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  **United States Securities and Exchange Commission****Washington, D.C. 20549****FORM 10-K**   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the fiscal year ended December 31, 2006****   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the transition period from                      to**                    ** **COMMISSION FILE NUMBER 0-49762****Triple-S Management Corporation**   **Puerto Rico** **66-0555678****(STATE OF INCORPORATION)** **(I.R.S. ID)****1441 F.D. Roosevelt Avenue, San Juan, PR 00920****(787) 749-4949**Securities registered pursuant to Section 12(b) of the Act:**None**Securities registered pursuant to Section 12(g) of the Act:**Common Stock, $40.00 Par Value**Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. YES o     NO þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. YES o     NO þIndicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. YES þ     NO oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of  “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act (Check one).Large accelerated filer o     Accelerated filer o     Non-accelerated filer þIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct). YES o     NO þThe aggregate market value of common stock held by non-affiliates of the registrant as of December31, 2006 was $356,440. *The number of shares outstanding of the registrant’s common stock as of March 15, 2007 was 8,913. * Aggregate market value was determined at par because there is no established public tradingmarket for TSM’s common stock.**DOCUMENTS INCORPORATED BY REFERENCE**Portions of the definitive Proxy Statement to be delivered to shareholders in connection with theAnnual Meeting of Shareholders to be held April 29, 2007 are incorporated by reference into PartIII of this Annual Report on Form 10-K.  
 

 
 **Triple-S Management Corporation****FORM 10-K**For The Fiscal Year Ended December 31, 2006INDEX       **Part I**      Item 1. Business.  3 Item 1A. Risk Factors.  19 Item 1B. Unresolved Staff Comments.  32 Item 2. Properties.  32 Item 3. Legal Proceedings.  32 Item 4. Submission of Matters to a Vote of Security Holders.  34        **Part II**      Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  34 Item 6. Selected Financial Data.  35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.  59 Item 8. Financial Statements and Supplementary Data.  62 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.  63 Item 9A. Controls and Procedures.  63 Item 9B. Other Information.  63        **Part III**      Item 10. Directors, Executive Officers and Corporate Governance.  63 Item 11. Executive Compensation.  63 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.  63 Item 13. Certain Relationships and Related Transactions, and Director Independence.  64 Item 14. Principal Accounting Fees and Services.  64        **Part IV**      Item 15. Exhibits, Financial Statement Schedules.  64          SIGNATURES  67  EX-3.(I) ARTICLES OF INCORPORATION EX-3.(II) BY-LAWS EX-10.1(C) EXTENSION TO HEALTH INSURANCE CONTRACT EX-10.2(C) EXTENSION TO HEALTH INSURANCE CONTRACT EX-10.3(C) EXTENSION TO HEALTH INSURANCE CONTRACT EX-14.1(A) CODE OF BUSINESS CONDUCT AND ETHICS EX-14.1(B) CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS EX-21.1 LIST OF SUBSIDIARIES OF THE CORPORATION EX-31.1 SECTION 302, CERTIFICATION OF THE CEO EX-31.2 SECTION 302, CERTIFICATION OF THE CFO EX-32.1 SECTION 906, CERTIFICATION OF THE CEO EX-32.2 SECTION 906, CERTIFICATION OF THE CFO Page 2

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 **Part I****Item 1. Business.****General Description of Business and Recent Developments**Triple-S Management Corporation (we, TSM or the Corporation) is the largest managed care company inPuerto Rico, serving approximately one million members across all regions, and holds a leadingmarket position covering approximately 25% of the population. We have the exclusive right to usethe Blue Shield name and mark throughout Puerto Rico and have over 45 years of experience in themanaged care industry. We offer a broad portfolio of managed care and related products in thecommercial, Medicare and Puerto Rico Health Reform (similar to Medicaid) (the Reform) markets.We serve a full range of customer segments, from corporate accounts, federal and local governmentemployees and individuals to Medicare recipients and Reform enrollees, with a wide range of managedcare products. We market our managed care products through both an extensive network ofindependent agents and brokers located throughout Puerto Rico as well as an internal salaried salesforce.We also offer complementary products and services, including life and accident and health insurance(life insurance) and property and casualty insurance. As a result of our recent acquisition ofGreat American Life Assurance Company of Puerto Rico (GA Life), we are the leading provider of lifeinsurance policies in Puerto Rico.Effective January 31, 2006, we acquired 100% of the common stock of GA Life and effective June 30,2006 merged the operations of Seguros de Vida Triple-S, Inc., our former life insurance subsidiary,into the operations of GA Life.All of the premiums generated by our insurance subsidiaries are from customers within Puerto Rico.In addition, all of our long-lived assets, other than financial instruments, including the deferredpolicy acquisition costs and value of business acquired and the deferred tax assets, are locatedwithin Puerto Rico.**Industry Overview*****Managed Care***The managed care industry has experienced significant change in the last decade. An increasingfocus on health care costs by employers, the government and consumers has led to the growth ofalternatives to traditional indemnity health insurance, such as Health Maintenance Organizations(HMOs) and Preferred Provider Organizations (PPOs), which managed care providers employ to attemptto contain the cost of health care by negotiating contracts with hospitals, physicians and otherproviders to deliver health care to plan members at favorable rates. These products usuallyfeature medical management and other quality and cost optimization measures such as pre-admissionreview and approval for certain non-emergency services, pre-authorization of certain outpatientsurgical procedures, network credentialing to determine that network doctors and hospitals have therequired certifications and expertise, and various levels of care management programs to helpmembers better understand and navigate the medical system. In addition, providers may haveincentives to achieve certain quality measures or may share medical cost risk. Members or theiremployers generally pay co-payments, coinsurance and deductibles when they receive services. Whilethe distinctions between the various types of plans have lessened over recent years, PPO productsgenerally provide reduced benefits for out-of-network services, while traditional HMO productsgenerally provide little to no reimbursement for non-emergency out-of-network utilization. An HMOplan may also require members to select one of the network primary care physicians to coordinatetheir care and approve any specialist or other services. The federal government provides hospitaland medical insurance benefits to eligible persons aged 65 and over as well as to certain otherqualified persons pursuant to the Medicare program, including the Medicare Advantage program. Thefederal government also offers prescription drug benefits to Medicare eligibles, both as part ofthe Medicare Advantage program and on a stand-alone basis, pursuant to Medicare Part D (alsoreferred to as PDP stand-alone product). In addition, the government of the Commonwealth of PuertoRico (the government of Puerto Rico) provides managed care coverage to the medically indigentpopulation of Puerto Rico through the Reform program. Page 3

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 Recently, economic factors and greater consumer awareness have resulted in the increasingpopularity of products that offer larger, more extensive networks, more member choice related tocoverage, physicians and hospitals, and a desire for greater flexibility for customers to assumelarger deductibles and co-payments in return for lower premiums. We believe we are well-positionedto respond to these market preferences due to the breadth and flexibility of our product offeringand size of our provider networks.The Blue Cross Blue Shield Association (BCBSA) had 39 independent licensees as of December 31,2006. We are licensed by BCBSA to use the “Blue Shield” mark in Puerto Rico. Most of the BCBSAlicensees have the right to use the “Blue Shield” and “Blue Cross” marks in their designatedgeographic territories. We are not licensed to use the “Blue Cross” mark in Puerto Rico. Adifference BCBSA licensee has the right to use the “Blued Cross” mark in Puerto Rico. The numberof people enrolled in Blue Cross Blue Shield (BCBS) plans has been steadily increasing, from 65.6million in 1995 to 98.6 million at December 31, 2006, which represents 32.7% of the U.S.population. The Blue Cross Blue Shield plans work cooperatively in a number of ways that createsignificant market advantages, especially when competing for very large, multi-state employergroups. For example, all Blue Cross Blue Shield plans participate in the BlueCard program, whicheffectively creates a national “Blue” network. Each plan is able to take advantage of other BlueCross Blue Shield plans’ broad provider networks and negotiated provider reimbursement rates wherea member covered by a policy in one state or territory lives or travels outside of the state orterritory in which the policy under which he or she is covered is written. This program isreferred to as BlueCard®, and is a source of revenue for providing member services in Puerto Ricofor individuals who are customers of other BCBS plans and at the same time provide us a significantnetwork in the U.S. BlueCard also provides a significant competitive advantage to us becausePuerto Ricans frequently travel to the continental United States.***Life Insurance***Total premiums in Puerto Rico for the life insurance market approximate $600 million. The mainproducts in the market are ordinary life, cancer and other dreaded diseases, term life, disabilityand annuities. The main distribution channels are through independent agents. In recent yearsbanks have established general agencies to cross sell many life products, such as term life andcredit life. It is estimated that the life insurance market is underinsured.***Property and Casualty Insurance Segment***The total property and casualty market in Puerto Rico in terms of gross premiums written for 2005was approximately $1.8 billion. Property and casualty insurance companies compete for the sameaccounts through aggressive pricing, more favorable policy terms and better quality of services.The main lines of business in Puerto Rico are personal and commercial auto, commercial multi peril,fire and allied lines and other general liabilities. Approximately 70% of the market is written bythe top six companies in terms of market share, and approximately 80% of the market is written bycompanies incorporated under the laws of, and which operate principally in, Puerto Rico.It is estimated that the Puerto Rican property and casualty insurance market has between $80billion and $90 billion of insured value, while the industry has capital and surplus of under $1.0billion. As a result, the market is highly dependent on reinsurance and some local carriers havediversified their operations outside Puerto Rico, particularly to Florida.**Puerto Rico’s Economy**The gross national product of Puerto Rico has grown by an average of 2.5% per annum over the lastdecade. The government of Puerto Rico has reported that factors contributing to this expansioninclude government-sponsored economic development programs, increases in the level of federaltransfer payments and the relative low cost of borrowing. The government of Puerto Rico furtherreported that in some years, these factors experienced in Puerto Rico were aided by a significantexpansion in construction investment driven by infrastructure projects, private investment,primarily in housing, and relatively low oil prices. Since the last recession in fiscal 2002 (fromJuly 1, 2001 to June 30, 2002), the economy has been expanding at a moderate annual rate of 2.3%,but recently, as several key economic figures have begun to indicate a slowing of economicactivity, the Puerto Rico Planning Board recently published a preliminary growth in gross nationalproduct of 0.7% for fiscal 2006 and lowered its real gross national product forecast from 2.5% to0.6% for fiscal 2007. Among the variables contributing to the Puerto Rico Planning Board’sdownward revision in the forecast are the persistent high levels of oil prices, the upward trend inshort-term interest rates, the depreciation of the dollar (which affects the value of imports fromforeign countries, accounting for approximately 50% of total imports to Puerto Rico), and thedeceleration of public investment due to Puerto Rico’s budget deficits (which served, together withother factors, to reduce activity in construction and other sectors). In April 2006, thegovernment of Puerto Rico announced a possible lack of budgetary funds to complete the fiscal yearended June 30, 2006 with a balanced budget, as required by law. This situation was remedied priorto June 30, 2006 when the legislative and executive branches of government approved a loan toprovide funding for the budget for that fiscal year. In order to raise additional funds in futurefiscal years, the legislative and executive branches also approved a fiscal Page 4

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 reform and a tax reform. The tax reform, which took effect on November 15, 2006, imposes a 7%sales tax on the consumption of goods and services. The implementation of this tax reform isexpected to alleviate Puerto Rico’s fiscal difficulties by raising additional revenues but this,too, may reduce net disposable income even after giving effect to certain income tax reductionsprovided in the tax reform legislation.The economy of Puerto Rico is closely linked to the continental United States economy, as most ofthe external factors that affect the Puerto Rico economy (other than the price of oil) aredetermined by the policies and results of the economy of the United States. These external factorsinclude exports, direct investment, the amount of federal transfer payments, the level of interestrates, the rate of inflation, and tourist expenditures. During fiscal year 2005 (from July 1, 2004to June 30, 2005) approximately 83% of Puerto Rico’s exports went to the United States mainland,which was also the source of approximately 50% of Puerto Rico’s imports.The dominant sectors of the Puerto Rico economy are manufacturing and services. The manufacturingsector has undergone fundamental changes over the years as a result of increased emphasis on higherwage, high technology industries, such as pharmaceuticals, biotechnology, electronics, computers,microprocessors, professional and scientific instruments, and certain high technology machinery andequipment. The services sector, including finance, insurance, real estate, wholesale and retailtrade, and tourism, also plays a major role in the economy. It ranks second to manufacturing incontribution to the gross domestic product and leads all sectors in providing employment.**Products and Services*****Managed Care***We offer a broad range of managed care products, including HMOs, PPOs, Medicare Supplement andMedicare Part D. Managed care products represented 88.6%, 92.7% and 92.3% of our consolidatedpremiums earned, net for the years ended December 31, 2006, 2005 and 2004. We design our productsto meet the needs and objectives of a wide range of customers, including employers, individuals andgovernment entities. Our customers either contract with us to assume underwriting risk orself-funded underwriting risk and rely on us for provider network access, medical cost management,claim processing, stop-loss insurance and other administrative services. Our products vary withrespect to the level of benefits provided, the costs paid by employers and members, includingdeductibles and co-payments, and the extent to which our members’ access to providers is subject toreferral or preauthorization requirements.Managed care generally refers to a method of integrating the financing and delivery of health carewithin a system that manages the cost, accessibility and quality of care. Managed care productscan be further differentiated by the types of provider networks offered, the ability to useproviders outside such networks and the scope of the medical management and quality assuranceprograms. Our members receive medical care from our networks of providers in exchange for premiumspaid by the individuals or their employers and, in some instances, a cost-sharing payment betweenthe employer and the member. We reimburse network providers according to pre-established feearrangements and other contractual agreements.We currently offer the following managed care plans:*Health Maintenance Organization (HMO).*We offer HMO plans that provide our Reform and MedicareAdvantage members with health care coverage for a fixed monthly premium in addition to applicablemember co-payments. Health care services can include emergency care, inpatient hospital andphysician care, outpatient medical services and supplemental services, such as dental, vision,behavioral and prescription drugs, among others. Members must select a primary care physicianwithin the network to provide and assist in managing care, including referrals to specialists.During the third quarter of 2005, we launched Medicare Selecto, our Medicare Advantage product fordual eligibles (individuals that are eligible for both the Reform and Medicare Advantage), and in2006 we launched a supplemental product sponsored by the government of Puerto Rico called MedicarePlatino. We also recently launched our new HMO Medicare Advantage product for the non-dualeligible population.*Preferred Provider Organization (PPO)*. We offer PPO managed care plans that provide ourcommercial and Medicare Advantage members and their dependent family members with health carecoverage in exchange for a fixed monthly premium from our member or the member’s employer. Inaddition, we provide our PPO members with access to a larger network of providers than our HMO. Incontrast to our HMO product, we do not require our PPO members to select a primary care physicianor to obtain a referral to utilize in-network specialists. We also provide coverage for PPOmembers who access providers outside of the network. Out-of-network benefits are generally subjectto a higher deductible and coinsurance. We also offer national in-network coverage to our PPOmembers through the BlueCard program. As a PPO under the Medicare Advantage program, effectiveJanuary 1, 2005 we launched Medicare Optimo, our PPO Medicare Advantage policy, under which weprovide extended health coverage to Medicare beneficiaries.*BlueCard.*For our members who purchase our PPO and some of our Medicare Advantage products, weoffer the BlueCard program. The BlueCard program offers these members in-network benefits throughthe networks of the other Blue Cross Blue Shield plans in the continental United States and certainU.S. territories. In addition, the BlueCard Page 5

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 program offers our PPO members in-network coverage in over 50 countries through Europe and LatinAmerica. We believe that the national and international coverage provided through this programallows us to compete effectively with large national insurers.*Prescription Drug Benefit Plans.*Every Medicare beneficiary must be given the opportunity toselect a prescription drug plan through Medicare Part D, largely funded by the federal government.We are required to offer a Medicare Part D prescription drug plan to our enrollees in every area inwhich we operate. We offer prescription drug benefits under Medicare Part D pursuant to ourMedicare Advantage plans as well as on a stand-alone basis. Our PDP stand-alone product, calledFarmaMed, was launched in 2006. In May 2005, we launched the Drug Discount Card for localgovernment employees and individuals. As of December 31, 2006, we had enrolled approximately17,000 members in this program. We plan to extend the program to members in group plans withoutdrug coverage during 2007.*Government Services*We serve as fiscal intermediary for the Medicare Part B program in PuertoRico and the U.S. Virgin Islands, for which we receive reimbursement of all direct costs andallocated overhead expenses, based on an approved budget by the Centers for Medicare and MedicaidServices (CMS). This program is subject to change. See “Regulation — Fiscal Intermediary”included in this Item.*Administrative Services Only*In addition to our fully insured plans, we also offer our PPOproducts on a self-funded or ASO basis, under which we provide claims processing and otheradministrative services to employers. Employers choosing to purchase our products on an ASO basisfund their own claims but their employees are able to access our provider network at our negotiateddiscounted rates. We administer the payment of claims to the providers but we do not bear anyinsurance risk in connection with claims costs because we are reimbursed in full by the employer.For certain self-funded plans, we provide stop loss insurance pursuant to which we assume some ofthe medical risk for a premium. The administrative fee charged to self-funded groups is generallybased on the size of the group and the scope of services provided.***Life Insurance***We offer a wide variety of life, accident and health and annuity products to all markets in PuertoRico. Among these are group life and life individual insurance products. Life insurance premiumsrepresented 5.7%, 1.2% and 1.3% of our consolidated premiums earned, net for the years endedDecember 31, 2006, 2005 and 2004. GA Life markets in-home service life and supplemental healthproducts through a network of company-employed agents. Ordinary life, cancer and dreaded diseases,credit and pre-need life products are marketed through independent agents. We are the only companyin Puerto Rico that offers guaranteed issue, funeral and cancer policies directly to people intheir homes in the lower and middle income market segments. We also market our group life coveragethrough our managed care subsidiary’s network of exclusive agents.***Property and Casualty Insurance***We offer a wide range of property and casualty insurance products. Property and casualty insurancepremiums represented 5.9%, 6.3% and 6.6% of our consolidated premiums earned, net for the yearsended December 31, 2006, 2005 and 2004. Our predominant lines of business are commercial multipleperil, commercial property mono-line policies, auto physical damage, auto liability and dwellinginsurance. The segment’s commercial lines target small to medium size accounts. We generate amajority of our dwelling business through our strong relationships with financial institutions. Inthe first half of 2007, we intend to expand our auto insurance business, which will write personalauto policies at preferred rates.Due to our geographical location, property and casualty insurance operations in Puerto Rico aresubject to natural catastrophic activity, in particular hurricanes and earthquakes. As a result,local insurers, including us, rely on the international reinsurance market. The property andcasualty insurance market has been affected by increased costs of reinsurance during the last yeardue to severe catastrophic losses in 2005, which are also expected to cause reinsurance costs tocontinue to increase in the near future.We maintain a comprehensive reinsurance program as a means of protecting our surplus in the eventof a catastrophe. Our policy is to enter into reinsurance agreements with reinsurers considered tobe financially sound. Although these reinsurance arrangements do not relieve us of our directobligations to our insureds, we believe that the risk of our reinsurers not paying balances due tous is low.**Marketing and Distribution**Our marketing activities concentrate on promoting our strong brand, quality care, customer serviceefforts, size and quality of provider networks, flexibility of plan designs, financial strength andbreadth of product offerings. We distribute our products through several different channels,including our salaried and commission-based internal sales force, direct mail, independent brokersand agents and telemarketing staff. We also use our website to market our products. Page 6

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 ***Branding and Marketing***Our branding and marketing efforts include “brand advertising”, which focuses on the Triple-S nameand the Blue Shield mark, “acquisition marketing”, which focuses on attracting new customers, and“institutional advertising”, which focuses on our overall corporate image. We believe that thestrongest element of our brand identity is the “Triple-S” name. We seek to leverage what webelieve to be the high name recognition and comfort level that many existing and potentialcustomers associate with this brand. Acquisition marketing consists of business-to-businessmarketing efforts which are used to generate leads for brokers and our sales force as well asdirect-to-consumer marketing which is used to add new customers to our direct pay businesses.Institutional advertising is used to promote key corporate interests and overall company image. Webelieve these efforts support and further our competitive brand advantage. We will continue toutilize the Triple-S name and the Blue Shield mark for all managed care products and services inPuerto Rico.***Distribution****Managed Care Segment.*We rely principally on our internal sales force and a network of independentbrokers and agents to market our products. Individual policies and Medicare Advantage products aresold entirely through independent agents who exclusively sell our individual products, and groupproducts are sold through our 70 person internal sales force as well as our approximately 200independent brokers and agents. We believe that each of these marketing methods is optimallysuited to address the specific needs of the customer base to which it is assigned. In the Reformsector, those notified by the government of Puerto Rico that they are eligible to participate inthe Reform may enroll in the program at our branch offices.Strong competition exists among managed care companies for brokers and agents with demonstratedability to secure new business and maintain existing accounts. The basis of competition for theservices of such brokers and agents are commission structure, support services, reputation andprior relationships, the ability to retain clients and the quality of products. We pay commissionson a monthly basis based on premiums paid. We believe that we have good relationships with ourbrokers and agents, and that our products, support services and commission structure are highlycompetitive in the marketplace.*Life Insurance Segment.*In our life insurance segment, we offer our insurance products through ourown network of brokers and independent agents, as well as group life insurance coverage through ourmanaged care network of agents. We place a majority of our premiums (52% in 2006) through directselling to customers in their homes. As of December 31, 2006, GA Life employed over 500 full-timeactive agents and managers and utilized approximately 570 independent agents and brokers. We paycommissions on a monthly basis based on premiums paid. In addition, GA Life has over 200 agentsthat are licensed to sell certain of our managed care products.*Property and Casualty Insurance Segment.*In our property and casualty insurance segment, businessis exclusively subscribed through 20 general agencies, including our insurance agency, SignatureInsurance Agency, Inc. (SIA), where business is placed by independent insurance agents and brokers.SIA placed approximately 52%, 52% and 53% of our property and casualty insurance subsidiary,Seguros Triple-S, Inc. (STS), total premium volume during the years ended December 31, 2006, 2005and 2004, respectively. As of December 31, 2006, SIA was the third largest insurance agency inPuerto Rico in terms of premiums written. The general agencies contracted by our property andcasualty insurance subsidiary remit premiums net of their respective commission.**Customers*****Managed Care***We offer our products in the managed care segment to four distinct market sectors in Puerto Rico.The following table sets forth enrollment information with respect to each sector at December 31,2006:           **Enrollment at** **Percentage of Total****Market Sector** **December 31, 2006** **Enrollment**                Commercial  580,850   59.3 Reform  357,515   36.5 Medicare Advantage  27,078   2.8 Stand-Alone Prescription Drug Plan  14,063   1.4    Total  979,506   100.0     Page 7

