effective January 1, 2003 (see note 17), TSIs earnings are now available for distribution to
shareholders. 2004
    
    
    2003
    
    
    2002Net income
    
    $
    45,803
    
    
    
    26,229
    
    
    
    48,249Less TSI result of operations
    
    
    
    
    
    
    
    
    
    
    37,903Net income available
to
stockholders
    
    $
    45,803
    
    
    
    26,229
    
    
    
    10,346
 The following table sets forth the computation of basic earnings per share for the three-year
period ended 31, 2004. 2004
    
    
    2003
    
    
    2002Numerator for basic earnings per share:Net income available to stockholders
    
    $
    45,803
    
    
    
    26,229
    
    
    
    10,346Denominator for basic earnings per share:Weighted average of common shares
outstanding
    
    
    8,919
    
    
    
    9,180
    
    
    
    9,531Basic net income per share
    
    $
    5,135
    
    
    
    2,857
    
    
    
    1,086
 79
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 
  (24)
    Quarterly Financial Information (Unaudited) 2004March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    TotalRevenue:Premiums earned, net
    
    $
    318,646
    
    
    
    322,896
    
    
    
    325,926
    
    
    
    328,955
    
    
    
    1 ,296,423Amounts attributable to
self-funded arrangements
    
    
    43,038
    
    
    
    46,045
    
    
    
    46,044
    
    
    
    46,575
    
    
    
    181,702Less amounts attributable to
claims under self-funded
arrangements
    
    
    (40,582
    )
    
    
    (42,485
    )
    
    
    (42,925
    )
    
    
    (43,932
    )
    
    
    (169,924
    )321,102
    
    
    
    326,456
    
    
    
    329,045
    
    
    
    331,598
    
    
    
    1,308,201Net investment income
    
    
    6,582
    
    
    
    6,393
    
    
    
    6,516
    
    
    
    7,008
    
    
    
    26,499Net realized investment gains
    
    
    1,383
    
    
    
    1,365
    
    
    
    4,237
    
    
    
    3,983
    
    
    
    10,968Net unrealized investment gain
(loss) on trading securities
    
    
    1,819
    
    
    
    (3,252
    )
    
    
    (435
    )
    
    
    4,910
    
    
    
    3,042Other income, net
    
    
    566
    
    
    
    1,120
    
    
    
    728
    
    
    
    946
    
    
    
    3,360Total revenue
    
    
    331,452
    
    
    
    332,082
    
    
    
    340,091
    
    
    
    348,445
    
    
    
    1,352,070Benefits and expenses:Claims incurred
    
    
    275,748
    
    
    
    286,246
    
    
    
    283,946
    
    
    
    269,853
    
    
    
    1,115,793Operating expenses, net of
reimbursement for services
    
    
    39,838
    
    
    
    42,635
    
    
    
    40,416
    
    
    
    48,990
    
    
    
    171,879Interest expense
    
    
    901
    
    
    
    931
    
    
    
    1,018
    
    
    
    1,731
    
    
    
    4,581Total benefits and
expenses
    
    
    316,487
    
    
    
    329,812
    
    
    
    325,380
    
    
    
    320,574
    
    
    
    1,292,253Income before
taxes
    
    
    14,965
    
    
    
    2,270
    
    
    
    14,711
    
    
    
    27,871
    
    
    
    59,817Income tax expense:Current
    
    
    3,298
    
    
    
    1,248
    
    
    
    2,756
    
    
    
    6,983
    
    
    
    14,285Deferred
    
    
    511
    
    
    
    (457
    )
    
    
    (139
    )
    
    
    (186
    )
    
    
    (271
    )Total income taxes
    
    
    3,809
    
    
    
    791
    
    
    
    2,617
    
    
    
    6,797
    
    
    
    14,014Net income
    
    $
    11,156
    
    
    
    1,479
    
    
    
    12,094
    
    
    
    21,074
    
    
    
    45,803Basic net income per share
    
    $
    1,239
    
    
    
    166
    
    
    
    1,361
    
    
    
    2,371
    
    
    
    5,137
 80
    
    (Continued)




---



##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2003March 31
    
    
    June30
    
    
    September 30
    
    
    December 31
    
    
    TotalRevenue:Premiums earned, net
    
    $
    315,556
    
    
    
    313,789
    
    
    
    314,043
    
    
    
    318,846
    
    
    
    1,262,234Amounts attributable to
self-funded arrangements
    
    
    40,003
    
    
    
    40,181
    
    
    
    40,790
    
    
    
    41,314
    
    
    
    162,288Less amounts attributable to
claims under self-funded
arrangements
    
    
    (37,359
    )
    
    
    (37,191
    )
    
    
    (38,410
    )
    
    
    (38,846
    )
    
    
    (151,806
    )318,200
    
    
    
    316,779
    
    
    
    3 1 6,423
    
    
    
    321,314
    
    
    
    1,272,716Net investment income
    
    
    6,098
    
    
    
    6,286
    
    
    
    5,868
    
    
    
    6,427
    
    
    
    24,679Net realized investment (losses)
gains
    
    
    (3,023
    )
    
    
    6,644
    
    
    
    3,669
    
    
    
    1,075
    
    
    
    8,365Net unrealized investment gain
(loss) on trading securities
    
    
    2,092
    
    
    
    7,276
    
    
    
    (345
    )
    
    
    5,870
    
    
    
    14,893Other income, net
    
    
    850
    
    
    
    1,524
    
    
    
    532
    
    
    
    1,797
    
    
    
    4,703Total revenue
    
    
    324,217
    
    
    
    338,509
    
    
    
    326,147
    
    
    
    336,483
    
    
    
    1,325,356Benefits and expenses:Claims incurred
    
    
    270,831
    
    
    
    259,172
    
    
    