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 ***Commercial Sector***The commercial accounts sector includes corporate accounts, individual accounts, MedicareSupplement, Federal government employees and local government employees.*Corporate Accounts.*Corporate accounts consist of small (2 to 50 employees) and large employers(over 50 employees). Employer groups may choose various funding options ranging from fully insuredto self-funded financial arrangements or a combination of both. While self-funded clientsparticipate in our managed care networks, the clients bear the claims risk.*Federal Government Employees.*For more than 40 years, we have maintained our leadership in theprovision of managed care to federal government employees in Puerto Rico. We provide our servicesto federal employees in Puerto Rico under the Federal Employees Health Benefits Program pursuant toa direct contract with the United States Office of Personnel Management (OPM). We are one of twocompanies in Puerto Rico that has such a contract with OPM. Every year, OPM allows other insurancecompanies to compete for this segment, provided such companies comply with the applicablerequirements for service providers. This contract is subject to termination in the event ofnoncompliance not corrected to the satisfaction of OPM.*Individual Accounts.*We provide managed care services to individuals and their dependent familymembers who contract these services directly with us though our network of independent brokers. Weprovide individual and family contracts. We assume the risk of both medical and administrativecosts in return for a monthly premium.*Local Government Employees.*We provide managed care services to the local government employeesof Puerto Rico through a government-sponsored program whereby the health plan assumes the risk ofboth medical and administrative costs for its members in return for a monthly premium. Thegovernment qualifies on an annual basis the managed care companies that participate in this programand sets the coverage, including benefits, co-payments and amount to be contributed by thegovernment. Employees then select from one of the authorized companies and pays for the differencebetween the premium of the selected carrier and the amount contributed by the government.*Medicare Supplement.*We offer Medicare Supplement products, which provide supplemental coveragefor many of the medical expenses that the basic Medicare program does not cover, such asdeductibles, coinsurance and specified losses that exceed the Federal program’s maximum benefits.***Reform Sector***In 1994, the government of Puerto Rico privatized the delivery of services to the medicallyindigent population in Puerto Rico, as defined by the government, by contracting with privatemanaged care companies instead of providing health services directly to such population. Thegovernment divided Puerto Rico into geographical areas and by December 31, 2001, the Reform hadbeen fully implemented in each of these areas. Each geographical area is awarded to a managed carecompany doing business in Puerto Rico through a competitive bid process. As of December 31, 2006,the Reform provided healthcare coverage to over 1.5 million people. Mental health and drug abusebenefits are currently offered to Reform beneficiaries by behavioral healthcare companies and aretherefore not part of the benefits covered by us.The Reform program is similar to the Medicaid program, a joint federal and state health insuranceprogram for medically indigent residents of the state. The Medicaid program is structured toprovide states the flexibility to establish eligibility requirements, benefits provided, paymentrates, and program administration rules, subject to general federal guidelines.The government has adopted several measures to control the increase of Reform expenditures, whichrepresented approximately 15.0% of total government expenditures during its fiscal year ended June30, 2006, including closer and continuous scrutiny of participants’ (members’) eligibility,decreasing the number of areas in order to take advantage of economies of scale and establishingdisease management programs. In addition, the government of Puerto Rico began a pilot project in2003 in one of the eight geographical areas under which it contracted services on an ASO basisinstead of contracting on a fully insured basis. This project was subsequently extended to theMetro-North region, which was served by us until October 31, 2006. All other areas that wecurrently serve remain with the fully-insured model however; there can be no assurance that thegovernment will not implement such a program in the future. If it is adopted in any areas servedby us during the contract period, we would not generate premiums in the Reform business but insteadadministrative service fees. On the other hand, the government has expressed its intention toevaluate different alternatives of providing health services to Reform beneficiaries.The government of Puerto Rico has also implemented a plan to allow dual-eligibles enrolled in theReform to move from the Reform program to a Medicare Advantage plan under which the government,rather than the insured, will assume all of the premiums for additional benefits not included intraditional Medicare programs, such as the deductibles and co-payments of prescription drugbenefits. All qualified Reform participants began moving to the Page 8

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 government-sponsored plan in January 2006, and approximately 61,000 of such participants did so inthe year ended December 31, 2006.We provide managed care services to Reform members in the North and Southwest regions. We haveparticipated in the Reform program since 1995. The premium rates for each Reform contract arenegotiated annually. The contracts include a provision, however, that if the net income for anygiven contract year, as defined therein, resulting from the provision of services there underexceeds 2.5% of earned premiums, the insurance company is required to return 75.0% of the excess tothe government. If the contract renewal process is not completed by a contract’s expiration date,the contract may be extended by the government, upon acceptance by us, for any subsequent period oftime if deemed to be in the best interests of the beneficiaries and the government. The terms of acontract, including premiums, can be renegotiated if the term of the contract is extended. Eachcontract is subject to termination in the event of non-compliance by the insurance company notcorrected or cured to the satisfaction of the government entity overseeing the Reform, or in theevent that the government determines that there is an insufficiency of funds to finance the Reform.For additional information please see Item 1A “Risk Factors — We are dependent on a small numberof government contracts to generate a significant amount of our revenues”.***Medicare Advantage Sector***Medicare is a federal program administered by CMS that provides a variety of hospital and medicalinsurance benefits to eligible persons aged 65 and over as well as to certain other qualifiedpersons. Medicare, with the approval of the Medicare Reform Act, started promoting a managed careorganizations (MCOs) sponsored Medicare product that offers benefits similar or better than thetraditional Medicare product, but where the risk is assumed by the MCOs. This is called MedicareAdvantage. We entered into the Medicare Advantage market in 2005 and have contracts with CMS toprovide extended Medicare coverage to Medicare beneficiaries under our *Medicare Optimo*, *MedicareSelecto*and *Medicare Platino*policies. Under these annual contracts, CMS pays us a set premiumrate based on membership that is adjusted for demographic factors and health status. In addition,for certain of our Medicare Advantage products the member will also pay an additional premium foradditional benefits.***Stand-Alone Prescription Drug Plan Sector***Every Medicare beneficiary must be given the opportunity to select a prescription drug plan throughMedicare Part D, largely funded by the federal government. We are required to offer a MedicarePart D prescription drug plan to our enrollees in every area in which we operate. We offerprescription drug benefits under Medicare Part D pursuant to our Medicare Advantage plans as wellas on a stand-alone basis. Our stand-alone prescription drug plan, called *FarmaMed*, was launchedin 2006.***Life Insurance***Our life insurance customers consist primarily of individuals, which hold approximately 320,000policies, and insure approximately 1,600 groups.***Property and Casualty Insurance***Our property and casualty insurance segment targets small to medium size accounts with low toaverage exposures to catastrophic losses. Our dwelling insurance line of business aims for ratestability and seeks accounts with a very low exposure to catastrophic losses. Our auto physicaldamage and auto liability customer bases consist primarily of commercial accounts.**Provider Arrangements**Approximately 98% of member services are provided through one of our contracted provider networksand the remaining 2% of member services are provided by out-of-network providers. Ourrelationships with managed care providers, physicians, hospitals, other facilities and ancillarymanaged care providers are guided by standards established by applicable regulatory authorities fornetwork development, reimbursement and contract methodologies. As of December 31, 2006, we hadprovider contracts with 4,285 primary care physicians, 2,992 specialists and 63 hospitals.It is generally our philosophy not to delegate full financial responsibility to our managed careproviders in the form of capitation-based reimbursement. For certain ancillary services, such asbehavioral health services, and primary services in the Reform business and *Medicare Optimo*product, we generally enter into capitation arrangements with entities that offer broad basedservices through their own contracts with providers. We attempt to provide market-basedreimbursement along industry standards. We seek to ensure that providers in our networks are paidin a timely manner, and we provide means and procedures for claims adjustments and disputeresolution. We also provide a dedicated service center for our providers. We seek to maintainbroad provider networks to ensure member choice while implementing effective management programsdesigned to improve the quality of care received by our members. Page 9

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 We promote the use of electronic claims billing to our providers. Approximately 90% of claims aresubmitted electronically through our fully automated claims processing system, and our “first-passrate”, or the rate at which a claim is approved for payment after the first time it is processed byour system without human intervention, for physician claims has averaged 93% for the last twoyears.In the Reform sector, we have a network of Independent Practice Associations (IPAs) which providemanaged care services to our Reform beneficiaries in exchange for a capitation fee. The IPAassumes the costs of certain primary care services provided and referred by its primary carephysicians (PCPs), including procedures and in-patient services not related to risks assumed by us.We retain the risk associated with services provided to beneficiaries under this arrangement, suchas: neonatal, obstetrical, AIDS, cancer, cardiovascular and dental services, among others.We believe that physicians and other providers primarily consider member volume, reimbursementrates, timeliness of reimbursement and administrative service capabilities along with the“non-hassle” factor or reduction of non-value added administrative tasks when deciding whether tocontract with a managed care plan. As a result of our established position in the Puerto Ricanmarket, the strength of the Triple-S name and our association with the Blue Cross Blue ShieldAssociation, we believe we have strong relationships with hospital and provider networks leading toa strong competitive position in terms of hospital count, number of providers and number ofin-network specialists.*Hospitals*. We generally contract for hospital services to be paid on an all-inclusive per diembasis, which includes all services necessary during a hospital stay. Negotiated rates vary amonghospitals based on the complexity of services provided. We annually evaluate these rates andrevise them, if appropriate.*Physicians.*Fee-for-service is our predominant reimbursement methodology for physicians, exceptfor the Reform sector. Our physician rate schedules applicable to services provided by in-networkphysicians are pegged to a resource-based relative value system fee schedule and then adjusted forcompetitive rates in the market. This structure is similar to reimbursement methodologiesdeveloped and used by the federal Medicare system and other major payers. Payments to physiciansunder the Medicare Advantage program are based on Medicare fees. In the Reform sector, we makepayments to certain of our providers in the form of capitation-based reimbursement.Services are provided to our members through our network providers with whom we contract directly.Members seeking medical treatment outside of Puerto Rico are served by providers in these areasthrough the BlueCard program, a third-party national provider network.*Subcontracting.*We subcontract our triage call center, utilization management and diseasemanagement, mental and substance abuse health services for federal government employees and otherlarge ASO accounts, and pharmacy benefits management services through contracts with third parties.In addition, we contract with a number of other ancillary service providers, including laboratoryservice providers, home health agency providers and intermediate and long-term care providers, toprovide access to a wide range of services. These providers are normally paid on either a feeschedule or fixed per day or per case basis.**Competition**The insurance industry in Puerto Rico is highly competitive and is comprised of both local andforeign entities. The approval of the Gramm-Leach-Bliley Act of 1999, which applies to financialinstitutions domiciled in Puerto Rico, has opened the insurance market to new competition byallowing financial institutions such as banks to enter into the insurance business. At the moment,several banks in Puerto Rico have established subsidiaries that operate as insurance agencies.***Managed Care***The managed care industry is highly competitive, both nationally and in Puerto Rico. Competitioncontinues to be intense due to aggressive marketing, business consolidations, a proliferation ofnew products and increased quality awareness and price sensitivity among customers. Industryparticipants compete for customers based on the ability to provide a total value proposition whichwe believe includes quality of service and flexibility of benefit designs, access to and quality ofprovider networks, brand recognition and reputation, price and financial stability.We believe that our competitive strengths, including our leading presence in Puerto Rico, our BlueShield license, the size and quality of our provider network, the broad range of our productofferings, our strong complementary businesses and our experienced management team, position uswell to satisfy these competitive requirements.Competitors in the managed care segment include national and local managed care plans. Wecurrently have approximately 980,000 members enrolled in our managed care segment at December 31,2006, representing approximately 25% of the population of Puerto Rico. Our market share in termsof premiums written in Puerto Rico was estimated at approximately 26% for the year ended December31, 2006. We offer a variety of managed care products, and are the leader by market share inalmost every sector, as measured by the share of premiums written. Our Page 10

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 nearest competitor is Medical Card Systems Inc., which had a market share of approximately 17% asof December 31, 2006. Our other largest competitors in the managed care segment are Aveta Inc. (orMMM Healthcare) and Humana Inc.***Life Insurance***As a result of the GA Life acquisition, we are the leading provider of life insurance products inPuerto Rico. In the life insurance segment, we are the only life insurance company thatdistributes our products through home service. However, we face competition in each of our productlines, in particular from Cooperativa de Seguros de Vida de Puerto Rico and National Life InsuranceCompany. In the ordinary life sector, our main competitors are National Life Insurance Company andAmerico Financial Life and Annuity Insurance Company. In group life insurance, our maincompetitors are Hartford Life, Inc., Universal Life Insurance Company and Metropolitan LifeInsurance Company. In the cancer sector, our main competitors are National Life Insurance Company,Trans-Oceanic Life Insurance Company, Universal Life Insurance Company and American FamilyInsurance.***Property & Casualty Insurance***The property and casualty insurance market in Puerto Rico is extremely competitive. In addition,soft market conditions prevailed during 2006 in Puerto Rico. In the local market, such conditionsmostly affected commercial risks, precluding rate increases and even provoking lower premiums onboth renewals and new business. Property and casualty insurance companies tend to compete for thesame accounts through more favorable price and/or policy terms and better quality of services. Wecompete by reasonably pricing our products and providing efficient services to producers, agentsand clients. We believe that our knowledgeable, experienced personnel are also an incentive forour customers to conduct business with us.In 2006, we rank among the top five largest companies in the property and casualty insurance marketin Puerto Rico, as measured by direct premiums, with a market share of approximately 8.5%. Ournearest competitors in the property and casualty insurance market in Puerto Rico in 2006 wereNational Insurance Company and Integrand Assurance Company. The market leaders in the property andcasualty insurance market in Puerto Rico in 2006 were Universal Insurance Group, Cooperativa deSeguros Múltiples de Puerto Rico and MAPFRE Corporation.**Blue Shield License**We have the exclusive right to use the Blue Shield name and mark for the sale, marketing andadministration of managed care plans and related services in Puerto Rico. We believe that the BlueShield name and mark are valuable brands of our products and services in the marketplace. Thelicense agreements, which have a perpetual term (but which are subject to termination undercircumstances described below), contain certain requirements and restrictions regarding ouroperations and our use of the Blue Shield name and mark. See Item 1A — Risk Factors — Thetermination or modification of our license agreements to use the Blue Shield name and mark couldhave an adverse effect on our business, financial condition and results of operations”.Events which could result in termination of our license agreements include, but are not limited to: **•** failure to maintain our total adjusted capital at 200% of Health Risk-BasedCapital Authorized Control Level, as defined by the National Association of InsuranceCommissioners (NAIC) Risk Based Capital (RBC) model act;  **•** failure to maintain liquidity of greater than one month of underwritten claimsand administrative expenses, as defined by the Blue Cross Blue Shield Association, for twoconsecutive quarters;  **•** failure to satisfy state-mandated statutory net worth requirements;  **•** impending financial insolvency; and  **•** a change of control not otherwise approved by the Blue Cross Blue ShieldAssociation or a violation of the Blue Cross Blue Shield Association voting and ownershiplimitations on our capital stock.The Blue Cross Blue Shield Association license agreements and membership standards specificallypermit a licensee to operate as a for-profit, publicly-traded stock company, subject to certaingovernance and ownership requirements.Pursuant to the rules and license standards of the Blue Cross Blue Shield Association, we guaranteeour subsidiaries’ contractual and financial obligations to their respective customers. Inaddition, pursuant to the rules and license standards of the Blue Cross Blue Shield Association, wehave agreed to indemnify the Blue Cross Blue Shield Association against any claims asserted againstit resulting from our contractual and financial obligations.Each license requires an annual fee to be paid to the Blue Cross Blue Shield Association. The feeis determined based on a per-contract charge from products using the Blue Shield name and mark.During the years ended December 31, Page 11

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 2006 and, 2005, we paid fees to the Blue Cross Blue Shield Association in the amount of $964,956and $791,587, respectively. The Blue Cross Blue Shield Association is a national trade associationof 39 Blue Cross Blue Shield licensees (also known as “Member Plans”), the primary function ofwhich is to promote and preserve the integrity of the Blue Cross Blue Shield names and marks, aswell as to provide certain coordination among the Member Plans. Each Blue Cross Blue Shield MemberPlan is an independent legal organization and is not responsible for obligations of other BlueCross Blue Shield Association Member Plans. With a few limited exceptions, we have no right tomarket products and services using the Blue Shield names and marks outside our Blue Shield licensedterritory.*BlueCard.*Under the rules and license standards of the Blue Cross Blue Shield Association, otherBlue Cross Blue Shield Plans must make available their provider networks to members of the BlueCardProgram in a manner and scope as consistent as possible to what such member would be entitled to inhis or her home region. Specifically, the Host Plan (located where the member receives theservice) must pass on discounts to BlueCard members from other Plans that are at least as great asthe discounts that the providers give to the Host Plan’s local members. The Blue Cross Blue ShieldAssociation requires us to pay fees to any Host Blue Cross Blue Shield Plan whose providers submitclaims for health care services rendered to our members who receive care in their service area.Similarly, we are paid fees for submitting claims and providing other services to members of otherBlue Cross Blue Shield Plans who receive care in our service area.**Regulation**The operations of our managed care business are subject to comprehensive and detailed regulation inPuerto Rico, as well as U.S. Federal regulation. Supervisory agencies include the Office of theCommissioner of Insurance of the Commonwealth of Puerto Rico (the Commissioner of Insurance), theHealth Department of the Commonwealth of Puerto Rico and the Administration for Health Insurance ofthe Commonwealth of Puerto Rico (ASES, for its Spanish acronym), which administers the ReformProgram for the Commonwealth of Puerto Rico. Federal regulatory agencies that oversee ouroperations include CMS, the Office of the Inspector General of the U.S. Department of Health andHuman Services, the Office of Civil Rights, the U.S. Department of Justice, and the Office ofPersonnel Management. These government agencies have the right to: **•** grant, suspend and revoke licenses to transact business;  **•** regulate many aspects of the products and services we offer;  **•** assess fines, penalties and/or sanctions;  **•** monitor our solvency and adequacy of our financial reserves; and  **•** regulate our investment activities on the basis of quality, diversificationand other quantitative criteria, within the parameters of a list of permitted investmentsset forth in applicable insurance laws and regulations.Our operations and accounts are subject to examination and audits at regular intervals by theseagencies. In addition, the U.S Federal and local governments continue to consider and enact manylegislative and regulatory proposals that have impacted, or would materially impact, variousaspects of the health care system. Some of the more significant current issues that may affect ourmanaged care business include: **•** initiatives to increase healthcare regulation, including efforts to expand the tort liability of health plans;  **•** local government plans and initiatives;  **•** Medicare reform legislation; and  **•** Increase government concerns regarding fraud and abuse.The U.S. Congress is continuing to develop legislation efforts directed toward patient protection,including proposed laws that could expose insurance companies to economic damages, and in somecases punitive damages, for making a determination denying benefits or for delaying members’receipt of benefits as well as for other coverage determinations. Similar legislation has beenproposed in Puerto Rico. Given the political process, it is not possible to determine whether anyfederal and/or local legislation or regulation will be enacted in 2007 or what form any suchlegislation might take. Other legislative or regulatory changes that may affect us are describedbelow. While certain of these measures could adversely affect us, at this time we cannot predictthe extent of this impact. Page 12

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 The Federal government and the government of Puerto Rico, including the Commissioner ofInsurance, have adopted laws and regulations that govern our business activities in various ways.These laws and regulations may restrict how we conduct our business and may result in additionalburdens and costs to us. Areas of governmental regulation include:**•** licensure; **•** policy forms, including plan design and disclosures; **•** premium rates and rating methodologies; **•** underwriting rules and procedures; **•** benefit mandates; **•** eligibility requirements; **•** security of electronically transmitted individually identifiable health information; **•** geographic service areas; **•** market conduct; **•** utilization review; **•** payment of claims, including timeliness and accuracy of payment; **•** special rules in contracts to administer government programs; **•** transactions with affiliated entities; **•** limitations on the ability to pay dividends; **•** rates of payment to providers of care; **•** transactions resulting in a change of control; **•** member rights and responsibilities; **•** fraud and abuse; **•** sales and marketing activities; **•** quality assurance procedures; **•** privacy of medical and other information and permitted disclosures; **•** rates of payment to providers of care; **•** surcharges on payments to providers; **•** provider contract forms; **•** delegation of financial risk and other financial arrangements in rates paid to providers of care; **•** agent licensing; **•** financial condition (including reserves); **•** reinsurance; **•** issuance of new shares of capital stock; **•** corporate governance; and **•** permissible investments.These laws and regulations are subject to amendments and changing interpretations in eachjurisdiction. Failure to comply with existing or future laws and regulations could materially andadversely affect our operations, financial condition and prospects.***Puerto Rico Insurance Laws***Our insurance subsidiaries are subject to the regulations and supervision of the Commissioner ofInsurance. The regulations and supervision of the Commissioner of Insurance consist primarily ofthe approval of certain policy forms, the standards of solvency that must be met and maintained byinsurers and their agents, and the nature of and limitations on investments, deposits of securitiesfor the benefit of policyholders, methods of accounting, periodic examinations and the form andcontent of reports of financial condition required to be filed, among others. In general, suchregulations are for the protection of policyholders rather than security holders.Puerto Rico insurance laws prohibit any person from offering to purchase or sell voting stock of aninsurance company with capital contributed by stockholders (a stock insurer) which constitutes 10%or more of the total issued and outstanding stock of such company or of the total issued andoutstanding stock of a company that controls an insurance company, without the prior approval ofthe Commissioner of Insurance. The proposed purchaser or seller must disclose any changes proposedto be made to the administration of the insurance company and provide the Commissioner of Insurancewith any information reasonably requested. The Commissioner of Insurance must make a determinationwithin 30 days of the later of receipt of the petition or of additional information requested. Thedetermination of the Commissioner of Insurance will be based on its evaluation of the transaction’seffect on the public, having regard to the experience and moral and financial responsibility of theproposed purchaser, whether such responsibility of the proposed purchaser will affect theeffectiveness of the insurance company’s operations and whether the change of control couldjeopardize the interests of insureds, claimants or the company’s other stockholders. Our Articlesof Incorporation prohibit any institutional investor from owning 10% or more of our voting power,any person that is not an institutional investor from owning 5% or more of our voting power, andany person from beneficially owning shares of our common stock or other equity securities, or acombination thereof, representing a 20% or more ownership interest in us. To the extent that aperson, including an institutional investor, acquires shares in excess of these limits, ourarticles provide that we will have the power to take certain actions, including refusing to giveeffect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoida violation of the ownership limitation in the articles. Page13

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 Puerto Rico insurance laws also require that stock insurers obtain the Commissioner of Insurance’sapproval prior to any merger or consolidation. The Commissioner of Insurance cannot approve anysuch transaction unless it determines that such transaction is just, equitable, consistent with thelaw and no reasonable objection exists. The merger or consolidation must then be authorized by aduly approved resolution of the board of directors and ratified by the affirmative vote oftwo-thirds of all issued and outstanding shares of capital stock with the right to vote thereon.The reinsurance of all or substantially all of the insurance of an insurance company by anotherinsurance company is also deemed to be a merger or consolidation.Puerto Rico insurance laws further prohibit insurance companies and insurance holding companies,among other entities, from soliciting or receiving funds in exchange for any new issuance of itssecurities, other than through a stock dividend, unless the Commissioner of Insurance has granted asolicitation permit in respect of such transaction. The Commissioner of Insurance will issue thepermit unless it finds that the funds proposed to be secured are excessive for the purposeintended, the proposed securities and their distribution would be inequitable, or the issuance ofthe securities would jeopardize the interests of policyholders or securityholders.Puerto Rico insurance laws also limit insurance companies’ ability to reinsure risk. Insurancecompanies can only accept reinsurance in respect of the types of insurance which they areauthorized to transact directly. Also, except for life and disability insurance, insurancecompanies cannot accept any reinsurance in respect of any risk resident, located, or to beperformed in Puerto Rico which was insured as direct insurance by an insurance company not thenauthorized to transact such insurance in Puerto Rico. As a result, insurance companies can onlyreinsure their risks with insurance companies in Puerto Rico authorized to transact the same typeof insurance or with a foreign insurance company that has been approved by the Commissioner ofInsurance. Insurance companies cannot reinsure 75% or more of their direct risk with respect toany type of insurance without first obtaining the approval of the Commissioner of Insurance.***Capital and Reserve Requirements***In addition to the capital and reserve requirements set forth below, the Commissioner of Insurancerequires our managed care subsidiary to maintain minimum capital of $1.0 million, our lifeinsurance subsidiary to maintain minimum capital of $2.5 million and our property and casualtyinsurance subsidiary to maintain minimum capital of $3.0 million. In addition, our managed caresubsidiary is subject to the capital and surplus licensure requirements of the BCBSA.The capital and surplus requirements of the BCBSA are based on the National Association ofInsurance Commissioners’ (NAIC) RBC Model Act. These capital and surplus requirements are intendedto assess capital adequacy taking into account the risk characteristics of an insurer’s investmentsand products. The RBC Model Act set forth the formula for calculating the risk-based capitalrequirements, which are designed to take into account risks, insurance risks, interest rate risksand other relevant risks with respect to an individual insurance company’s business.We and our insurance subsidiaries currently meet the minimum capital requirements of theCommissioner of Insurance and the BCBSA, as applicable. Regulation of financial reserves forinsurance companies and their holding companies is a frequent topic of legislative and regulatoryscrutiny and proposals for change. It is possible that the method of measuring the adequacy of ourfinancial reserves could change and that could affect our financial condition.Natural disasters have affected Puerto Rico greatly over the past 10 years and have prompted thelocal government to mandate property and casualty insurance reserves. In addition to itscatastrophic reinsurance coverage, we are required by local regulatory authorities to establish andmaintain a trust fund (the Trust) to protect us from our dual exposure to hurricanes andearthquakes. The Trust is intended to be used as our first layer of catastrophe protectionwhenever qualifying catastrophic losses exceed 5% of catastrophe premiums or when authorized by theCommissioner of Insurance. Contributions to the Trust are determined by a rate (1% in 2006 and2005), imposed by the Commissioner of Insurance on the catastrophe premiums written in that year.As of December 31, 2006 and 2005, we had $27.1 million and $25.1 million, respectively, invested insecurities deposited in the Trust. The income generated by investment securities deposited in theTrust becomes part of the Trust fund balance. For additional details see note 19 of the auditedconsolidated financial statements.***Federal Regulation******The Medicare Program and Medicare Advantage***Medicare is the health insurance program for retired United States citizens aged 65 and older,qualifying disabled persons, and persons suffering from end-stage renal disease. Medicare is fundedby the federal government and administered by CMS.The Medicare program, created in 1965, offers both hospital insurance, known as Medicare Part A,and medical insurance, known as Medicare Part B. In general, Medicare Part A covers hospital careand some nursing home, hospice and home care. Although there is no monthly premium for MedicarePart A, beneficiaries are responsible for significant deductibles and co-payments. All UnitedStates citizens eligible for Medicare are automatically enrolled in Page14

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 Medicare Part A when they turn 65. Enrollment in Medicare Part B is voluntary. In general,Medicare Part B covers outpatient hospital care, physician services, laboratory services, durablemedical equipment, and some other preventive tests and services. Beneficiaries that enroll inMedicare Part B pay a monthly premium that is usually withheld from their Social Security checks.Medicare Part B generally pays 80% of the cost of services and beneficiaries pay the remaining 20%after the beneficiary has satisfied a $125 deductible. To fill the gaps in traditionalfee-for-service Medicare coverage, individuals often purchase Medicare supplement products,commonly known as “Medigap”, to cover deductibles, co-payments, and coinsurance.Initially, Medicare was offered only on a fee-for-service basis. Under the Medicarefee-for-service payment system, an individual can choose any licensed physician and use theservices of any hospital, healthcare provider, or facility certified by Medicare. CMS reimbursesproviders if Medicare covers the service and CMS considers it “medically necessary”. There iscurrently no fee-for-service coverage for certain preventive services, including annual physicalsand well visits, eyeglasses, hearing aids, dentures and most dental services.As an alternative to the traditional fee-for-service Medicare program, in geographic areas where amanaged care plan has contracted with CMS pursuant to the Medicare Advantage program, Medicarebeneficiaries may choose to receive benefits from a managed care plan. The current Medicaremanaged care program was established in 1997 when Congress created a Medicare Part C, formerlyknown as Medicare+Choice and now known as Medicare Advantage. Pursuant to Medicare Part C,Medicare Advantage plans contract with CMS to provide benefits at least comparable to those offeredunder the traditional fee-for-service Medicare program in exchange for a fixed monthly premiumpayment per member from CMS. The monthly premium varies based on the county in which the memberresides, as adjusted to reflect the member’s demographics and the plans’ risk scores. Individualswho elect to participate in the Medicare Advantage program often receive greater benefits thantraditional fee-for-service Medicare beneficiaries including, in some Medicare Advantage plansincluding ours, additional preventive services, and dental and vision benefits. Medicare Advantageplans typically have lower deductibles and co-payments than traditional fee-for-service Medicare,and plan members do not need to purchase supplemental Medigap policies. In exchange for theseenhanced benefits, members are generally required to use only the services and provider networkprovided by the Medicare Advantage plan. Most Medicare Advantage plans have no additionalpremiums. In some geographic areas, however, and for plans with open access to providers, membersmay be required to pay a monthly premium.Prior to 1997, CMS reimbursed health plans participating in the Medicare program primarily on thebasis of the demographic data of the plans’ members. One of CMS’s primary directives inestablishing the Medicare+Choice program was to make it more attractive to managed care plans toenroll members with higher intensity illnesses. To accomplish this, CMS implemented a riskadjustment payment system for Medicare health plans pursuant to the Balanced Budget Act of 1997, orBBA. This payment system was further modified pursuant to the Medicare, Medicaid and SCHIPBenefits Improvement and Protection Act of 2000, or BIPA. CMS is phasing in this risk adjustmentpayment methodology with a model that bases a portion of the total CMS reimbursement payments onvarious clinical and demographic factors including hospital inpatient diagnoses, additionaldiagnosis data from ambulatory treatment settings, hospital outpatient department and physicianvisits, gender, age and Medicaid eligibility. CMS requires that all managed care companiescapture, collect and submit the necessary diagnosis code information to CMS twice a year forreconciliation with CMS’s internal database. Under this system, the risk adjusted portion of thetotal CMS payment to the Medicare Advantage plans will equal the local rate set forth in thetraditional demographic rate book, adjusted to reflect the plan’s average gender, age, anddisability demographics. During 2003, risk adjusted payments accounted for only 10% of Medicarehealth plan payments, with the remaining 90% being reimbursed in accordance with the traditionaldemographic rate book. The portion of risk adjusted payments was increased to 30% in 2004, 50%, in2005 and 75% in 2006, and will increase to 100% in 2007.***The 2003 Medicare Modernization Act****Overview.*In December 2003, Congress passed the Medicare Prescription Drug, Improvement andModernization Act, which is known as the Medicare Modernization Act, or MMA. The MMA increased theamounts payable to Medicare Advantage plans such as ours, expanded Medicare beneficiary healthcareoptions by, among other things, creating a transitional temporary prescription drug discount cardprogram for 2004 and 2005 and added a Medicare Part D prescription drug benefit beginning in 2006,as further described below.One of the goals of the MMA was to reduce the costs of the Medicare program by increasingparticipation in the Medicare Advantage program. Effective January 1, 2004, the MMA adjustedMedicare Advantage statutory payment rates to 100% of Medicare’s expected cost per beneficiaryunder the traditional fee-for-service program. Generally, this adjustment resulted in an increasein payments per member to Medicare Advantage plans. Medicare Advantage plans are required to usethese increased payments to improve the healthcare benefits that are offered, to reduce premiums orto strengthen provider networks. The reforms proposed by the MMA, including in particular theincreased reimbursement rates to Medicare Advantage plans, have allowed and will continue to allowMedicare Advantage plans to offer more comprehensive and attractive benefits, including betterpreventive care and dental and vision benefits, while also reducing out-of-pocket expenses forbeneficiaries. Page15

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 *Prescription Drug Benefit.*As part of the MMA, every Medicare recipient is able to select aprescription drug plan through Medicare Part D. Medicare Part D replaced the Medicaid PrescriptionDrug Coverage for beneficiaries eligible for participation under both the Medicare and Medicaidprograms, or dual-eligibles. The Medicare Part D prescription drug benefit is largely subsidizedby the federal government and is additionally supported by risk-sharing with the federal governmentthrough risk corridors designed to limit the profits or losses of the drug plans and reinsurancefor catastrophic drug costs, as described below. The government subsidy is based on the nationalweighted average monthly bid for this coverage, adjusted for member demographics and risk factorpayments. The beneficiary will be responsible for the difference between the government subsidyand his or her plan’s bid, together with the amount of his or her plan’s supplemental premium(before rebate allocations), subject to the co-pays, deductibles and late enrollment penalties, ifapplicable, described below. Additional subsidies are provided for dual-eligible beneficiaries andspecified low-income beneficiaries.The Medicare Part D benefits are available to Medicare Advantage plan enrollees as well as Medicarefee-for-service enrollees. Medicare Advantage plan enrollees who elect to participate may pay amonthly premium for this Medicare Part D prescription drug benefit, or MA-PD, while fee-for-servicebeneficiaries will be able to purchase a stand-alone prescription drug plan, or PDP, from a list ofCMS-approved PDPs available in their area. Any Medicare Advantage Member enrolling in astand-alone PDP, however, will automatically be disenrolled from the Medicare Advantage planaltogether, thereby resuming traditional fee-for-service Medicare. Under the standard Part D drugcoverage for 2006, beneficiaries enrolled in a stand-alone PDP will pay a $250 deductible,co-insurance payments equal to 25% of the drug costs between $250 and the initial annual coveragelimit of $2,250 and all drug costs between $2,250 and $5,100, which is commonly referred to as thePart D “doughnut hole”. After the beneficiary has incurred $3,600 in out-of-pocket drug expenses,the MMA provides catastrophic stop loss coverage that will cover approximately 95% of thebeneficiaries’ remaining out-of-pocket drug costs for that year. MA-PDs are not required to mirrorthese limits, but are required to provide, at a minimum, coverage that is actuarially equivalent tothe standard drug coverage delineated in the MMA. The deductible, co-pay and coverage amounts willbe adjusted by CMS on an annual basis. Each Medicare Advantage plan will be required to offer aPart D drug prescription plan as part of its benefits. We currently offer prescription drugbenefits through our Medicare Advantage plans and also offer a stand-alone PDP.*Dual-Eligible Beneficiaries.*A “dual-eligible” beneficiary is a person who is eligible for bothMedicare, because of age or other qualifying status, and Reform, because of economic status.Health plans that serve dual-eligible beneficiaries receive a higher premium from CMS and thegovernment of Puerto Rico for dual-eligible members. Currently, CMS pays an additional premium,generally ranging from 30% to 45% more per member per month, for a dually-eligible beneficiary.This additional premium is based upon the estimated incremental cost CMS incurs, on average, tocare for dual-eligible beneficiaries. The government of Puerto Rico has implemented a plan toallow dual-eligibles enrolled in the Reform to move from the Reform program to a Medicare Advantageplan under which the government, rather than the insured, will assume all of the premiums foradditional benefits not included in traditional Medicare programs, such as prescription drugbenefits. All qualified Reform participants could begin moving to the government-sponsored planbeginning in January 2006, and as of December 31, 2006 approximately 61,000 such participants didso. By managing utilization and implementing disease management programs, many Medicare Advantageplans can profitably care for dually-eligible members. The MMA provides subsidies and reduced oreliminated deductibles for certain low-income beneficiaries, including dual-eligible individuals.Pursuant to the MMA, as of January 1, 2006 dual-eligible individuals receive their drug coveragefrom the Medicare program rather than the Reform program. Companies offering stand-alone PDPs withbids at or below the regional weighted average bid resulting from the annual bidding processreceived a pro-rata allocation and auto-enrollment of the dual-eligible beneficiaries within theapplicable region.*2006 Bidding Process.*Although Medicare Advantage plans will continue to be paid on a capitated,or PMPM, basis, as of January 1, 2006 CMS uses a new rate calculation system for Medicare Advantageplans. The new system is based on a competitive bidding process that allows the federal governmentto share in any cost savings achieved by Medicare Advantage plans. In general, the statutorypayment rate for each county, which is primarily based on CMS’s estimated per beneficiaryfee-for-service expenses, was relabeled as the “benchmark” amount, and local Medicare Advantageplans will annually submit bids that reflect the costs they expect to incur in providing the baseMedicare Part A and Part B benefits in their applicable service areas. If the bid is less than thebenchmark for that year, Medicare will pay the plan its bid amount, risk adjusted based on its riskscores, plus a rebate equal to 75% of the amount by which the benchmark exceeds the bid, resultingin an annual adjustment in reimbursement rates. Plans will be required to use the rebate toprovide beneficiaries with extra benefits, reduced cost sharing, or reduced premiums, includingpremiums for MA-PD and other supplemental benefits. CMS will have the right to audit the use ofthese proceeds. The remaining 25% of the excess amount will be retained in the statutory Medicaretrust fund. If a Medicare Advantage plan’s bid is greater than the benchmark, the plan will berequired to charge a premium to enrollees equal to the difference between the bid amount and thebenchmark, which is expected to make such plans less competitive.***Sales and Marketing.***The marketing and sales activities of our insurance and managed caresubsidiaries are closely regulated by CMS and ASES. For example, our sales and marketing materialsmust be approved in advance by the applicable regulatory authorities, and they often impose otherregulatory restrictions on our marketing activities. Page16

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 *Annual Enrollment and Lock-in.*Prior to the MMA, Medicare beneficiaries were permitted to enrollin a Medicare managed care plan or change plans at any point during the year. As of January 1,2006, Medicare beneficiaries have defined enrollment periods, similar to commercial plans, in whichthey can select a Medicare Advantage plan, stand-alone PDP, or traditional fee-for-serviceMedicare. The initial enrollment period for 2006 began November 15, 2005 and ended on May 15, 2006for a MA-PD or stand-alone PDP. In addition, beneficiaries had an open election period from January1, 2006 through June 30, 2006 in which they could make or change an equivalent election. In futureyears, the annual enrollment period for PDPs will be from November 15 through December 31 of eachyear, and enrollment in Medicare Advantage plans will occur from November 15 through March 31 ofthe subsequent year. Enrollment on or prior to December 31 will be effective as of January 1 ofthe following year and enrollment on or after January 1 and within the enrollment period will beeffective as of the first day of the month following the date on which the enrollment occurred.After these defined enrollment periods end, generally only seniors turning 65 during the year,Medicare beneficiaries who permanently relocate to another service area, dual-eligiblebeneficiaries and others who qualify for special needs plans and employer group retirees will bepermitted to enroll in or change health plans during that plan year. Eligible beneficiaries whofail to timely enroll in a Part D plan will be subject to the penalties described above if theylater decide to enroll in a Part D plan. The new annual “lock-in” created by the MMA will changethe way we and other managed care companies market our services to and enroll Medicarebeneficiaries in ways we cannot yet fully predict. The recently adopted Tax Relief and Health CareAct of 2006 allows Medicare beneficiaries to enroll throughout the year only in Medicare Advantageplans that do not offer Part D prescription drug coverage. In one of our products we do offer such coverage, thus in that particular product we canonly enroll new Medicare Advantage members between November 15 and December 31 each year. We offer another product which does not offer the Part D prescription drug coverage and that is open for enrollment during the entire year. New eligibles can enroll at any time during the year at the date of eligibility. In addition, we can enroll MA members from other carriersthrough March 31st of the next calendar year. Dual-eligibles are allowed to enrollthroughout the year.*Fiscal Intermediary.*As set forth in the MMA, the Federal government, through the Centers forMedicare and Medicaid Services (CMS), will replace the current Title 18 fiscal intermediary (Fl)and carrier contracts with competitively procured contracts that conform to the Federal AcquisitionRegulation under the new Medicare Administrative Contractor (MAC) contracting authority. CMS hassix years, between 2006 and 2011, to complete the transition of Medicare fee-for-service claimsprocessing activities from the FI’s and carriers to the MAC’s. We are currently engaged in theanalysis and evaluation of this transition process and the effect that it may have on our existingorganizational structure as a Medicare carrier.*Fraud and Abuse Laws.*The federal anti-kickback provisions of the Social Security Act and itsregulations prohibit the payment, solicitation, offering or receipt of any form of remuneration(including kickbacks, bribes, and rebates) in exchange for the referral of federal healthcareprogram patients or any item or service that is reimbursed by any federal health care program. Inaddition, the federal regulations include certain safe harbors that describe relationships thathave been determined by CMS not to violate the federal anti-kickback laws. Relationships that donot fall within one of the enumerated safe harbors are not a per se violation of the law, but willbe subject to enhanced scrutiny by regulatory authorities. Failure to comply with theanti-kickback provisions may result in civil damages and penalties, criminal sanctions,administrative remedies, such as exclusion from the applicable federal health care program.***Federal False Claims Act.***Federal regulations also strictly prohibit the presentation of falseclaims or the submission of false information to the federal government. Under the federal FalseClaims Act, any person or entity that has knowingly presented or caused to be presented a false orfraudulent request for payment from the federal government or who has made a false statement orused a false record in the submission of a claim may be subject to treble damages and penalties ofup to $11,000 per claim. The federal government has taken the position that claims presented inrelationships that violate the anti-kickback statute may also be considered to be violations of thefederal False Claims Act. Furthermore, the federal False Claims Act permits private citizen“whistleblowers” to bring actions on behalf of the federal government for violations of the Act andto share in the settlement or judgment that may result from the lawsuit.***HIPAA and Gramm-Leach-Bliley Act***The Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorizes the U.S.Department of Health and Human Services (HHS) to issue standards for administrative simplification,as well as privacy and security of medical records and other individually identifiable healthinformation. The regulations under the HIPAA Administrative Simplification section impose a numberof additional obligations on issuers of health insurance coverage and health benefit plan sponsors.HIPAA Administrative Simplification section requirements apply to self-funded group plans, healthinsurers and HMOs, health care clearinghouses and health care providers who transmit healthinformation electronically (“covered entities”). Regulations adopted to implement HIPAAAdministrative Simplification also require that business associates acting for or on behalf ofHIPAA-covered entities be contractually obligated to meet HIPAA standards. The regulations of theAdministrative Simplification section establish significant criminal penalties and civil sanctionsfor noncompliance. Page17