    264,202
    
    
    
    271,145
    
    
    
    1,065,350Operating expenses, net of
reimbursement for services
    
    
    38,490
    
    
    
    39,917
    
    
    
    37,301
    
    
    
    49,441
    
    
    
    165,149Interest expense
    
    
    703
    
    
    
    765
    
    
    
    776
    
    
    
    987
    
    
    
    3,231Total benefits and
expenses
    
    
    310,024
    
    
    
    299,854
    
    
    
    302,279
    
    
    
    321,573
    
    
    
    1,233,730Income before taxes
    
    
    14,193
    
    
    
    38,655
    
    
    
    23,868
    
    
    
    14,910
    
    
    
    91,626Income tax expense:Current
    
    
    377
    
    
    
    63,909
    
    
    
    6,967
    
    
    
    (461
    )
    
    
    70,792Deferred
    
    
    339
    
    
    
    (1,968
    )
    
    
    139
    
    
    
    (3,905
    )
    
    
    (5,395
    )Total income taxes
    
    
    716
    
    
    
    61,941
    
    
    
    7,106
    
    
    
    (4,366
    )
    
    
    65,397Net income (loss)
    
    $
    13,477
    
    
    
    (23,286
    )
    
    
    16,762
    
    
    
    19,276
    
    
    
    26,229Basic net income (loss) per share
    
    $
    451
    
    
    
    (2,514
    )
    
    
    1,844
    
    
    
    2,136
    
    
    
    2,857
 81
    
    (Continued)




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 
 (25) Reconciliation of Net Income to Net Cash Provided by Operating Activities A reconciliation of net income to net cash provided by operating activities follows: 2004
    
    
    2003
    
    
    2002Net income
    
    $
    45,803
    
    
    
    26,229
    
    
    
    48,249Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    5,343
    
    
    
    5,709
    
    
    
    7,595Net amortization of investments premiums
    
    
    1,035
    
    
    
    1,866
    
    
    
    2Accretion in value of securities
    
    
    (464
    )
    
    
    (1,188
    )
    
    
    (1,664
    )Increase (decrease) in provision for
doubtful receivables
    
    
    2,158
    
    
    
    (4,779
    )
    
    
    2,116(Decrease) increase in net deferred
tax liability
    
    
    (271
    )
    
    
    (5,396
    )
    
    
    1,233Gain on sale of securities
    
    
    (10,968
    )
    
    
    (8,365
    )
    
    
    (185
    )Unrealized (gain) loss of trading securities
    
    
    (3,042
    )
    
    
    (14,893
    )
    
    
    8,322Proceeds from trading securities sold
or matured:Fixed maturities sold
    
    
    50,330
    
    
    
    77,582
    
    
    
    103,012Equity securities
    
    
    26,523
    
    
    
    28,924
    
    
    
    11,804Acquisition of securities in trading portfolio:Fixed maturities
    
    
    (54,550
    )
    
    
    (96,237
    )
    
    
    (112,879
    )Equity securities
    
    
    (38,700
    )
    
    
    (38,956
    )
    
    
    (16,471
    )Gain on sale of property and equipment
    
    
    (16
    )
    
    
    (58
    )
    
    
    (1
    )(Increase) decrease in premiums receivable
    
    
    (10,956
    )
    
    
    4,809
    
    
    
    (5,881
    )(Increase) decrease in accrued
interest receivable
    
    
    18
    
    
    
    (218
    )
    
    
    (47
    )Increase in other receivables
    
    
    (11,052
    )
    
    
    (9,062
    )
    
    
    (9,066
    )Increase in deferred policy acquisition costs
    
    
    (2,041
    )
    
    
    (2,901
    )
    
    
    (4,220
    )(Increase) decrease in other assets
    
    
    (5,138
    )
    
    
    (3,188
    )
    
    
    240Increase (decrease) in claims processed
and incomplete
    
    
    16,267
    
    
    
    (6,613
    )
    
    
    13,029increase in unreported losses
    
    
    14,875
    
    
    
    9,139
    
    
    
    70Increase in loss-adjustment expenses
    
    
    263
    
    
    
    812
    
    
    
    2,043Increase (decrease) on annuity contracts
    
    
    1,003
    
    
    
    365
    
    
    
    (832
    )Increase in unearned premiums
    
    
    5,879
    
    
    
    7,743
    
    
    
    12,655Increase (decrease) in liability to FEHBP
    
    
    2,320
    
    
    
    405
    
    
    
    (5,064
    )Increase in accounts payable
and accrued liabilities
    
    
    4,616
    
    
    
    6,914
    
    
    
    2,136(Decrease) increase in income tax payable
    
    
    (30,395
    )
    
    
    31,506
    
    
    
    611Net cash provided by
operating activities
    
    $
    8,840
    
    
    
    10,149
    
    
    
    56,807
 (Continued) 82




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##### 



TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003, and 2002 (Dollar amounts in thousands, except per share data) 2004
    
    
    2003
    
    
    2002Supplementary information on noncash transactions
affecting cash flows activities:Change in net unrealized gain on securities
available for sale, including deferred
income tax liability of $3,330, $3,198,
and
$963, in 2004, 2003, and 2002,
respectively
    
    $
    1,101
    
    
    
    6,022
    
    
    
    5,986Retirement of fully depreciated items
    
    
    13,054
    
    
    
    1,594
    
    
    
    1,258Change in cash-flow hedges, including
deferred income tax asset of $56 and
$234 in 2004 and 2003, respectively
    
    
    281
    
    
    
    103
    
    
    
    470Change in minimum pension liability,
including related intangible asset of
$598 and $645 and deferred income
tax asset of $3,576 and $3,614 in
2004 and 2003, respectively
    
    
    3
    
    
    
    2,292
    
    
    
    8,114
 83