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 HHS has released rules mandating the use of new standard formats with respect to certain healthcare transactions (e.g. health care claims information, plan eligibility, referral certificationand authorization, claims status, plan enrollment and disenrollment, payment and remittance advice,plan premium payments and coordination of benefits). HHS also has published rules requiring theuse of standardized code sets and unique identifiers by employers and providers. Our managed caresubsidiary was required to comply with the transactions and code set standards by October 16, 2003and with the employer identifier rules by July 2004 and believes that it is in material compliancewith all relevant requirements. Our managed care subsidiary is required to comply with provideridentifier rules by May 2007 and currently expects to meet such deadline.HHS also sets standards relating to the privacy of individually identifiable health information.In general, these regulations restrict the use and disclosure of medical records and otherindividually identifiable health information held by health plans and other affected entities inany form, whether communicated electronically, on paper or orally, subject only to limitedexceptions. In addition, the regulations provide patients new rights to understand and control howtheir health information is used. HHS has also published security regulations designed to protectmember health information from unauthorized use or disclosure. Our managed care subsidiary iscurrently in material compliance with these security regulations.Other federal legislation includes the Gramm-Leach-Bliley Act, which applies to financialinstitutions domiciled in Puerto Rico. The Gramm-Leach-Bliley Act generally placed restrictions onthe disclosure of non-public information to non-affiliated third parties, and required financialinstitutions including insurers, to provide customers with notice regarding how their non-publicpersonal information is used, including an opportunity to “opt out” of certain disclosures. TheGramm-Leach-Bliley Act also gives banks and other financial institutions the ability to affiliatewith insurance companies, which has led to new competitors in the insurance and health benefitsfields in Puerto Rico.***Employee Retirement Income Security Act of 1974***The provision of services to certain employee welfare benefit plans is subject to the EmployeeRetirement Income Security Act of 1974, as amended, or ERISA, a complex set of laws and regulationssubject to interpretation and enforcement by the Internal Revenue Service and the Department ofLabor, or DOL. ERISA regulates certain aspects of the relationships between us, the employers whomaintain employee welfare benefit plans subject to ERISA and participants in such plans. Some ofour administrative services and other activities may also be subject to regulation under ERISA. Inaddition, certain states require licensure or registration of companies providing third-partyclaims administration services for benefit plans. We provide a variety of products and services toemployee welfare benefit plans that are covered by ERISA. Plans subject to ERISA can also besubject to state laws and the question of whether ERISA preempts a state law has been, and willcontinue to be, interpreted by many courts.**Financial Information About Segments**Operating revenues (with intersegment premiums/service revenues shown separately), operating incomeand total assets attributable to the reportable segments are set forth in note 26 to the auditedconsolidated financial statements for the years ended December 31, 2006, 2005 and 2004.**Trademarks**We consider our trademarks of “Triple-S” and “SSS” very important and material to all segments inwhich it is engaged. In addition to these, other trademarks used by our subsidiaries that areconsidered important have been duly registered with the Department of State of Puerto Rico and theUnited States Patent and Trademark Office. It is our policy to register all its important andmaterial trademarks in order to protect its rights under applicable corporate and intellectualproperty laws. In addition, we have the exclusive right to use the “Blue Shield” mark in PuertoRico. See “— Blue Shield License”.**Employees**As of February 28, 2007, we had 2,252 full-time employees and 266 temporary employees. Our managedcare subsidiary has a collective bargaining agreement with the Unión General de Trabajadores, whichrepresents approximately 45% of our managed care subsidiary’s 794 regular employees. Thecollective bargaining agreement expires on July 31, 2012. The Corporation considers its relationswith employees to be good.**Available Information**We file annual, quarterly and current reports and other information with the Securities andExchange Commission (the SEC). The SEC maintains a website that contains annual, quarterly andcurrent reports and other information that issuers and filers (including ourselves) fileelectronically with the SEC. The SEC’s website is www.sec.gov. We Page18

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 currently do not have an Internet website through which we can make available our SEC filings. Thewebsite address listed above is provided for the information of the reader and is not intended tobe an active link. We will provide free of charge copies of our filings to any shareholder thatrequests them at the following address: Triple-S Management Corporation; Office of the Secretary ofthe Board; PO Box 363628; San Juan, P.R. 00936-3628.**Cautionary Statement Regarding Forward-Looking Information**This Annual Report on Form 10-K contains forward-looking statements; as such term is defined in thePrivate Securities Litigation Reform Act of 1995. Forward-looking statements are statements thatinclude information about possible or assumed future sales, results of operations, developments,regulatory approvals or other circumstances and may be found in the sections of this Annual Reporton Form 10-K entitled “Business”, “Risk Factors”, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K.Statements that use the terms “believe”, “expect”, “plan”, “intend”, “estimate”, “anticipate”,“project”, “may”, “will”, “shall”, “should” and similar expressions, whether in the positive ornegative, are intended to identify forward-looking statements.All forward-looking statements in this Annual Report on Form 10-K reflect our current views aboutfuture events and are based on assumptions and subject to risks and uncertainties. Consequently,actual results may differ materially from those anticipated in these forward-looking statements asa result of various factors, including all the risks discussed in “Risk Factors” and elsewhere inthis Annual Report on Form 10-K. We believe the forward-looking statements in this Annual Reporton Form 10-K are reasonable; however, there is no assurance that the actions, events or resultsanticipated by the forward-looking statements will occur or, if any of them do, what impact theywill have on our results of operations or financial condition. In view of these uncertainties, youshould not place undue reliance on any forward-looking statements, which are based on our currentexpectations. Further, forward-looking statements speak only as of the date they are made, and,other than as required by applicable law, including the securities laws of the United States, we donot intend to update or revise any of them in light of new information or future events.**Item 1A.** **Risk Factors**We must deal with several risk factors during the normal course of business. The followingrisk factors and other information included in this Annual Report on Form 10-K should be carefullyconsidered. The risks and uncertainties described below are not the only ones we face. Additionalrisks and uncertainties not presently known to us or that are currently deemed immaterial also mayimpair our business operations. If any of the following risks occur our business, financialcondition, operating results, and cash flows could be materially affected.**Risks Relating to our Capital Stock*****Certain of our current and former providers may bring materially dilutive claims against us.***Between approximately 1985 and 1994, our predecessor managed care subsidiary, Seguros de Serviciosde Salud de Puerto Rico, Inc. (“SSS”) generally entered into an agreement with each new physicianor dentist who joined the Corporation’s provider network to sell the provider shares of SSS at afuture date (each a “Share Acquisition Agreement”). These agreements were necessary because therewere not enough authorized shares of SSS available during this period and afterwards for issuanceto all new providers. Each Share Acquisition Agreement committed SSS to sell, and each newprovider to purchase, five $40-par-value shares of SSS at $40 per share after SSS had increased itsauthorized share capital in compliance with the Puerto Rico Insurance Code and was in a position toissue new shares. Despite repeated efforts in the 1990s, SSS was not successful in obtainingshareholder approval to increase its share capital, other than in connection with the Corporation’sreorganization in 1999, when SSS was merged into a newly-formed entity having authorized capital of25,000 $40-par-value shares, or twice the number of authorized shares of SSS. SSS’s shareholdersdid not, however, authorize the issuance of the newly formed entity’s shares to providers or anyother third party. In addition, subsequent to the Corporation’s reorganization, TSM’s shareholdersdid not approve attempts to increase TSM’s share capital in 2002 and 2003.Notwithstanding the fact that TSI and its predecessors were never in a position to issue new sharesto providers as contemplated by the Share Acquisition Agreements because shareholder approval forsuch issuance was never obtained, and the fact that SSS on several occasions in the 1990s offeredproviders the opportunity to purchase shares of its treasury stock and such offers were accepted byvery few providers, providers who entered into Share Acquisition Agreements may claim that theShare Acquisition Agreements entitled them to acquire shares of TSI or TSM at a subscription priceequivalent to that provided for in the Share Acquisition Agreements. SSS entered into ShareAcquisition Agreements with approximately 3,000 providers, the substantial majority of whom nevercame to own shares of SSS. Such Share Acquisition Agreements provide for the purchase and sale ofapproximately 15,000 shares of SSS. Were TSI or TSM required to issue a significant number ofshares in respect of these Agreements, the interest Page19

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 of existing shareholders in the Corporation would be substantially diluted. As of the date of thisannual report, although no judicial claims of this nature have been commenced, our records indicatethat the Corporation has received inquiries with respect to at least approximately 500 shares underShare Acquisition Agreements.Management has been advised by Puerto Rico counsel that, on the basis of a reasoned analysis, whilethe matter is not free from doubt and there are no applicable controlling precedents, theCorporation should prevail if litigation of these claims were to be commenced by providers because,among other defenses, the condition precedent to SSS’s obligations under the Share AcquisitionAgreements never occurred, and any obligation it or its subsidiaries or predecessors may have hadunder the Share Acquisition Agreements should be understood to have expired prior to our corporatereorganization, which took effect in 1999, although the Share Acquisition Agreements do notexpressly provide for any expiration.Management believes the Corporation should prevail in litigation if any judicial claims arecommenced with respect to these matters; however, the Corporation cannot predict the outcome of anysuch litigation, including with respect to the magnitude of any claims that may be asserted by anyplaintiff, and the interests of the Corporation’s shareholders could be materially diluted to theextent that claims under the Share Acquisition Agreements are successful.***Heirs of certain of our former shareholders may bring materially dilutive claims against us.***For much of its history, the Corporation and its predecessor entities have restricted the ownershipor transferability of their shares, including by reserving to TSM or its predecessors a right offirst refusal with respect to share transfers and by limiting ownership of such shares tophysicians and dentists. In addition, TSM and its predecessors, consistent with the requirementsof their by-laws, have sought to repurchase shares of deceased shareholders at the amountoriginally paid for such shares by those shareholders. Nonetheless, the Corporation anticipatesthat some former shareholders’ heirs who were not eligible to own or be transferred shares becausethey were not physicians or dentists at the time of their purported inheritance (“Non-medicalHeirs”), may claim an entitlement to TSM shares or to damages in respect to the repurchased shares notwithstanding applicable transfer and ownership restrictions. Our records indicate that there may be as many as approximately 450 Non-medical Heirs whomay claim to have inherited up to 3,500 shares, although no judicial claims in this regard haveever been initiated. Our records indicate that, as of the date of this Annual Report on Form 10-K,we have received inquiries from Non-medical Heirs with respect to approximately 420 shares.Management believes that the Corporation should generally prevail against any such claims ifbrought; however, management cannot predict the outcome of any eventual litigation regarding theseNon-medical Heirs. The interests of the Corporation’s existing shareholders could be materiallydiluted to the extent that any such claims are successful.**Risks Related to Our Business*****Our inability to contain managed care costs may adversely affect our business and profitability.***Substantially all of our managed care revenue is generated by premiums consisting of monthlypayments per member that are established by contracts with our commercial customers, the governmentof Puerto Rico (for our Reform program) or the Centers for Medicare and Medicaid Services, or CMS(for our Medicare Advantage plans), all of which are typically renewable on an annual basis. Ifour medical expenses exceed our estimates, except in very limited circumstances or as a result ofrisk score adjustments for member acuity, we will be unable to increase the premiums we receiveunder these contracts during the then-current terms. As a result, our profitability in any yeardepends, to a significant degree, on our ability to adequately predict and effectively manage ourmedical expenses related to the provision of managed care services through underwriting criteria,medical management, product design and negotiation of favorable provider contracts with hospitals,physicians and other health care providers. The aging of the population and other demographiccharacteristics and advances in medical technology continue to contribute to rising health carecosts. Government-imposed limitations on Medicare and Reform reimbursement have also caused theprivate sector to bear a greater share of increasing health care costs. Also, we have in the pastand may in the future enter into new lines of business in which it may be difficult to estimateanticipated costs. Numerous factors affecting the cost of managed care, including changes inhealth care practices, inflation, new technologies such as genetic laboratory screening fordiseases like breast cancer, the cost of prescription drugs such as ElapraseTM for Hunter syndromeand other new drugs approved for various conditions, clusters of high cost cases, changes in theregulatory environment including the implementation of Health Insurance Portability andAccountability Act of 1996 (HIPAA), as well as others, may adversely affect our ability to predictand manage managed care costs, as well as our business, financial condition and results ofoperations.***Our inability to implement increases in premium rates on a timely basis may adversely affect ourbusiness and profitability.***In addition to the challenge of managing managed care costs, we face pressure to contain premiumrates. Our customers may move to a competitor at policy renewal to obtain more favorable premiums.Future Medicare and Reform Page20

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 premium rate levels may be affected by continuing government efforts to contain medical expense orother federal budgetary constraints. In particular, in the past the government of Puerto Rico hasadopted several measures to control Reform expenditures, such as closer and continuous scrutiny ofparticipants’ eligibility, redesign of benefits, co-payments, deductibles, and requiring theestablishment of disease management programs. Changes in the Medicare and Reform program,including with respect to funding, may lead to reductions in the amount of reimbursement,elimination of coverage for certain benefits, or reductions in the number of persons enrolled in oreligible for Medicare and the Reform. A limitation on our ability to increase or maintain ourpremium levels could adversely affect our business, financial condition and results of operations.***Our profitability may be adversely affected if we are unable to maintain our current provideragreements and to enter into other appropriate agreements.***Our profitability is dependent upon our ability to contract on favorable terms with hospitals,physicians and other managed care providers. We face heavy competition from other managed careplans to enter into contracts with hospitals, physicians and other providers in our providernetworks. Consolidation in our industry, both on the provider side and on the managed care side,only exacerbates this competition. Currently certain providers are pressing for legislation thatwould allow them to negotiate service fees by provider groups. The failure to maintain or tosecure new cost-effective managed care provider contracts may result in a loss in membership orhigher medical costs. In addition, our inability to contract with providers could adversely affectour business.***A reduction in the enrollment in our managed care programs could have an adverse effect on ourbusiness and profitability.***A reduction in the number of enrollees in our managed care programs could adversely affect ourbusiness, financial condition and results of operations. Factors that could contribute to areduction in enrollment include: failure to obtain new customers or retain existing customers;premium increases and benefit changes; our exit from a specific market; reductions in workforce byexisting customers; negative publicity and news coverage; failure to maintain the BCBS license; andany general economic downturn that results in business failures.***We are dependent on a small number of government contracts to generate a significant amount of therevenues of our managed care business.***Our managed care business participates in government contracts that generate a significant amountof our consolidated premiums earned, net, as follows: **•** *Reform Program.*We participate in the government of Puerto Rico HealthReform to provide health coverage to medically indigent citizens in Puerto Rico. Ourresults of operations have depended to a significant extent on our participation in theReform program. During each of the years ended December 31, 2006, 2005 and 2004, theReform program has accounted for 30.2%, 37.0% and 37.3%, respectively , of ourconsolidated premiums earned, net. During these periods, we were the sole Reform providerin three of the eight Reform regions in Puerto Rico. Since we obtained our first Reformcontract in 1995, we have been the sole provider for two to three regions each year. Thecontract for each geographical area is subject to termination in the event of anynon-compliance by the insurance company which is not corrected or cured to thesatisfaction of the government entity overseeing the Reform, or on ninety days’ priorwritten notice in the event that the government determines that there is an insufficiencyof funds to finance the Reform. These contracts have one-year terms and expire onSeptember 30 of each year. Upon the expiration of the contract for a geographical area,the government of the Commonwealth of Puerto Rico usually commences an open biddingprocess for such area. In October 2006, we were informed that the new contract to serveone of these regions, Metro-North, had been awarded to another managed care companyeffective November 1, 2006. During each of the years ended December 31, 2006, 2005 and2004, this region accounted for 10.7%, 14.6% and 14.2%, respectively, of our consolidatedpremiums earned, net and 7.3%, 10.3% and 9.3%, respectively, of our consolidated operatingincome. We intend to continue to participate in the Reform program, but we may not beable to retain the right to service a particular geographical area in which we currentlyoperate after the expiration of our current or any future contracts.  **•** *Medicare Advantage:*We provide services through our Medicare Advantagehealth plans pursuant to a limited number of contracts with CMS. These contractsgenerally have terms of one year and must be renewed each year. Each of our contractswith CMS is terminable for cause if we breach a material provision of the contract orviolate relevant laws or regulations. If we are unable to renew, or to successfully re-bidor compete for any of these contracts, or if any of these contracts are terminated, ourbusiness would be materially impaired. Contracts with CMS represented 11.3% of ourconsolidated premiums earned, net and 45.9% of our consolidated operating income duringthe year ended December 31, 2006 and may in the future represent a greater percentage ofour results. Page21

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  **•** *Commercial*: Our managed care subsidiary is a qualified contractor toprovide managed care coverage to federal government employees within Puerto Rico. Suchcoverage is provided pursuant to a contract with the U.S. Office of Personnel Management,or OPM, that is subject to termination in the event of noncompliance not corrected to thesatisfaction of the OPM. Premiums generated under this contract represented 7.5%, 8.2%and 8.3% of our consolidated premiums earned, net during the years ended December 31,2006, 2005 and 2004, respectively.If any of these contracts is terminated for any reason, including by reason of any noncompliance byus, or not renewed or replaced by a comparable contract, our premiums would be materially adverselyaffected. The further loss or non-renewal of either of our Reform contracts could have a materialadverse effect on our operating results and could result in the downsizing of certain personnel,the cancellation of lease agreements of certain premises and of certain contracts, and severancepayments, among others.***A change in our managed care product mix may impact our profitability.***Our managed care products that involve greater potential risk, such as fully insured arrangements,generally tend to be more profitable than administrative services products and those managed careproducts where employer groups retain the risk, such as self-funded financial arrangements. Therehas been a trend in recent years among our commercial customers of moving from fully-insured plansto self-funded, or ASO, arrangements. In addition, the government of the Commonwealth of PuertoRico began a pilot project in 2003 in one of the eight geographical areas under which it contractedservices on an ASO basis for certain members instead of contracting on a fully insured basis. Thisproject was subsequently extended to the Metro-North region, which was served by us until October31, 2006. There can be no assurance that the government will not implement such a program in areasserved by us. As of December 31, 2006, 83.9% of our managed care customers had fully insuredarrangements and 16.1% had ASO arrangements, as compared to approximately 87.8% and 12.2%,respectively, as of December 31, 2005. Unfavorable changes in the relative profitability orcustomer participation among our various products could have a material adverse effect on ourbusiness, financial condition, and results of operations.***Our failure to accurately estimate incurred but not reported claims would affect our reportedfinancial results.***A portion of the claim liabilities recorded by our insurance segments represents an estimate ofamounts needed to pay and adjust anticipated claims with respect to insured events that haveoccurred, including events that have not yet been reported to us. These amounts are based onestimates of the ultimate expected cost of claims and on actuarial estimation techniques. Judgmentis required in actuarial estimation to ascertain the relevance of historical payment and claimsettlement patterns under each segment’s current facts and circumstances. Accordingly, theultimate liability may be in excess of or less than the amount provided. We regularly compareprior period liabilities to re-estimated claim liabilities based on subsequent claims development;any difference between these amounts is adjusted in the operations of the period determined.Additional information on how each reportable segment determines its claim liabilities, and thevariables considered in the development of this amount, is included elsewhere in this Annual Reporton Form 10-K under “Item 7 — Management’s Discussion and Analysis of Financial Condition andResults of Operation — Critical Accounting Policies”. Actual experience will likely differ fromassumed experience, and to the extent the actual claims experience is less favorable than estimatedbased on our underlying assumptions, our incurred losses would increase and future earnings couldbe adversely affected.***The termination or modification of our license agreements to use the Blue Shield name and markcould have an adverse effect on our business, financial condition and results of operations.***We are a party to license agreements with the Blue Cross Blue Shield Association, or BCBSA, whichentitle us to the exclusive use of the Blue Shield name and mark in the Commonwealth of PuertoRico. We believe that the Blue Shield name and mark are valuable identifiers of our products andservices in the marketplace. The termination of these license agreements or changes in the termsand conditions of these license agreements could adversely affect our business, financial conditionand results of operations.Our license agreements with the BCBSA contain certain requirements and restrictions regarding ouroperations and our use of the Blue Shield name and mark. Failure to comply with any of theserequirements and restrictions could result in a termination of the license agreements. Thestandards under the license agreements may be modified in certain instances by the BCBSA.Additional information about BCBSA requirements is included under “Item 1 — Products and Services— Blue Shield License”. To the extent that such amendments to the license agreements are adoptedin the future, they could have a material adverse effect on our future expansion plans or resultsof operations.Upon any event causing termination of the license agreements, we would no longer have the right touse the Blue Shield name and mark in Puerto Rico. Furthermore, the BCBSA would be free to issue alicense to use the Blue Shield name and mark in Puerto Rico to another entity. Events that couldcause the termination of a license agreement with the BCBSA include failure to comply with minimumcapital requirements imposed by the BCBSA, a change of control or violation of the BCBSA ownershiplimitations on our capital stock, impending financial insolvency and the Page22

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 appointment of a trustee or receiver or the commencement of any action against a licensee seekingits dissolution. Accordingly, termination of the license agreements could have a material adverseeffect on our business, financial condition and results of operations.In addition, the BCBSA requires us to comply with certain specified levels of RBC. RBC is designedto identify weakly capitalized companies by comparing each company’s adjusted surplus to itsrequired surplus (the RBC ratio). Although we are currently in compliance with these requirements,we may be unable to continue to comply in the future. Failure to comply with these requirementscould result in the revocation or loss of our BCBS license.Upon termination of a license agreement, the BCBSA would impose a “Re-establishment Fee” upon us,which would allow the BCBSA to “re-establish” a Blue Shield presence in the vacated service areawith another managed care company. Through December 31, 2006 the fee is set at $83.41 per licensedenrollee. If the re-establishment fee was applied to our total Blue Shield enrollees, we would beassessed approximately $81.7 million by the BCBSA.***Our ability to manage our exposure to underwriting risks in our life insurance and property andcasualty insurance businesses depends on the availability and cost of reinsurance coverage.***Reinsurance is the practice of transferring part of an insurance company’s liability and premiumunder an insurance policy to another insurance company. We use reinsurance arrangements to limitand manage the amount of risk we retain, to stabilize our underwriting results and to increase ourunderwriting capacity. In the year ended December 31, 2006, 41.3%, or $65.7 million, of thepremiums written in the property and casualty insurance segment and 10.6%, or $9.7 million, of thepremiums written in the life insurance segment were ceded to reinsurers. The availability and costof reinsurance is subject to changing market conditions and may vary significantly over time. Anydecrease in the amount of our reinsurance coverage will increase our risk of loss. We may beunable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage inadequate amounts and at favorable rates. If we are unable to renew our expiring coverage or obtainnew coverage, it will be difficult for us to manage our underwriting risks and operate our businessprofitably.It is also possible that the losses we experience on insured risks for which we have obtainedreinsurance will exceed the coverage limits of the reinsurance. If the amount of our reinsurancecoverage is insufficient, our insurance losses could increase substantially.***If our reinsurers do not pay our claims or do not pay them in a timely manner, we may incur losses.***We are subject to loss and credit risk with respect to the reinsurers with whom we deal becausebuying reinsurance does not relieve us of our liability to policyholders. In accordance withgeneral industry practices, our property and casualty and life insurance subsidiaries annuallypurchase reinsurance to protect them from the impact of large unforeseen losses and prevent suddenand unpredictable changes in our net income and stockholders equity. Reinsurance contracts do notrelieve us from our obligations to policyholders. In the event that all or any of the reinsurancecompanies are unable to meet their obligations under existing reinsurance agreements or pay on atimely basis, we will continue to be liable to our policyholders notwithstanding such defaults ordelays. If our reinsurers are not capable of fulfilling their financial obligations to us, ourinsurance losses would increase, which would negatively affect our financial condition and resultsof operations.*A downgrade in our A.M. Best rating or our inability to increase our A.M. Best rating could affectour ability to write new business or renew our existing business in our property and casualtysegment.*Ratings assigned by A.M. Best are an important factor influencing the competitive position the property and casualty ofinsurance companies in Puerto Rico. In July 2006, as a result of the additional indebtedness we incurred inconnection with the acquisition of GA Life, A.M. Best although maintaining our property andcasualty insurance subsidiary’s rating of A-; changed the outlook to negative. A.M. Best ratingsrepresent independent opinions of financial strength and ability to meet obligations topolicyholders and are not directed toward the protection of investors. Financial strength ratingsare used by brokers and customers as a means of assessing the financial strength and quality ofinsurers. A.M. Best reviews its ratings periodically and we may not be able to maintain ourcurrent ratings in the future. A downgrade of our property and casualty subsidiary’s rating couldseverely limit or prevent us from writing desirable property business or from renewing our existingbusiness. The lines of business that property and casualty subsidiary writes and the market inwhich it operates are particularly sensitive to changes in A.M. Best financial strength ratings.*Significant competition could negatively affect our ability to maintain or increase ourprofitability.**Managed Care*The managed care industry in Puerto Rico is very competitive. If we are unable to competeeffectively while appropriately pricing the business subscribed, our business and financialcondition could be materially affected. 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 of claim payments and reputation. This competitive environment has produced and will likelycontinue to produce significant pressures on the profitability of managed care companies. Inaddition, the managed care market in Puerto Rico, other than the Medicare Advantage market, ismature. According to the U.S. Census Bureau, Puerto Rico’s population grew by 0.4% between July2004 and 2005, less than half the national population rate growth of 0.9% during the same period.As a result, in order to increase our profitability we must increase our membership in the newMedicare Advantage program, increase market share in the commercial sector, improve our operatingprofit margins, make acquisitions or expand geographically. In Puerto Rico, several new managedcare plans and other entities have been awarded contracts for Medicare Advantage or stand-aloneMedicare prescription drug plans and entered that market in 2006. We anticipate that these otherplans will aggressively market their benefits to our current and our prospective members. Althoughwe believe that we market an attractive offering, there are no assurances that we will be able tocompete successfully with these other plans for new members, or that our current members will notchoose to terminate their relationship with us and enroll in these other plans.Concentration in our industry also has created an increasingly competitive environment, both forcustomers and for potential acquisition targets, which may make it difficult for us to grow ourbusiness. Some of our competitors are larger and have greater financial and other resources thanwe do. We may have difficulty competing with larger managed care companies, which can createdownward price pressures on premium rates. We may not be able to compete successfully againstcurrent and future competitors. Competitive pressures faced by us may adversely affect ourbusiness, financial condition and results of operations.Future legislation at the federal and local levels also may result in increased competition in ourmarket. While we do not anticipate that any of the current legislative proposals of which we areaware would increase the competition we face, future legislative proposals, if enacted, might doso.*Complementary Products*The property and casualty insurance market in Puerto Rico is extremely competitive. Due to therelatively low level of economic growth in Puerto Rico, there are few new sources of business inthis segment. As a result, property and casualty insurance companies compete for the same accountsthrough aggressive pricing, more favorable policy terms and better quality of services. We alsoface heavy competition in the life and disability insurance market.We believe these trends will continue. There can be no assurance that these competitive pressureswill not adversely affect our business, financial condition and results of operations.***As a holding company, we are largely dependent on rental payments, dividends and other paymentsfrom our subsidiaries, although the ability of our regulated subsidiaries to pay dividends or makeother payments to us is subject to the regulations of the Commissioner of Insurance, includingmaintenance of minimum levels of capital, as well as covenant restrictions in their indebtedness.***We are a holding company whose assets include, among other things, all of the outstanding shares ofcommon stock of our subsidiaries, including our regulated insurance subsidiaries. We principallyrely on rental income and dividends from our subsidiaries to fund our debt service, dividendpayments and operating expenses, although our subsidiaries do not declare dividends every year. Wealso benefit to a lesser extent from income on our investment portfolio.Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance. Theseregulations, among other things, require insurance companies to maintain certain levels of capitalwhich range by type of insurance from $1.0 million to $3.0 million, thereby restricting the amountof earnings that can be distributed. Our subsidiaries’ ability to make any payments to us willalso depend on their earnings, the terms of their indebtedness, if any, business and other legalrestrictions. Furthermore, our subsidiaries are not obligated to make funds available to us, andcreditors of our subsidiaries have a superior claim to such subsidiaries’ assets. Our subsidiariesmay not be able to pay dividends or otherwise contribute or distribute funds to us in an amountsufficient for us to meet our financial obligations. In addition, from time to time, we could berequired to provide financial assistance, either through subordinated loans or capital infusions toour subsidiaries.In addition, we are subject to RBC requirements by the BCBSA. See “— The termination ormodification of our license agreements to use the Blue Shield name and mark could have an adverseeffect on our business, financial condition and results of operations”.***Our results may fluctuate as a result of many factors, including cyclical changes in the insuranceindustry.***Results of companies in the insurance industry, and particularly the property and casualtyinsurance industry, historically have been subject to significant fluctuations and uncertainties.The industry’s profitability can be affected significantly by: **•** rising levels of actual costs that are not known by companies at the time they price their products; Page24

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  **•** volatile and unpredictable developments, including man-made and natural catastrophes;  **•** changes in reserves resulting from the general claims and legal environmentsas different types of claims arise and judicial interpretations relating to the scope ofinsurers’ liability develop; and  **•** fluctuations in interest rates, inflationary pressures and other changes inthe investment environment, which affect returns on invested capital.Historically, the financial performance of the insurance industry has fluctuated in cyclicalperiods of low premium rates and excess underwriting capacity resulting from increased competition,followed by periods of high premium rates and a shortage of underwriting capacity resulting fromdecreased competition. Fluctuations in underwriting capacity, demand and competition, and theimpact on us of the other factors identified above, could have a negative impact on our results ofoperations and financial condition. We believe that underwriting capacity and price competition inthe current market is increasing. This additional underwriting capacity may result in increasedcompetition from other insurers seeking to expand the kinds or amounts of business they write orcause some insurers to seek to maintain market share at the expense of underwriting discipline. Wemay not be able to retain or attract customers in the future at prices we consider adequate.***We may be subject to regulatory and investigative proceedings, which may find that our policies,procedures and contracts do not fully comply with complex and changing healthcare regulations.***The Commissioner of Insurance, as well as other Federal and Puerto Rico government authorities,including but not limited to CMS, the Office of the Inspector General of the U.S. Department ofHealth and Human Services, the Office of the Civil Rights, the U.S. Department of Justice, and theOffice of Personnel Management, regularly make inquiries and conduct audits concerning ourcompliance with applicable insurance and other laws and regulations. We may become the subject ofregulatory or other investigations or proceedings brought by these authorities, and our compliancewith and interpretation of applicable laws and regulations may be challenged. In addition, ourregulatory compliance may also be challenged by private citizens under the “whistleblowerprovisions” of applicable laws. The defense of any such challenge could result in substantial costand a diversion of management’s time and attention. Thus, any such challenge could have a materialadverse effect on our business, regardless of whether it ultimately is successful. If we fail tocomply with any applicable laws, or a determination is made that we have failed to comply withthese laws, our financial condition and results of operations could be adversely affected.***As a Medicare Advantage program participant, we are subject to complex regulations. If we fail tocomply with these regulations, we may be exposed to criminal sanctions and significant civilpenalties, and our Medicare Advantage contracts may be terminated.***The laws and regulations governing Medicare Advantage program participants are complex, subject tointerpretation and can expose us to penalties for non-compliance. If we fail to comply with theselaws and regulations, we could be subject to criminal fines, civil penalties or other sanctions,including the termination of our Medicare Advantage contracts.***The revised rate calculation system for Medicare Advantage established by the MMA could reduce ourprofitability.***Effective January 1, 2006, a revised rate calculation system based on a competitive bidding processwas instituted for Medicare Advantage managed care plans, including our *Medicare Selecto*and*Medicare Optimo*plans. The statutory payment rate was relabeled as the benchmark amount, and planssubmit competitive bids that reflect the costs they expect to incur in providing the base Medicarebenefits. If the accepted bid is less than the benchmark, Medicare pays the plan its bid plus arebate of 75% of the amount by which the benchmark exceeds the bid. However, these rebates canonly be used to enhance benefits or lower premiums and co-pays for plan members. If the bid isgreater than the benchmark, the plan will be required to charge a premium to enrollees equal to thedifference between the bid and the benchmark, which could affect our ability to attract enrollees.CMS reviews the methodology and assumptions used in bidding with respect to medical andadministrative costs, profitability and other factors. CMS could challenge such methodology orassumptions or seek to cap or limit plan profitability.Furthermore, the Deficit Reduction Act of 2005, or the DRA, signed by the President on February 8,2006, directs CMS to conduct an analysis of fee-for-service provider (a provider who receivespayment for services based on actual services provided to Medicare beneficiaries and acontractually mandated or CMS-mandated fee schedule) and Medicare Advantage plan treatment andcoding practices (methods of documenting medical services provided to and diagnoses of members) andto incorporate any identified differences into benchmark calculations no later than 2008. Thisrevised rate calculation system established by the MMA and amended by the DRA is likely toeventually result in reduced Medicare Advantage payment rates, which could reduce our revenues andcause our profitability to decline. We may also face the risk of reduced or insufficientgovernment funding and we may need to terminate our Medicare Advantage contracts with respect tounprofitable markets, which may have a material adverse effect on our financial position, resultsof operations or cash flows. In addition, as a result of the competitive bidding process, we mayin the future be required to reduce benefits or charge our members an additional premium in order tomaintain our current Page25

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 level of profitability, either of which could make our health plans lessattractive to members and adversely affect our membership.***CMS’s risk adjustment payment system and budget neutrality factors make our revenue andprofitability difficult to predict and could result in material retroactive adjustments to ourresults of operations.***CMS has implemented a risk adjustment payment system for Medicare health plans to improve theaccuracy of payments and establish incentives for Medicare plans to enroll and treat less healthyMedicare beneficiaries. CMS is phasing in this payment methodology with a risk adjustment modelthat bases a portion of the total CMS reimbursement payments on various clinical and demographicfactors including hospital inpatient diagnoses, diagnosis data from ambulatory treatment settings,including hospital outpatient facilities and physician visits, gender, age and Medicaideligibility. CMS requires that all managed care companies capture, collect and submit thenecessary diagnosis code information to CMS twice a year for reconciliation with CMS’s internaldatabase. As part of the phase-in, during 2003, risk adjusted payments accounted for 10% ofMedicare health plan payments, with the remaining 90% being reimbursed in accordance with thetraditional CMS demographic rate books. The portion of risk adjusted payments was increased to 30%in 2004, 50% in 2005 and 75% in 2006, and will increase to 100% in 2007. As a result of thisprocess, it is difficult to predict with certainty our future revenue or profitability. Inaddition, our own risk scores for any period may result in favorable or unfavorable adjustments tothe payments we receive from CMS and our Medicare premium revenue. There can be no assurance thatour contracting physicians and hospitals will be successful in improving the accuracy of recordingdiagnosis code information, which has an impact on our risk scores.Payments to Medicare Advantage plans are also adjusted by a “budget neutrality” factor that wasimplemented in 2003 by Congress and CMS to prevent health plan payments from being reduced overallwhile, at the same time, directing risk adjusted payments to plans with more chronically illenrollees. In general, this adjustment has favorably impacted payments to all Medicare Advantageplans. The President’s budget for 2005 assumed the phasing out of the budget neutralityadjustments over a five year period from 2007 through 2011.***If during the open enrollment season our Medicare Advantage members enroll in another MedicareAdvantage plan, they will be automatically unenrolled from our plan, possibly without our immediateknowledge.***Pursuant to the MMA, members enrolled in one insurer’s Medicare Advantage program will beautomatically unenrolled from that program if they enroll in another insurer’s Medicare Advantageprogram. If our members enroll in another insurer’s Medicare Advantage program during the openenrollment season, we may not discover that such member has been unenrolled from our program untilsuch time as we fail to receive reimbursement from the CMS in respect of such member, which mayoccur several months after the end of the open season. As a result, we may discover that a memberhas unenrolled from our program after we have already provided services to such individual. Ourprofitability would be reduced as a result of such failure to receive payment from CMS if we hadmade related payments to providers and were unable to recoup such payments from them.***We face intense competition to attract and retain employees and independent agents and brokers.***We are dependent on retaining existing employees, attracting and retaining additional qualifiedemployees to meet current and future needs and achieving productivity gains. Our life anddisability insurance subsidiary, GA Life, has historically experienced a very high level ofturnover in its home service agents, through which it places a majority of its premiums, and weexpect this trend to continue. Our inability to retain existing employees or attract additionalemployees could have a material adverse effect on our business, financial condition and results ofoperations.In addition, in order to market our products effectively, we must continue to recruit, retain andestablish relationships with qualified independent agents and brokers. We may not be able torecruit, retain and establish relationships with agents and brokers. Independent agents andbrokers are typically not exclusively dedicated to us and may frequently also market ourcompetitors’ managed care products. We face intense competition for the services and allegiance ofindependent agents and brokers. If such agents and brokers do not help us to maintain our currentcustomer accounts or establish new accounts, our business and profitability could be adverselyaffected. Page26

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 ***Our investment portfolios are subject to varying economic and market conditions.***We have exposure to market risk in our investment activities. The market values of our investmentsvary from time to time depending on economic and market conditions. Fixed maturity securitiesexpose us to interest rate risk. Equity securities expose us to equity price risk. Interest ratesare highly sensitive to many factors, including governmental monetary policies and domestic andinternational economic and political conditions. These and other factors also affect the equitysecurities owned by us. The outlook of our investment portfolio depends on the future direction ofinterest rates, fluctuations in the equity securities market and in the amount of cash flowsavailable for investment. For additional information, see “Item 7A — Quantitative and QualitativeDisclosures About Market Risk” for a detailed analysis of our exposure to interest and equity pricerisks and the procedures in place to manage these risks. Ourinvestment portfolios may lose money in future periods, which could have a material adverse effecton our financial condition. Page27

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 ***The geographic concentration of our business in Puerto Rico may subject us to economicdownturns in the region.***Substantially all of our business activity is with insureds located throughout Puerto Rico, and assuch, we are subject to the risks associated with the Puerto Rico economy. If economic conditionsin Puerto Rico deteriorate, we may experience a reduction in existing and new business, which couldhave a material adverse effect on our business, financial condition and results of operations.A number of key economic indicators suggest that the Puerto Rican economy is suffering a slowdown,as a result of, among other things, the persistent high levels of oil prices, the current trend inshort-term interest rates, the depreciation of the dollar and the deceleration of public investmentdue to the current fiscal situation in Puerto Rico.If economic conditions in Puerto Rico deteriorate, we may experience a reduction in existing andnew business, which could have a material adverse effect on our business, financial condition andresults of operations.***We may not be able to retain our executive officers and significant employees, and the loss of anyone or more of these officers and their expertise could adversely affect our business.***Our operations are highly dependent on the efforts of our senior executives, each of whom has beeninstrumental in developing our business strategy and forging our business relationships. While webelieve that we could find replacements, the loss of the leadership, knowledge and experience ofour executive officers could adversely affect our business. Replacing many of our executiveofficers might be difficult or take an extended period of time because a limited number ofindividuals in the industries in which we operate have the breadth and depth of skills andexperience necessary to operate and expand successfully a business such as ours. We do notcurrently maintain key-man life insurance on any of our executive officers.***The success of our business depends on developing and maintaining effective information systems.***Our business and operations may be harmed if we do not maintain our information systems and theintegrity of our proprietary information. We are materially dependent on our information systemsfor all aspects of our business operations, including monitoring utilization and other factors,supporting our managed care management techniques, processing provider claims and providing data toour regulators, and our ability to compete depends on our ability to continue to adapt technologyon a timely and cost-effective basis. Malfunctions in our information systems, communication andenergy disruptions, security breaches or the failure to maintain effective and up-to-dateinformation systems could disrupt our business operations, alienate customers, contribute tocustomer and provider disputes, result in regulatory violations and possible liability, increaseadministrative expenses or lead to other adverse consequences. The use of patient data by all ofour businesses is regulated at federal and local levels. These laws and rules change frequentlyand developments require adjustments or modifications to our technology infrastructure.Our information systems and applications require continual maintenance, upgrading and enhancementto meet our operational needs. If we are unable to maintain or expand our systems, we could sufferfrom, among other things, operational disruptions, such as the inability to pay claims or to makeclaims payments on a timely basis, loss of members, difficulty in attracting new members,regulatory problems and increases in administrative expenses. We recently completed a systemconversion process related to our property and casualty insurance business. We started theimplementation of this system in April 2005 and completed it on October 1, 2006 at an estimatedcost of $4 million. In addition, we recently selected QCSI to assess and implement new corebusiness applications for our managed care segment. We expect the assessment to be completed in2007, at which point we plan to convert our managed care systems over time by line of business,with the first line of business expected to be converted in the first half of 2009. We expect themanaged care conversion process to be completed by 2012 at a total cost of approximately $40million. If we are unsuccessful in implementing these improvements in a timely manner or if theseimprovements do not meet our customers’ requirements, we may not be able to recoup these costs andexpenses and effectively compete in our industry.Our business requires the secure transmission of confidential information over public networks.Advances in computer capabilities, new discoveries in the field of cryptography or other event ordevelopments could result in compromises or breaches of our security system and patient data storedin our information systems. Anyone who circumvents our security measures could misappropriate ourconfidential information or cause interruptions in services or operations. The Internet is apublic network and data is sent over this network from many sources. In the past, computer virusesor software programs that disable or impair computers have been distributed and have rapidly spreadover the Internet. Computer viruses could be introduced into our systems, or those of ourproviders or regulators, which could disrupt our operations, or make our systems inaccessible toour providers or regulators. We may be required to expend significant capital and other resourcesto protect against the threat of security breaches or to alleviate problems caused by breaches.Because of the confidential health information we store and transmit, security breaches couldexpose us to a risk of regulatory action, litigation, possible liability and loss. Our securitymeasures may be inadequate to prevent security breaches, and our business operations would beadversely affected by cancellation of contracts and loss of members if they are not prevented. Page 28

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 ***We are required to evaluate our internal control over financial reporting under Section 404 ofSarbanes Oxley, and any adverse results from such evaluation could result in a loss of investorconfidence in our financial reports and have an adverse effect on our stock price.***Pursuant to Section 404 of Sarbanes-Oxley Act, beginning with our Annual Report on Form 10-K forthe fiscal year ending December 31, 2007, we will be required to furnish a report by our managementon our internal control over financial reporting. Such a report will contain, among other matters,an assessment of the effectiveness of our internal control over financial reporting as of the endof our fiscal year, including a statement as to whether or not our internal control over financialreporting is effective. This assessment must include disclosure of any material weaknesses in ourinternal control over financial reporting identified by management.The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a frameworkfor companies to assess and improve their internal control systems. The Public Company AccountingOversight Board’s Auditing Standard No. 2 provides the professional standards and relatedperformance guidance for auditors to attest to, and report on, management’s assessment of theeffectiveness of internal control over financial reporting under Section 404. Management’sassessment of internal control over financial reporting requires management to make subjectivejudgments and some of the judgments will be in areas that may be open to interpretation andtherefore the report may be uniquely difficult to prepare. We are still performing the system andprocess documentation and evaluation needed to comply with Section 404, which is both costly andchallenging.During this process, if our management identifies one or more material weaknesses in our internalcontrol over financial reporting, we will be unable to assert such internal control is effective.If we are unable to assert that our internal control over financial reporting is effective as ofDecember 31, 2007, or if our auditors are unable to attest that our management’s report is fairlystated or they are unable to express an opinion on the effectiveness of our internal controls as ofDecember 31, 2008, we could lose investor confidence in the accuracy and completeness of ourfinancial reports.We cannot be certain as to the timing of completion of our evaluation, testing and any requiredremediation. If we are not able to complete our assessment under Section 404 in a timely manner,we would be unable to conclude that our internal control over financial reporting is effective asof December 31, 2007.***We face risks related to litigation.***We are, or may be in the future, a party to a variety of legal actions that affect any business,such as employment and employment discrimination-related suits, employee benefit claims, breach ofcontract actions, tort claims and intellectual property-related litigation. In addition, becauseof the nature of our business, we may be subject to a variety of legal actions relating to ourbusiness operations, including the design, management and offering of our products and services.We are a defendant in various lawsuits, including two class action lawsuits, some of which involveclaims for substantial and/or indeterminate amounts and the outcome of which is unpredictable.While we are defending these suits vigorously, we will incur expenses in the defense of thesesuits. Any adverse judgment against us resulting in such damage awards could have an adverseeffect on our cash flows, results of operations and financial condition. See “Item 3 — LegalProceedings”.***Large-scale natural disasters may have a material adverse effect on our business, financialcondition and results of operations.***Puerto Rico has historically been at a relatively high risk of natural disasters such as hurricanesand earthquakes. If Puerto Rico were to experience a large-scale natural disaster, claims incurredby our property and casualty insurance segment would likely increase and our properties may incursubstantial damage, which could have a material adverse effect on our business, financial conditionand results of operations.***Covenants in our credit agreements and note purchase agreements may restrict our operations.***We are a party to two secured loans with a commercial bank in an aggregate amount of $61.0 million,of which we had a total outstanding balance of $27.6 million and $10.5 million, respectively, as ofDecember 31, 2006. Also, we have an aggregate of $145.0 million of senior unsecured notes,consisting of $50.0 million aggregate principal amount of 6.30% notes due 2019, $60.0 millionaggregate principal amount of 6.60% notes due 2020 and $35.0 million aggregate principal amount of6.70% notes due 2021 (collectively, the notes). The credit agreements and the note purchaseagreements governing the notes contain covenants that restrict, among other things, the granting ofcertain liens, limitations on acquisitions and limitations on changes in control. These covenantscould restrict our operations. In addition, if we fail to make any required payment under ourcredit agreements or note purchase agreements governing the notes or to comply with any of thecovenants included therein, we would be in default and the lenders or holders of our debt, as thecase may be, could cause all of our outstanding debt obligations under our credit agreements ornote Page 29

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 purchase agreements to become immediately due and payable, together with accrued and unpaidinterest and, in the case of the credit agreements, cease to make further extensions of credit. Ifthe indebtedness under our credit agreements or note purchase agreements is accelerated, it couldhave a material adverse effect in our business for we may be unable to repay or finance the amountsdue.***We expect to pursue acquisitions in the future.***We may acquire additional companies if consistent with our strategic plan for growth. Thefollowing are some of the risks associated with acquisitions that could have a material adverseeffect on our business, financial condition and results of operations: **•** disruption of on-going business operations, distraction of management,diversion of resources and difficulty in maintaining current business standards, controlsand procedures;  **•** difficulty in integrating information technology of acquired entity andunanticipated expenses related to such integration;  **•** difficulty in the integration of the new company’s accounting, financialreporting, management, information, human resources and other administrative systems andthe lack of control if such integration is delayed or not implemented;  **•** difficulty in the implementation of controls, procedures and policiesappropriate for filers with the Securities and Exchange Commission at companies that priorto acquisition lacked such controls, policies and procedures;  **•** potential unknown liabilities associated with the acquired company;  **•** failure of acquired businesses to achieve anticipated revenues, earnings or cash flow;  **•** dilutive issuances of equity securities and incurrence of additional debt to finance acquisitions;  **•** other acquisition-related expenses, including amortization of intangible assets and write-offs; and  **•** competition with other firms, some of which may have greater financial andother resources, to acquire attractive companies.In addition, we may not successfully realize the intended benefits of any acquisition orinvestment.**Risks Relating to the Regulation of Our Industry*****Changes in governmental regulations, or the application thereof, may adversely affect our business,financial condition and results of operations.***Our business is subject to changing Federal and local legal, legislative and regulatoryenvironments, including general business regulations and laws relating to taxation, privacy, dataprotection and pricing. Please refer to “Item 1 — Business — Regulation”. In addition, ourinsurance subsidiaries are subject to the regulations of the Commissioner of Insurance.Some of the more significant proposed regulatory changes that may affect our business are: **•** initiatives to increase healthcare regulation, including efforts to expand the tort liability of health plans;  **•** local government plans and initiatives, and  **•** Medicare and Reform reform legislation.The U.S. Congress is developing legislation aimed at patient protection, including proposed lawsthat could expose insurance companies to damages, and in some cases punitive damages, for certaincoverage determinations including the denial of benefits or delay in providing benefits to members.Similar legislation has been proposed in Puerto Rico.Regulations imposed by the Commissioner of Insurance, among other things, influence how ourinsurance subsidiaries conduct business and solicit subscriptions for shares of capital stock, andplace limitations on investments and dividends. Possible penalties for violations of suchregulations include fines, orders to cease or change practices or behavior and possible suspensionor termination of licenses. The regulatory powers of the Commissioner of Insurance are designed toprotect policyholders, not stockholders. While we cannot predict the terms of future regulation,the enactment of new legislation could affect the cost or demand of insurance policies, limit ourability to obtain rate increases in those cases where rates are regulated, otherwise restrict ouroperations, limit the expansion of our business, Page 30

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 expose us to expanded liability or impose additional compliance requirements. In addition, we mayincur additional operating expenses in order to comply with new legislation and may be required torevise the ways in which we conduct our business.Future regulatory actions by the Commissioner of Insurance or other governmental agencies couldhave a material adverse effect on the profitability or marketability of our business, financialcondition and results of operations.***If we are deemed to have violated the insurance company change of control statutes in Puerto Rico,we may suffer adverse consequences.***We are subject to change of control statutes applicable to insurance companies. These statutesregulate, among other things, the acquisition of control of an insurance company or a holdingcompany of an insurance company. Under these statutes, no person may make an offer to acquire orto sell the issued and outstanding voting stock of an insurance company, which constitutes 10% ormore of the issued and outstanding voting stock of an insurance company, or of the total stockissued and outstanding of a holding company of an insurance company, without the prior approval ofthe Commissioner of Insurance. Our Amended and Restated Articles of Incorporation (the Articles)prohibit any institutional investor from owning 10% or more of our voting power and any person thatis not an institutional investor from owning 5% or more of our voting power. We cannot, however,assure you that ownership of our securities will remain below these thresholds. To the extent thata person, including an institutional investor, acquires shares in excess of these limits, ourArticles provide that we will have the power to take certain actions, including refusing to giveeffect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoida violation of the ownership limitation in the Articles. If the Commissioner of Insurancedetermines that a change of control has occurred, we could be subject to fines and penalties; insome instances, subject to the discretion of the Commissioner of Insurance, operating licensescould be revoked.We are also subject to change of control limitations pursuant to our BCBSA license agreements. See"—The termination or modification of our license agreements to use the Blue Shield name and markcould have an adverse effect on our business, financial condition and results of operations”.***Our insurance subsidiaries are subject to minimum capital requirements. Our failure to meet thesestandards could subject us to regulatory actions.***Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance, amongother things, require insurance companies to maintain certain levels of capital, therebyrestricting the amount of earnings that can be distributed by our insurance subsidiaries to us.Although we are currently in compliance with these requirements, there can be no assurance that wewill continue to comply in the future. Failure to maintain required levels of capital or tootherwise comply with the reporting requirements of the Commissioner of Insurance could subject ourinsurance subsidiaries to corrective action, including government supervision or liquidation, orrequire us to provide financial assistance, either through subordinated loans or capital infusions,to our subsidiaries to ensure they maintain their minimum statutory capital requirements.We are also subject to minimum capital requirements pursuant to our BCBSA license agreements. See"—The termination or modification of our license agreements to use the Blue Shield name and markcould have an adverse effect on our business, financial condition and results of operations”.***We are required to comply with laws governing the transmission, security and privacy of healthinformation.***Certain implementing regulations of the Health Insurance Portability and Accountability Act of 1996(HIPAA) require us to comply with standards regarding the formats for electronic transmission, andthe privacy and security of certain health information within our company and with third parties,such as managed care providers, business associates and our members. These rules also provideaccess rights and other rights for health plan beneficiaries with respect to their healthinformation. These regulations include standards for certain electronic transactions, includingencounter and claims information, health plan eligibility and payment information. Compliance withHIPAA is enforced by the Department of Health and Human Service’s Office for Civil Rights forprivacy, CMS for security and electronic transactions, and by the Department of Justice forcriminal violations. Further, Gramm-Leach Bliley, or GLB, imposes certain privacy and securityrequirements on insurers that may apply to certain aspects of our business as well.We continue to implement and revise our health information policies and procedures to monitor andensure our compliance with these laws and regulations. Furthermore, Puerto Rico’s ability topromulgate its own laws and regulations (including those issued in response to GLB), such as ActNo. 194 of August 25, 2000, also known as the Patient’s Rights and Responsibilities Act, includingthose more stringent than HIPAA, and uncertainty regarding many aspects of such state requirements,make compliance with applicable health information laws more difficult. For these reasons, ourtotal compliance costs may increase in the future. Page 31

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 **Item 1B. Unresolved Staff Comments**None.**Item 2. Properties**We own a seven story (including the basement floor) building located at 1441 F.D. RooseveltAvenue, in San Juan, Puerto Rico, and two adjacent buildings, as well as the adjoining parking lot.In addition, we own five floors of a fifteen-story building located at 1510 F.D. Roosevelt Avenue,in Guaynabo, Puerto Rico. The properties are subject to liens under our credit facilities. See“Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidityand Capital Resources”.In addition to the properties described above, we or our subsidiaries are parties to operatingleases that are entered into in the ordinary course of business.We believe that our facilities are in good condition and that the facilities, together with capitalimprovements and additions currently underway, are adequate to meet our operating needs for theforeseeable future. The need for expansion, upgrading and refurbishment of facilities iscontinually evaluated in order to keep facilities aligned with planned business growth andcorporate strategy.**Item 3. Legal Proceedings.**Various litigation claims and assessments against us have arisen in the ordinary course ofbusiness, including but not limited to, our activities as an insurer and employer. Furthermore,the Commissioner of Insurance, as well other Federal and Puerto Rico government authorities,regularly make inquiries and conduct audits concerning our compliance with applicable insurance andother laws and regulations.Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any,arising from such claims, assessments, audits and lawsuits would not have a material adverse effecton our consolidated financial position or results of operations. However, given the inherentunpredictability of these matters, it is possible that an adverse outcome in certain matters could,have a material adverse effect on our operating results and/or cash flows.Additionally, we may face various potential litigation claims that have not to date been asserted,including claims from persons purporting to have contractual rights to acquire shares of theCorporation on favorable terms or to have inherited such shares notwithstanding applicable transferand ownership restrictions. See “Item 1A — Risk Factors — Risks Relating to our Capital Stock”.***Sánchez Litigation***On September 4, 2003, José Sánchez and others filed a putative class action complaint against us,present and former directors of the Board and our managed care subsidiary, and others, in theUnited States District Court for the District of Puerto Rico, alleging violations under theRacketeer Influenced and Corrupt Organizations Act, better known as the RICO Act. On May 4, 2006,the Court issued an Opinion and Order, which entered a summary judgment in favor of all thedefendants, and dismissing the case. Plaintiffs filed a notice of appeal before the United StatesCourt of Appeals for the First Circuit. The Appeals Court notified the briefing schedule, andplaintiffs filed their brief on August 21, 2006. Respondent filed theirs on September 30, 2006.The parties argued the case before the First Circuit on February 6, 2007, who took the case underadvice. Judgment is expected within the next 90 days.***Jordán el al Litigation***On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against TSM,TSI and others in the Court of First Instance for San Juan, Superior Section, alleging, among otherthings, violations by the defendants of provisions of the Puerto Rico Insurance Code,anti-monopolistic practices, unfair business practices and damages in the amount of $12.0 million.They also requested that we sell shares to them. It appears that many of the allegations broughtby the plaintiffs in this complaint have been resolved in favor of us and our managed caresubsidiary in previous cases brought by the same plaintiffs in the United States District Court forthe District of Puerto Rico and in the local courts. The defendants, including us and our managedcare subsidiary, answered the complaint, filed a counterclaim and filed several motions to dismissthis claim.On May 9, 2005 the plaintiffs amended the complaint and the defendants are preparing thecorresponding motions to dismiss this amended complaint. The plaintiffs amended the complaint toallege causes of action similar to those dismissed in the Sánchez case, in which summary judgmenthas been granted to us. Defendants moved to dismiss the Page 32

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 amended complaint. Plaintiffs have notified their opposition to some of the defendants’ motion todismiss, and the defendants filed the corresponding replies. In 2006 the Court held severalhearings to argue dispositive motions. The Court stayed all discovery until the motions areresolved. On January 19, 2007, the Court denied a motion by the plaintiffs to dismiss thedefendants’ counterclaim for malicious prosecution and abuse of process. The Court orderedPlaintiffs to answer the counterclaim by February 20, 2007. Although done after the required date, plaintiffs filedthe answer to the counterclaim. Also, on February 7, 2007 the Court decided the motions to dismissthat have been filed. In summary, the Court dismissed the following counts: charitable trust, RICOand violation of due process. The dismissal of these counts affects all the plaintiffs. Othercounts of the complaint, torts, breach of contract and violation of the Puerto Rico corporations’law, were dismissed only against certain of the physician plaintiffs. The Court allowed the countbased on antitrust. We will appeal the denial of the motion to dismiss the antitrust allegations.***Thomas Litigation***On May 22, 2003 a putative class action suit was filed by Kenneth A. Thomas, M.D. and MichaelKutell, M.D., on behalf of themselves and all others similarly situated and the Connecticut StateMedical Society against the Blue Cross and Blue Shield Association (BCBSA) and substantially all ofthe other Blue plans in the United States, including our managed care subsidiary. The case ispending before the U.S. District Court for the Southern District of Florida, Miami District.The individual plaintiffs bring this action on behalf of themselves and a class of similarlysituated physicians seeking redress for alleged illegal acts of the defendants, which they allegehave resulted in a loss of their property and a detriment to their business, and for declaratoryand injunctive relief to end those practices and prevent further losses. Plaintiffs alleged thatthe defendants, on their own and as part of a common scheme, systematically deny, delay anddiminish the payments due to doctors so that they are not paid in a timely manner for the covered,medically necessary services they render.The class action complaint alleges that the health care plans are the agents of BCBSA licensedentities, and as such have committed the acts alleged above and acted within the scope of theiragency, with the consent, permission, authorization and knowledge of the others, and in furtheranceof both their interest and the interests of other defendants.Management believes that our managed care subsidiary was brought to this litigation for the solereason of being associated with the BCBSA. However, on June 18, 2004 the plaintiffs moved to amendthe complaint to include the Colegio de Médicos y Cirujanos de Puerto Rico (a compulsoryassociation grouping all physicians in Puerto Rico), Marissel Velázquez, MD, President of theColegio de Médicos y Cirujanos de Puerto Rico, and Andrés Meléndez, MD, as plaintiffs against ourmanaged care subsidiary. Later Marissel Velázquez, MD voluntarily dismissed her complaint againstour managed care subsidiary.Our managed care subsidiary, along with the other defendants, moved to dismiss the complaint onmultiple grounds, including but not limited to arbitration and applicability of the McCarranFerguson Act.The parties are currently engaged in mediation. Twenty four (24) plans have been activelyparticipating in the mediation efforts. The mediation resulted in the creation of a SettlementAgreement, presently under discussion with the plaintiffs’ lawyers.***Solomon Litigation***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 MedicalAssociation, Florida Chiropractic Association, California Podiatric Medical Association, FloridaPodiatric Medical Association, Texas Podiatric Medical Association, and Independent ChiropracticPhysicians, against the BCBSA and multiple other insurance companies, including TSI and all membersof the BCBSA. The case is still pending before the United States District Court for the SouthernDistrict of Florida, Miami District.This lawsuit challenges many of the same practices previously described for the Thomas litigation.Management believes that TSI was brought to this litigation for the sole reason of being associatedwith the BCBSAOn June 25, 2004, plaintiffs amended the complaint but the allegations against TSI did not vary.TSI along with the other defendants, moved to dismiss the complaint on multiple grounds, includingbut not limited to arbitration and applicability of the McCarran Ferguson Act. During September2006, the Court, *sua sponte*, ordered the parties to engage in Mediation. However, the defendantspresented a joint position that they do not which to mediate but to have the class certificationissue decided by the Court. On March 6, 2007, the plaintiffs filed a notice of voluntary dismissalto dismiss the complaint without prejudice, against 52 of the 74 defendants, including us. Casewas dismissed without prejudice by the Court on March 14, 2007. Page 33

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 **Item 4. Submissions of Matters to a Vote of Security Holders.**None.**Part II****Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities.****Market Information**There is no established public trading market for our common stock. Sporadic transfers of ourcommon stock have been limited to redemptions at the greater of the shares’ $40.00 par value or atthe amount originally paid for the stock, since our common stock was not transferable to thegeneral public. In March 2007 we filed amended and restated Articles of Incorporation whicheliminated previous ownership and transferability restrictions.In determining the market value of common stock disclosed in the facing page of this Annual Reporton Form 10-K, we used the shares’ par value of $40.00 as of December 31, 2006.**Holders**Our only outstanding voting securities are shares of common stock, par value $40.00 per share. Asof March 15, 2007, there were 8,913 shares of Common Stock outstanding. The number of our holdersof common stock as of March 15, 2007 was 1,779.**Dividends**On January 13, 2006, our board of directors (the Board) declared a cash dividend of $6.2 milliondistributed pro rata among all of the issued and outstanding common shares, excluding those sharesissued to the representatives of the community that are members of the Board (the qualifyingshares). All shareholders of record as of the close of business on January 16, 2006, except thosewho only hold qualifying shares, received a dividend per share of $700 for each share held on thatdate. We did not declare any dividends during the year 2005.**Recent Sales of Unregistered Securities**Not applicable.**Purchases of Equity Securities by the Issuer**Not applicable. Page 34

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 **Item 6. Selected Financial Data.**                     *(Dollar amounts in millions, except per share data)* **2006 (1)** **2005** **2004** **2003** **2002**                      **Statement of Earnings Data**                    *Years ended December 31,*                                         Premiums earned, net $1,511.6   1,380.2   1,299.0   1,264.4   1,236.6 Administrative service fees  14.1   14.4   9.2   8.3   9.5 Net investment income  42.7   29.1   26.8   24.7   24.8  Total operating revenues  1,568.4   1,423.7   1,335.0   1,297.4   1,270.9  Net realized investments gains  0.8   7.2   11.0   8.4   0.2 Net unrealized investment gain (loss) ontrading securities  7.7   (4.7)  3.0   14.9   (8.3)Other income, net  2.3   3.7   3.4   4.7   2.1  Total revenues $1,579.2   1,429.9   1,352.4   1,325.4   1,264.9                       Net income $54.5   28.4   45.8   26.2   48.2  Basic net income per share (2): $6,120   3,193   5,135   2,857   1,085                       Dividend declared per common share (3): $700   —   —   —   —                       **Balance Sheet Data**                    *December 31,*                                         Total assets $1,345.5   1,137.5   919.7   834.6   721.9  Long-term borrowings $183.1   150.6   95.7   48.4   50.0                       Total stockholders’ equity $342.6   308.7   301.4   254.3   231.7  (1) On January 31, 2006 we completed the acquisition of GA Life. The results of operations andfinancial condition of GA Life are included in this table for the period following theeffective date of the acquisition. See note 3 to the audited consolidated financialstatements for the years ended December 31, 2006, 2005 and 2004. (2) Further details of the calculation of basic earnings per share are set forth in notes 2 and22 of the audited financial consolidated financial statements for the years ended December 31,2006, 2005 and 2004. (3) Shareowners holding qualifying shares were excluded from dividend payment. See note 23 ofthe audited financial consolidated financial statements for the years ended December 31, 2006,2005 and 2004.**Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.**This financial discussion contains an analysis of our consolidated financial position andfinancial performance as of December 31, 2006 and 2005, and consolidated results of operations for2006, 2005 and 2004. This analysis should be read in its entirety and in conjunction with theconsolidated financial statements, notes and tables included elsewhere in this Annual Report onForm 10-K.**Overview**We are the largest managed care company in Puerto Rico in terms of membership, with over 45 yearsof experience in the managed care industry. We offer a broad portfolio of managed care and relatedproducts in the commercial, Reform, Medicare Advantage and Part D stand-alone prescription drugplan (PDP) markets. The Reform is a Puerto Rico government-funded managed care program for themedically indigent, similar to Medicaid. We have the exclusive right to use the Blue Shield nameand mark throughout Puerto Rico, serve approximately one million members across all regions ofPuerto Rico and hold a leading market position covering approximately 25% of the population. Wealso have significant positions in the life insurance and property and casualty insurance markets.Our life insurance segment has a market share of approximately 25% (in terms of premiums writtengiving pro forma effect Page 35

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 to the acquisition of GA Life) as of December 31, 2005. Our property and casualty segment has amarket share of 8.5% (in terms of direct premiums) as of December 31, 2006. For the year endedDecember 31, 2006, our managed care segment represented 88.6% of our total consolidated premiumsearned, net and 62.0% of our operating income. We participate in the managed care market throughour subsidiary, TSI. Our managed care subsidiary is a BCBSA licensee, which provides us withexclusive use of the Blue Shield brand in Puerto Rico. We offer products to the commercial,Reform, Medicare Advantage and PDP market sectors, including corporate accounts, federal governmentemployees, local government employees, individual accounts and Medicare Supplement.We participate in the life insurance market through our subsidiary, GA Life (formerly Seguros deVida Triple-S, Inc.) and in the property and casualty insurance market through our subsidiary, STS,which represented approximately 5.7% and 5.9%, respectively, of our consolidated premiums earned,net for the year ended December 31, 2006 and 15.3% and 15.3%, respectively, of our operating incomefor that period.The Commissioner of Insurance of the Commonwealth of Puerto Rico recognizes only statutoryaccounting practices for determining and reporting the financial condition and results ofoperations of an insurance company, for determining its solvency under the Puerto Rico insurancelaws and for determining whether its financial condition warrants the payment of a dividend to itsstockholders. No consideration is given by the Commissioner of Insurance of the Commonwealth ofPuerto Rico to financial statements prepared in accordance with U.S. GAAP in making suchdeterminations. See note 24 to our audited consolidated financial statements.Intersegment revenues and expenses are reported on a gross basis in each of the operating segmentsbut eliminated in the consolidated results. Except as otherwise indicated, the numbers presentedin this Annual Report on Form 10-K do not reflect inter-company eliminations. These intersegmentrevenues and expenses affect the amounts reported on the financial statement line items for eachsegment, but are eliminated in consolidation and do not change net income. The following tableshows premiums earned, net and net fee revenue and operating income for each segment, as well asthe intersegment premiums earned, service revenues and other intersegment transactions, which areeliminated in the consolidated results:               **Years ended December 31,***(Dollar amounts in millions)* **2006** **2005** **2004**              **Premiums earned, net**                         Managed care $1,339.8   1,279.5   1,199.2 Life insurance  86.9   17.1   16.4 Property and casualty insurance  88.5   86.8   86.2 Intersegment premiums earned  (3.6)  (3.2)  (2.8) Consolidated premiums earned, net $1,511.6   1,380.2   1,299.0                 **Years ended December 31,***(Dollar amounts in millions)* **2006** **2005** **2004**              **Administrative service fees**                         Managed care $16.9   15.5   10.3 Intersegment administrative service fees  (2.8)  (1.1)  (1.1) Consolidated administrative service fees $14.1   14.4   9.2                 **Years ended December 31,***(Dollar amounts in millions)* **2006** **2005** **2004**              **Operating income**                         Managed care $45.5   16.1   36.2 Life insurance  11.2   3.0   0.6 Property and casualty insurance  11.2   12.3   7.7 Other segments and intersegment eliminations  5.4   2.3   2.8  Consolidated operating income $73.3   33.7   47.3  During the reported periods, we had one-year contracts with the government of Puerto Rico to be theReform insurance carrier for three of the eight geographical areas into which Puerto Rico isdivided for purposes of the Reform. In October 2006, we were informed that the new contract toserve one of these regions, Metro-North, had been awarded to another managed care company,effective November 1, 2006. The contracts for the other two regions were renewed for an additionalone-year period. The premiums earned, net and operating income related to the operations of theMetro- Page 36

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 North region during the years ended December 31, 2006 amounted to $161.6 million and $5.4 million,respectively, and during the year ended December 31, 2005 amounted to $200.9 million and $3.5million, respectively.**Results of Operations*****Revenue****General.*Our revenue consists primarily of (i) premium revenue we generate from our managed carebusiness, (ii) administrative service fees we receive for administrative services provided toself-insured (ASO) employers, (iii) premiums we generate from our life insurance and property andcasualty insurance businesses and (iv) investment income.*Managed Care Premium Revenue.*Our revenue primarily consists of premiums earned from the sale ofmanaged care products to the commercial market sector, including corporate accounts, U.S. federalgovernment employees, local government employees, individual accounts and Medicare Supplement, aswell as to the Medicare Advantage, Reform and PDP sectors. We receive a monthly payment from or onbehalf of each member enrolled in our commercial managed care plans (excluding ASO). We recognizeall premium revenue in our managed care business during the month in which we are obligated toprovide services to an enrolled member. Premiums we receive in advance of that date are recordedas unearned premiums.Premiums are generally fixed by contract in advance of the period during which healthcare iscovered. Our commercial premiums are generally fixed for the plan year in the annual renewalprocess. Our Medicare Advantage contracts entitle us to premium payments from CMS on behalf ofeach Medicare beneficiary enrolled in our plans, generally on a per member per month, or PMPM,basis. We submit rate proposals to CMS in June for each Medicare Advantage product that will beoffered beginning January 1 of the subsequent year in accordance with the new competitive biddingprocess under the MMA. Retroactive rate adjustments are made periodically with respect to ourMedicare Advantage plans based on the aggregate health status and risk scores of our planparticipants.Premium payments from CMS in respect of our Medicare Part D prescription drug plans are based onwritten bids submitted by us which include the estimated costs of providing the prescription drugbenefits.*Administrative Service Fees.*Administrative service fees include amounts paid to us foradministrative services provided to self-insured employers. We provide a range of customerservices pursuant to our administrative services only (ASO) contracts, including claimsadministration, billing, access to our provider networks and membership services. Administrativeservice fees are recognized in the month in which services are provided.*Other Premium Revenue.*Other premium revenue includes premiums generated from the sale of lifeinsurance and property and casualty insurance products. Premiums on life insurance policies arebilled in the month prior to the effective date of the policy, with a one-month grace period, andthe related revenue is recorded as earned during the coverage period. If the insured fails to paywithin the one-month grace period, we may cancel the policy. We recognize premiums on property andcasualty contracts as earned on a pro rata basis over the policy term. The portion of premiumsrelated to the period prior to the end of coverage is recorded in the consolidated balance sheet asunearned premiums and is transferred to premium revenue as earned.*Investment Income and Other Income.*Investment income consists of interest income and otherincome consists of net realized gains on investment securities. See note 2(c) to our auditedconsolidated financial statements.***Expenses****Claims Incurred.*Our largest expense is medical claims incurred, or the cost of medical serviceswe arrange for our members. Medical claims incurred include the payment of benefits and losses,mostly to physicians, hospitals and other service providers, and to policyholders. We generallypay our providers on one of three bases: (1) fee-for-service contracts based on negotiated feeschedules; (2) capitated arrangements, generally on a fixed PMPM payment basis, whereby theprovider generally assumes some of the medical expense risk; and (3) risk-sharing arrangements,whereby we advance a capitated PMPM amount and share the risk of the medical costs of our memberswith the provider based on actual experience as measured against pre-determined sharing ratios.Claims incurred also include claims incurred in our life insurance and property and casualtyinsurance businesses. Each segment’s results of operations depend in significant part on ourability to accurately predict and effectively manage claims. A portion of the claims incurred foreach period consists of claims reported but not paid during the period, as well as a management andactuarial estimate of claims incurred but not reported during the period.The medical loss ratio (MLR), which is calculated by dividing managed care claims incurred bymanaged care premiums earned, net is one of our primary management tools for measuring these costsand their impact on our profitability. The medical loss ratio is affected by the cost andutilization of services. The cost of services is affected by many factors, in particular ourability to negotiate competitive rates with our providers. The cost of services is also Page 37

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 influenced by inflation and new medical discoveries, including new prescription drugs, therapiesand diagnostic procedures. Utilization rates, which reflect the extent to which beneficiariesutilize healthcare services, significantly influence our medical costs. The level of utilizationof services depends in large part on the age, health and lifestyle of our members, among otherfactors. As the medical loss ratio is the ratio of claims incurred to premiums earned, net it isaffected not only by our ability to contain cost trends but also by our ability to increase premiumrates to levels consistent with or above medical cost trends. We use medical loss ratios both tomonitor our management of healthcare costs and to make various business decisions, including whatplans or benefits to offer and our selection of healthcare providers.*Operating Expenses.*Operating expenses include commissions to external brokers, general andadministrative expenses, cost containment expenses such as case and disease management programs,and depreciation and amortization. The operating expense ratio is calculated by dividing operatingexpenses by premiums earned, net and administrative service fees. A significant portion of ouroperating expenses are fixed costs. Accordingly, it is important that we maintain or increase ourvolume of business in order to distribute our fixed costs over a larger membership base.Significant changes in our volume of business will affect our operating expense ratio and resultsof operations. We also have variable costs, which vary in proportion to changes in volume ofbusiness. Our operating expense ratio has remained broadly constant over the past three years,notwithstanding membership growth, because of certain significant expenses incurred in recentyears, including the costs associated with Sarbanes-Oxley Section 404 compliance, HIPAA compliance,additional legal expenses and related reserves in connection with certain litigation, costsassociated with the acquisition of GA Life and consulting costs incurred in connection with ITsystems upgrades.**Membership**Our results of operation depend in large part on our ability to maintain or grow our membership.In addition to driving revenues, membership growth is necessary to successfully introduce newproducts, maintain an extensive network of providers and achieve economies of scale. Our abilityto maintain or grow our membership is affected principally by the competitive environment andgeneral market conditions.In recent years, we have experienced a decrease in our fully insured commercial membership due tothe highly aggressive pricing of our competitors, which has also affected our ability to increasepremiums, and the shifting of Medicare eligibles from our Medicare complementary program and Reformprogram to Medicare Advantage plans offered by our competitors and, to a lesser extent, ourselves.We believe that the Medicare Advantage and PDP programs provide a significant opportunity forgrowth in membership. We commenced offering Medicare Advantage products in 2005, with theintroduction of our *Medicare Selecto*and *Medicare Optimo*plans. Membership enrolled in ourMedicare Advantage programs increased by 126% in 2006; from 11,993 as of December 31, 2005 to27,078 members as of December 31, 2006. In January 2006, we launched our stand-alone PDP plan,*FarmaMed*, which as of December 31, 2006, had 14,063 members. We expect that Medicare Advantageenrollment will continue to experience significant growth, but not at the same pace as in thisinitial period.The following table sets forth selected membership data as of the dates set forth below:               **As of December 31,**  **2006** **2005** **2004**              Commercial (1)  580,850   612,218   621,665 Reform (2)  357,515   628,438   614,443 Medicare Advantage  27,078   11,993   — Part D Stand-Alone Prescription Drug Plan  14,063   —   —  Total  979,506   1,252,649   1,236,108  (1) Commercial membership includes corporate accounts, self-funded employers, individualaccounts, Medicare Supplement, Federal government employees and local government employees. (2) Enrollment for 2005 and 2004 includes the Metro-North region. The contract for this regionwas not renewed effective November 1, 2006.**Significant Transactions**Effective January 31, 2006, we completed the acquisition of 100% of the common stock of GA Life for$37.5 million, and effective June 30, 2006 we merged the operations of our former life insurancesubsidiary, SVTS, into GA Life. GA Life’s results of operations and financial condition areincluded in our consolidated financial statements for the period following January 31, 2006. Ourhistorical results of operations and “comparable basis” information for 2005 are included in thefollowing tables. Comparable basis information was determined by adding the historical statements Page 38

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 of earnings of GA Life from February 1, 2005 to December 31, 2005 to our statement of earnings forthe year 2005. Comparable basis information is presented in order to provide a more meaningfulcomparison of the 2006 and 2005 periods. Comparable basis is not calculated in accordance withU.S. generally accepted accounting principles and is not intended to represent or be indicative ofthe results of operations that would have been reported by us had the acquisition been completed asof January 31, 2005. Comparable basis information, unlike the pro forma financial informationincluded in note 3 of the audited financial consolidated financial statements for the years endedDecember 31, 2006, 2005 and 2004, does not reflect adjustments, such as interest expense associatedwith indebtedness incurred in connection with the acquisition.***Consolidated***               **Year ended December 31, 2005**          **Comparable***(Dollar amounts in millions, except per share data)* **TSM** **GA Life** **Basis**              Revenues:            Premiums earned, net $1,380.2   61.6   1,441.8 Administrative service fees  14.4   —   14.4 Net investment income  29.1   10.6   39.7  Total operating revenues  1,423.7   72.2   1,495.9 Net realized investment gains  7.2   4.4   11.6 Net unrealized investment loss in trading securities  (4.7)  —   (4.7)Other income, net  3.7   —   3.7  Total revenues  1,429.9   76.6   1,506.5  Benefits and expenses:            Claims incurred  1,208.3   29.0   1,237.3 Operating expenses  181.7   31.5   213.2  Total operating costs  1,390.0   60.5   1,450.5 Interest expense  7.6   1.4   9.0  Total benefits and expenses  1,397.6   61.9   1,459.5  Income before taxes  32.3   14.7   47.0  Income tax expense (benefit):            Current  4.0   0.6   4.6 Deferred  (0.1)  (1.4)  (1.5) Total income taxes  3.9   (0.8)  3.1  Net income $28.4   15.5   43.9   Page 39

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 ***Life and Disability Insurance Segment***               **Year ended December 31, 2005**           **Comparable** *(Dollar amounts in thousands)* **SVTS**  **GA Life**  **Basis**   Operating revenues:            Net earned premiums:            Earned premiums $24.2   63.7   87.9 Earned premiums ceded  (8.0)  (2.1)  (10.1)Assumed earned premiums  0.4   —   0.4   Net earned premiums  16.6   61.6   78.2 Commission income on reinsurance  0.5   —   0.5   Premiums earned, net  17.1   61.6   78.7 Net investment income  3.0   10.6   13.6   Total operating revenues  20.1   72.2   92.3  Operating costs:            Policy benefits and claims incurred  8.9   29.0   37.9 Underwriting and other expenses  8.2   31.5   39.7   Total operating costs  17.1   60.5   77.6  Operating income $3.0   11.7   14.7  **Consolidated Operating Results**The following table sets forth our consolidated operating results for the years ended December 31,2006, 2005 and 2004. The 2005 comparable basis information is presented to provide a moremeaningful comparison of the 2006 and 2005 periods, see “Significant Transactions — Consolidated”included in this Item.                      **Comparable**       *(Dollar amounts in millions)*  **2006**  **Basis 2005**  **2005**  **2004**    *Years ended December 31,*                Revenues:                Premiums earned, net $1,511.6   1,441.8   1,380.2   1,299.0 Administrative service fees  14.1   14.4   14.4   9.2 Net investment income  42.7   39.7   29.1   26.8   Total operating revenues  1,568.4   1,495.9   1,423.7   1,335.0 Net realized investment gains  0.8   11.6   7.2   11.0 Net unrealized investment gain (loss) on trading securities  7.7   (4.7)  (4.7)  3.0 Other income, net  2.3   3.7   3.7   3.4   Total revenues  1,579.2   1,506.5   1,429.9   1,352.4   Benefits and expenses:                 Claims incurred  1,259.0   1,237.3   1,208.3   1,115.8 Operating expenses  236.1   213.2   181.7   171.9   Total operating costs  1,495.1   1,450.5   1,390.0   1,287.7 Interest expense  16.6   9.0   7.6   4.6   Total benefits and expenses  1,511.7   1,459.5   1,397.6   1,292.3   Income before taxes  67.5   47.0   32.3   60.1   Income tax expense  13.0   3.1   3.9   14.3   Net income $54.5   43.9   28.4   45.8   ***Year ended December 31, 2006 compared with the year ended December 31, 2005****Operating Revenues*Consolidated premiums earned, net and administrative service fees presented a combined increaseduring 2006 of $131.1 million, or 9.4%, to $1.5 billion in the 2006 period as compared to the 2005period. On a comparable basis, 
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 including GA Life’s results from both periods, consolidated earnedpremiums, net and administrative service fees increased by $69.5 million, or 4.8%. These increaseswere primarily due to an increase in our managed care segment, principally due to strong growthfrom our Medicare Advantage and PDP products, net of a decrease in the Reform sector due to theloss of the Metro-North region.Consolidated net investment income presented an increase of $13.6 million, or 46.7%, to $42.7million during the year 2006. On a comparable basis, the consolidated net investment incomeincreased by $3.0 million, or 7.6%, during the 2006 period. This increase is primarily the resultof a higher balance of invested assets and an increase in yield during 2006.*Net realized investment gains*Consolidated net realized investment gains presented a decrease of $6.4 million, or 88.9%, to $0.8million during 2006. On a comparable basis, the consolidated net realized investment gainsdecreased by $10.8 million, or 93.1%, during the 2006 period. This decrease is primarily the aresult of high levels of sales of investments in 2005 in order to take advantage of a temporaryreduction in the capital gains tax rate for sales of long-term capital assets, thus causingrelatively significant gains to be realized in the 2005 period.*Net unrealized gain (loss) on trading securities and other income, net*The combined balance of our consolidated net unrealized gain on trading securities and otherincome, net was $10.0 million during the 2006 period, an increase of $11.0 million on both anactual and comparable basis. This increase is attributable to unrealized gains in the tradingportfolios held by the segments in equity securities. The loss in 2005 period is attributable tothe realization of gains in that period, as discussed above.*Claims Incurred*Consolidated claims incurred during 2006 increased by $50.7 million, or 4.2%, to $1.3 billion in2006 when compared to the claims incurred during 2005. On a comparable basis, the consolidatedclaims incurred increased by $21.7 million, or 1.8%, principally due to increased claims in themanaged care segment as a result of increased enrollment in the Medicare Advantage and PDP sectors,net of a decrease in the Reform sector. In addition, the loss ratio on a comparable basisdecreased by 2.5 percentage points.*Operating Expenses*Consolidated operating expenses during 2006 increased by $54.4 million, or 29.9%, to $236.1 millionin the 2006 period as compared to the operating expenses during the 2005 period. On a comparablebasis, consolidated operating expenses increased by $22.9 million, or 10.7%, which is attributedprimarily to increased volume of business across all of our businesses during the 2006 period. Inaddition, we experienced normal increases in payroll and related expenses, commission expenses andinformation technology related costs.*Interest expense*Consolidated interest expense for 2006 period increased by $9.0 million, to $16.6 million in 2006.On a comparable basis, consolidated interest expense increased by $7.6 million, primarily due tothe interest expense corresponding to new debt incurred during the fourth quarter of 2005 andduring the first quarter of 2006 in connection with the GA Life acquisition.*Income tax expense*The consolidated effective tax rate increased by 7.2 percentage points, from 12.1% in 2005 to 19.3%in 2006, primarily due to an increase in non-exempt income, offset in part by an increase in netincome relating to the life insurance segment, which has a lower effective tax rate than the otherlines of business.***Year ended December 31, 2005 compared with the year ended December 31, 2004****Operating Revenues*Consolidated premiums earned, net and administrative service fees presented a combined increase of$86.4 million, or 6.6%, to $1.4 billion during 2005, $85.5 million of which was from the managedcare segment across many of our products.Consolidated net investment income presented an increase of $2.3 million, or 8.6%, to $29.1 millionduring the year 2005, principally due a higher balance of invested assets as well as to a higheryield during 2005. 
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 *Net realized investment gains*Consolidated net realized investment gains presented a decrease of $3.8 million, or 34.5%, to $7.2million during 2005, principally due to higher sales of investments in common stocks during 2004.*Net unrealized gain (loss) on trading securities and other income, net*The combined balance of our consolidated net unrealized gain on trading securities and otherincome, net decreased by $7.4 million, or 115.6%, to a loss of $1.0 million in 2005, primarilyreflecting unrealized losses in equity securities. We experienced an unrealized loss in 2005because, during the second quarter of 2005, we sold certain equity investments with unrealizedgains in order to take advantage of a temporary reduction in the capital gains tax rate, thuseliminating the unrealized gains that would have offset the unrealized losses in our portfoliosduring this period.*Claims Incurred*Consolidated claims incurred increased by $92.5 million, or 8.3%, to $1.2 billion during 2005.This increase was principally driven by fluctuations in the claims incurred by the managed caresegment, primarily due to increased utilization, costs of services and enrollment.*Operating Expenses*Consolidated operating expenses increased by $9.8 million, or 5.7%, to $181.7 million in 2005,primarily due to increased business volume and startup costs associated with the launching of ournew Medicare Advantage products.*Interest expense*Consolidated interest expense in 2005 period increased by $3.0 million, to $7.6 million, primarilydue to the interest expense corresponding to new debt incurred by our managed care subsidiary inSeptember 2004.*Income tax expense*The consolidated effective tax rate decreased from 23.8% in 2004 to 12.1% in 2005 due to the neteffect of an increase in exempt interest income during 2005, which decreased the effective rate,and an increase in the property and casualty insurance segment’s deferred tax expense. 
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 **Managed Care Operating Results**We offer our products in the managed care segment to four distinct market sectors in Puerto Rico:commercial, Reform, Medicare Advantage and stand-alone prescription drug plans. The commercialsector represented 47.2%, and the Reform sector represented 30.2%, of our consolidated premiumsearned, net during the year 2006 and 2.4% and 13.8%, respectively, of our operating income for thisperiod. Earned premiums, net and operating income generated from our Medicare Advantage contractsduring the year 2006 represented 11.3% and 45.9% of the consolidated earned premiums, net andoperating income, respectively.             *(Dollar amounts in millions, except enrollment data)* **2006**  **2005**  **2004** *Years ended December 31,*            Medical operating revenues:            Medical premiums earned, net:            Commercial  $713.2   734.5   714.5 Reform  455.8   510.8   484.7 Medicare Advantage  155.7   34.2   — PDP  15.1   —   —  Medical premiums earned  1,339.8   1,279.5   1,199.2 Administrative service fees  16.9   15.5   10.3 Net investment income  18.8   17.0   16.0  Total medical operating revenues  1,375.5   1,312.0   1,225.5  Medical operating costs:            Medical claims incurred  1,173.6   1,155.9   1,058.6 Medical operating expenses  156.4   140.0   130.7  Total medical operating costs  1,330.0   1,295.9   1,189.3  Medical operating income   $45.5   16.1   36.2  Additional data:            Member months enrollment:            Commercial:            Fully-insured  5,272,987   5,632,249   5,755,380 Self funded  1,861,833   1,840,716   1,692,108  Total commercial  7,134,820   7,472,965   7,447,488 Reform  6,484,270   7,465,777   7,377,048 Medicare Advantage  281,274   71,947   — PDP  180,444   —   —  Total member months  14,080,808   15,010,689   14,824,536  Medical loss ratio  87.6%  90.3%  88.3%Medical expense ratio  11.5%  10.8%  10.8%***Year ended December 31, 2006 compared with the year ended December 31, 2005****Medical Operating Revenues*Medical premiums earned during 2006 increased by $60.3 million, or 4.7%, to $1.3 billion whencompared to earned premiums during 2005, principally as a result of the following: **•** Medical premiums generated by the Medicare Advantage business increased during2006 by $121.5 million, or 355.3%, primarily due to an increase in member monthsenrollment of 209,327, or 290.9%, reflecting the initial ramp-up of this business, whichcommenced in 2005, and the introduction of additional Medicare Advantage policies. InJanuary 2006, we expanded our Medicare Advantage business with the introduction of*Medicare Platino*for the dual-eligible population, the medically indigentMedicare-qualified beneficiaries. We expect that Medicare Advantage enrollment will continue to experience significantgrowth, but not at the same pace as in this initial period.  **•** In January 2006, we introduced a new Part D stand-alone prescription drug plan(PDP), *FarmaMed*, which had member months enrollment of 180,444 and premiums of $15.1million during the 2006 period. We have noted a trend in this business, where themembership of our PDP business is transferring to one of our Medicare Advantage policies, thus we expect a slight decrease in the enrollment of this business. 
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     **•** During 2006, member months enrollment in the Reform business decreased by981,507, or 13.1%, and premiums earned during the year decreased by $55.0 million, or10.8%. This business experienced a decrease in its member months as a result of the lossof the Metro-North region effective November 1, 2006. Monthly premiums earned from theMetro-North region averaged approximately $16.2 million in 2006. In addition, thisbusiness also experienced a shift in membership by dual eligibles to Medicare Advantagepolicies offered by us and our competitors and a tightening of membership restrictions bythe Puerto Rico government. The effect of this decrease in membership was mitigated by anincrease in premium rates, effective August 1, 2005, of approximately 5.0%.  **•** Medical premiums generated by the commercial sector decreased by $21.3million, or 2.9%. This decrease is due to a decrease in member months of 359,262, or6.4%, primarily as a result of the loss of several fully-insured accounts due toaggressive marketing and pricing by our competitors as well as qualified enrolleestransferring to our or our competitors’ Medicare Advantage policies and fully-insuredgroups changing to ASO arrangements, offset in part by an average increase in premiumrates of approximately 3.7%.Administrative service fees increased by $1.4 million, or 9.0%, to $16.9 million during the 2006period due to an increase in member months enrollment of ASO arrangements of 21,117, or 1.1%, andincreases in fee rates.*Medical Claims Incurred*Medical claims incurred during 2006 increased by $17.7 million, or 1.5%, to $1.2 billion whencompared to 2005. The increase in medical claims incurred is mostly related to the medical claimsincurred of the Medicare Advantage and PDP businesses, which increased by $92.7 million during the2006 period due to an increase in members, mitigated by a decrease of $66.7 million in medicalclaims incurred related to the decreased enrollment of the Reform business. The medical loss ratiodecreased by 2.7 percentage points during the 2006 period, to 87.6%, primarily driven by lowerutilization trends in the Reform business and the increased relative contribution in the 2006period of our Medicare Advantage business, which has had a lower medical loss ratio than our otherbusinesses.*Medical Operating Expenses*Medical operating expenses for 2006 increased by $16.4 million, or 11.7%, to $156.4 million whencompared to 2005. This increase is primarily attributed to additional administrative costs relatedto the growth of our Medicare Advantage business of approximately $9.8 million and an increase of$4.4 million in technology-related costs and ordinary course payroll and payroll related increases.The segment’s operating expense ratio increased by 0.7 percentage points during the 2006 period.***Year ended December 31, 2005 compared with the year ended December 31, 2004****Medical Operating Revenues*Medical premiums earned, net increased by $80.3 million, or 6.7%, to $1.3 billion during 2005,primarily as a result of the following: **•** Medical premiums earned of the Medicare Advantage business, which beganoperating in 2005, amounted to $34.2 million. During 2005 the Medicare Advantage sectorhad a member months enrollment of 71,947.**•** Medical premiums earned of the Reform sector increased by $26.1 million, or5.4%, during 2005. The increase in the medical premiums earned of this business is theresult of an increase in average premium rates of 4.5% and an increase in member monthsenrollment of 88,729, or 1.2%, due to an increase in the number of Reform eligibles.**•** Medical premiums earned of the commercial sector increased by $20.0 million,or 2.8%, during 2005 due to the net effect of a 6.0% increase in average premium rates anda decrease in member months enrollment of 123,131, or 2.1%. The decrease in enrollment isprimarily due to a continuation of the trend of employers shifting their groups fromfully-insured to ASO arrangements and a decrease in the member months enrollment of localgovernment employees and individual accounts as retirees change to Medicare Advantagepolicies.Administrative service fees increased by $5.2 million, or 50.5%, to $15.5 million during the 2005period due to an increase in member months enrollment of ASO arrangements of 148,608, or 8.8%, andan increase in the rates charged to certain of these groups.*Medical Claims Incurred*Medical claims incurred during 2005 increased by $97.3 million, or 9.2%, to $1.2 billion in 2005due to increased enrollment and an increase in claims experience trends. The medical loss ratioincreased by 2.0 percentage points 
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 during the same period, from 88.3% in 2004 to 90.3% in 2005,principally driven by higher utilization levels and costs per service in the Reform business,particularly with respect to cardiovascular services, dialysis, obstetrics, office visits,prescription drugs, laboratory services and specialized procedures, such as MRIs and CT scans. Themedical claims incurred of the Reform and commercial businesses increased by $40.2 million and$57.1 million, respectively, in 2005. Medical claims experience trends in the commercial sectorincreased from 5.7% in 2004 to 6.7% in 2005.*Medical Operating Expenses*Medical operating expenses increased by $9.3 million, or 7.1%, to $140.0 million in 2005principally due to expenses amounting to $9.4 million related to the launch of the new MedicareAdvantage product, new business generated during the year and the commencement of preparations tocomply with SOX 404, offset in part by a reduction of approximately $2.8 million in expensesrelated to several operating projects that were completed during 2005 but had been ongoing duringmost of 2004, such as changes due to the requirements of HIPAA. The medical operating expenseratio was unchanged at 10.8% in 2004 and 2005.**Life Insurance Operating Results**The 2005 comparable basis information included in the following table is presented to provide amore meaningful comparison of the 2006 and 2005 periods, see “Significant Transactions —Consolidated” included in this Item.                       **Comparable**         *(Dollar amounts in millions)* **2006**  **Basis 2005**  **2005**  **2004**  *Years ended December 31,*                Operating revenues:                Premiums earned, net                Premiums earned, net $91.9   87.9   24.2   23.7 Premiums earned ceded  (9.7)  (10.1)  (8.0)  (7.8)Assumed premiums earned  4.4   0.4   0.4   —  Net premiums earned  86.6   78.2   16.6   15.9 Commission income on reinsurance  0.3   0.5   0.5   0.5  Premiums earned, net  86.9   78.7   17.1   16.4 Net investment income  13.7   13.6   3.0   2.8  Total operating revenues  100.6   92.3   20.1   19.2  Operating costs:                Policy benefits and claims incurred  43.6   37.9   8.9   11.2 Underwriting and other expenses  45.8   39.7   8.2   7.4 Total operating costs  89.4   77.6   17.1   18.6  Operating income $11.2   14.7   3.0   0.6  Additional data:                Loss ratio  50.2%  48.2%  52.0%  68.3%Expense ratio  52.7%  50.4%  48.0%  45.1%***Year ended December 31, 2006 compared with the year ended December 31, 2005****Operating Revenues*Premiums earned for the segment increased by $67.7 million, or 279.8%, to $91.9 million in 2006 ascompared to the 2005 period, reflecting the acquisition of GA Life in 2006. On a comparable basis,premiums earned during 2006 increased by $4.0 million, or 4.6%. This increase is primarily theresult of an increase in the life business attributed to new sales of ordinary life and monthlydebt ordinary insurance (MDO) policies, as well as an increase in the cancer and other dreadeddiseases business.On December 22, 2005, we entered into a coinsurance funds withheld agreement with GA Life pursuantto which our former subsidiary SVTS assumed 69% of all the business written by GA Life (prior toits acquisition by us) as of and after the effective date of the agreement. Since we acquired GALife effective January 31, 2006, our results reflect premiums assumed of $4.4 million, whichrepresents our share of premiums for the month of January 2006 under the coinsurance agreement.The effects of the reinsurance transactions corresponding to this agreement were eliminated forconsolidated financial statement purposes for the period following January 31, 2006. 
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 *Policy Benefits and Claims Incurred*Policy benefits and claims incurred in 2006 increased by $34.7 million, or 389.9%, to $43.6 millionin the 2006 period when compared to the 2005 period. On a comparable basis, policy benefits andclaims incurred increased by $5.7 million, or 15.0%, due in part to our share of claims andactuarial reserves for the month of January 2006 under the coinsurance agreement with GA Lifeamounting to $2.3 million. In addition, this segment also experienced increases in death benefits,policy surrenders and in policy reserves of approximately $3.6 million, primarily as the result ofnew sales in the ordinary life and MDO business and to the natural growth of actuarial reserves,which contributed to the increase in the loss ratio on a comparable basis by 2.0 percentage points,from 48.2% in 2005 to 50.2% in the 2006 period.*Underwriting and Other Expenses*Underwriting and other expenses for the segment increased from $8.2 million to $45.8 million in2006 period. On a comparable basis, underwriting and other expenses increased by $6.1 million, or15.4%. The segment’s operating expense ratio on a comparable basis increased by 2.3 percentagepoints during the year 2006, from 50.4% in to 52.7% in 2006. The increase in underwriting and otherexpenses includes $1.8 million relating to our share of commissions and other operating expensesfor the month of January 2006 under the coinsurance agreementwith GA Life. The remaining increasein operating expenses is mostly related to management fees charged by TSM and an increase in theamortization expense resulting from the deferred policy acquisition costs and value of businessacquired arising from the acquisition of GA Life.***Year ended December 31, 2005 compared with the year ended December 31, 2004****Operating Revenues*Premiums earned increased by $0.5 million, or 2.1%, to $24.2 million in 2005 as compared to 2004,primarily as a result of an increase in the cancer and other dreaded diseases line of business,which was introduced in the second half of 2004, offset in part by a decrease in the group lifeline of business due to the termination of a major group with an adverse history of losses.On December 22, 2005, we entered into a coinsurance funds withheld reinsurance agreement with GALife pursuant to which GA Life assumed 69% of all business written as of and after the effectivedate of the agreement. During December 2005, we recorded assumed premiums related to this agreementamounting to $0.4 million.*Policy Benefits and Claims Incurred*Policy benefits and claims incurred decreased by $2.3 million, or 20.5%, to $8.9 million in 2005,primarily as a result of the termination or non-renewal ofunprofitable groups. As a result, theloss ratio decreased by 16.3 percentage points, from 68.3% in 2004 to 52.0% in 2005.*Underwriting and Other Expenses*Underwriting and other expenses increased by $0.8 million, or 10.8%, to $8.2 million in 2005,primarily due to increase in commission and other related expenses in the cancer and other dreadeddiseases line of business. The operating expense ratio increased by 2.9 percentage points, from45.1% in 2004 to 48.0% in 2005. Page 46

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 **Property and Casualty Insurance Operating Results**             *(Dollar amounts in millions)* **2006** **2005** **2004**                           *Years ended December 31,*            Operating revenues:            Premiums earned, net:             Premiums written $158.9   151.1   141.8 Premiums ceded  (65.7)  (59.2)  (52.2)Change in unearned premiums  (4.7)  (5.1)  (3.4) Premiums earned, net  88.5   86.8   86.2 Net investment income  9.6   8.7   7.7  Total operating revenues  98.1   95.5   93.9  Operating costs:            Claims incurred  41.7   43.6   46.0 Underwriting and other operating expenses  45.2   39.6   40.2  Total operating costs  86.9   83.2   86.2  Operating income $11.2   12.3   7.7  Additional data:            Loss ratio  47.1%  50.2%  53.4%Expense ratio  51.1%  45.6%  46.6%Combined ratio  98.2%  95.8%  100.0% ***Year ended December 31, 2006 compared with the year ended December 31, 2005****Operating Revenues*Total premiums written during 2006 increased by $7.8 million, or 5.2%, to $158.9 million,principally as a result of increases in the dwelling and commercial property mono-line, commercialmulti-peril and auto physical damage lines of business.Premiums ceded to reinsurers increased by $6.5 million, or 11.0%, to $65.7 million as a result ofan increase in the portion of risk ceded to reinsurers and to increases in the cost of reinsurance,particularly in non-proportional treaties, including catastrophe coverage. The ratio of premiumsceded to premiums written increased by 2.1 percentage points, from 39.2% in the 2005 period to41.3% in the 2006 period.*Claims Incurred*Claims incurred in the 2006 period decreased by $1.9 million, or 4.4%, to $41.7 million, mostly asthe result of the segment’s efforts to improve the quality of underwriting and improvements in theclaims handling process. The loss ratio decreased by 3.1 percentage points during this period, to47.1%.*Underwriting and Other Operating Expenses*Underwriting and other operating expenses in 2006 increased by $5.6 million, or 14.1%, to $45.2million. The operating expense ratio increased by 5.5 percentage points during the same period, to51.1% in 2006. These increases are primarily due to increases in commission expenses due toincreased volume and commission rate increases reflecting market conditions and salaries andbenefits expenses, as well as costs associated with the implementation of new IT systems.***Year ended December 31, 2005 compared with the year ended December 31, 2004****Operating Revenues*Total premiums written increased by $9.3 million, or 6.6%, to $151.1 million in 2005, primarily dueto increases in the commercial multi-peril package and auto physical damage lines of business.Premiums ceded to reinsurers increased by $7.0 million, or 13.4%, to $59.2 million in 2005,primarily as a result of an increase in business volume. The ratio of premiums ceded to totalpremiums written increased by 2.4 percentage points, from 36.8% in 2004 to 39.2% in 2005, as aresult of an increase in the portion of risk ceded to reinsurers, particularly in the commercialand personal lines quota share arrangements as well as increases in cost of reinsurance. Page 47

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 *Claims Incurred*Claims incurred decreased by $2.4 million, or 5.2%, to $43.6 million in 2005. The loss ratiodecreased by 3.2 percentage points, to 50.2% in 2005. These decreases are primarily due to netlosses of $2.1 million incurred in 2004 from the effects of Tropical Storm Jeanne in September2004.*Underwriting and Other Operating Expenses*Underwriting and other operating expenses decreased by $0.6 million, or 1.5%, to $39.6 million in2005, and the operating expense ratio decreased by 1.0 percentage points, to 45.6% in 2005.**Liquidity and Capital Resources*****Cash Flows***A summary of our major sources and uses of cash for the periods indicated is presented in thefollowing table:             *(dollar amounts in millions)* **2006** **2005** **2004**              *Years ended December 31,*            Sources of cash:            Cash provided by operating activities $73.7   49.1   8.8 Proceeds from long-term borrowings  35.0   60.0   50.0 Proceeds from short-term borrowings  117.8   174.1   20.4 Proceeds from annuity contracts  6.0   11.5   11.0 Other  —   3.9   6.8  Total sources of cash  232.5   298.6   97.0  Uses of cash:            Net purchases of investment securities  (7.6)  (92.9)  (41.5)Acquisition of GA Life, net of cash acquired  (27.8)  —   — Capital expenditures  (11.9)  (7.6)  (3.5)Dividends  (6.2)  —   — Payments of long-term borrowings  (2.5)  (5.1)  (2.6)Payments of short-term borrowings  (119.5)  (174.0)  (57.4)Surrenders of annuity contracts  (16.0)  (5.1)  (4.6)Other  (8.7)  —   —  Total uses of cash  (200.2)  (284.7)  (109.6) Net increase (decrease) in cash and cashequivalents $32.3   13.9   (12.6) *Year ended December 31, 2006 compared to year ended December 31, 2005*Cash provided by operating activities increased by $24.6 million, or 50.1%, to $73.7 million during2006. It is principally due to a 10% increase in premiums collected, offset in part by a 4%increase in claims losses and benefits paid, reflecting primarily lower utilization trends in themanaged care segment during 2006. Also, our operating cash flows during 2006 include the operatingcash flows of GA Life, not present in prior years. The effect of these fluctuations was mitigated bya decrease in net proceeds from sales of our trading portfolio following the sale of $71.9 millionof our corporate bond trading portfolio during 2005.Proceeds from long-term borrowings amounted to $35.0 million during 2006 as a result of theissuance and sale of our 6.7% senior unsecured notes during the first quarter of 2006, which wereused for the acquisition of GALife.Net purchases of investment securities decreased by $85.3 million during the 2006 period, primarilyas a result of 2005 acquisitions of available-for-sale securities with the proceeds from the saleof our corporate bonds trading portfolio.On January 31, 2006, we acquired GA Life at a cost of $27.8 million, net of $10.4 million of cashacquired.Capital expenditures increased by $4.3 million as a result of the renovation of a building adjacentto our corporate headquarters as well as costs related to the acquisition by our property andcasualty insurance segment of an insurance application and hardware to manage its operations.On January 13, 2006, we declared and paid dividends to our shareholders amounting to $6.2 million. Page 48

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 The 2006 period reflects net surrenders of annuity contracts of $10 million while the 2005 periodpresents net proceeds from annuity contracts of $6.4 million. This fluctuation is principally due toan increase in the amount of annuity surrenders and a decrease in the proceeds received from thefixed deferred annuity product in the 2006 period.*Year ended December 31, 2005 compared to year ended December 31, 2004*Cash provided by operating activities increased by $40.3 million during 2005 to $49.1 million,principally due to an increase in 2005 of the net proceeds received from sales of our corporatebonds trading portfolio, offset by an increase in claims, losses and benefits paid at a higher ratethan the premiums collected during 2005. During 2005, the amount of claims, losses and benefits paidincreased by 9% while the amount of premiums collected increased by7%. The fluctuation in theincrease in the amount of claims, losses and benefits paid over premiums collected is primarily dueto the higher utilization and cost trends experienced by the managed care segment during 2005.Proceeds from long-term borrowings increased by $10.0 million during 2005 due to the net effect ofthe $60.0 million proceeds received from the issuance and sale of our 6.6% senior unsecured notesin December 2005 and the $50.0 million proceeds received from the issuance and sale of our managedcare subsidiary’s 6.3% senior unsecured notes in September 2004 to repay, among other things, shortterm borrowings.Net purchases of investments increased by $51.4 million during 2005 principally as a result ofinvestments in available-for-sale securities with the net proceeds obtained from the sale of ourcorporate bonds trading portfolio.Capital expenditures increased by $4.1 million in 2005 in connection with the renovation of one ofour properties and the acquisition of an insurance operations system by our property and casualtyinsurance segment.Net payments of short-term debt decreased by $37.1 million as a result of the repayment ofshort-term borrowings incurred by us in 2003 to pay the tax liability related to the closingagreement with the Puerto Rico Treasury Department (PRTD) upon the termination of our taxexemption. This repayment was made with the proceeds of the long-term debt described above.***Financing and Financing Capacity***We have several short-term facilities available to address timing differences between cash receiptsand disbursements. These short-term facilities are mostly in the form of arrangements to sellsecurities under repurchase agreements. As of December 31, 2006, we had $53.0 million of availablecredit under these facilities. There were no outstanding short-term borrowings under thesefacilities as of December 31, 2006. Outstanding borrowings under these short-term facilities as ofDecember 31, 2005 amounted to $1.7 million, which were paid out of our operating cash flows in2006.As of December 31, 2006, we had the following senior unsecured notes payable: **•** On January 31, 2006, we issued and sold $35.0 million of our 6.7% seniorunsecured notes payable due January 2021 (the 6.7% notes). The 6.7% notes were privatelyplaced to various institutional accredited investors. The notes pay interest each month untilthe principal becomes due and payable. These notes can be redeemed after five years at par,in whole or in part, as determined by us. The proceeds obtained from this issuance were usedto finance the acquisition of 100% of the common stock of GA Life effective January 31,2006.  **•** On December 21, 2005, we issued and sold $60.0 million of our 6.6% seniorunsecured notes due December 2020 (the 6.6% notes). The 6.6% notes were privately placed tovarious institutional accredited investors. The notes pay interest each month until theprincipal becomes due and payable. These notes can be redeemed after five yearsat par, in whole or in part, as determined by us. The proceeds obtained from this issuance wereused to pay the initial ceding commission to GA Life on the effective date of the coinsurancefunds withheld reinsurance agreement.  **•** On September 30, 2004 our managed care subsidiary issued and sold $50.0 millionof its 6.3% senior unsecured notes due September 2019 (the 6.3%notes). The 6.3% notes areunconditionally guaranteed as to payment of principal, premium, if any, and interest byus. The notes were privately placed to various institutionalaccredited investors. The notespay interest semiannually until the principal becomes due andpayable. These notes can beprepaid after five years at par, in whole or in part, as determined by our managed caresubsidiary. Most of the proceeds obtained from this issuance were used to repay $37.0 millionof short-term borrowings. The remaining proceeds were used for general business purposes.The 6.3%notes, the 6.6% notes and the 6.7% notes contain certain covenants. At December 31, 2006,we and our managed care subsidiary, as applicable, are in compliance with these covenants.In addition, we are a party to two secured term loans with a commercial bank, FirstBank PuertoRico. These secured loans bear interest at a rate equal to the London Interbank Offered Rate (LIBOR)plus a margin specified at the time of the agreement. As of December 31, 2006, the two secured loanshad outstanding balances of $27.6 million and Page 49

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 $10.5million, respectively, and average annualinterest rates of 6.1% and 6.4%, respectively. The first secured loan requires monthly principalrepayment of $0.1 million. The second secured loan requires repayment of principal amounts of notless than $0.3 million and integral multiples of $0.1 million in excess thereof and must be repaidby August 1, 2007.These secured loans are guaranteed by a first lien on our land, buildings and substantially allleasehold improvements, as collateral for the term of the agreements under a continuing generalsecurity agreement. These secured loans contain certain covenants which are customary for this typeof facility, including, but not limited to, restrictions on the granting of certain liens,limitations on acquisitions and limitations on changes in control. As of December 31, 2006, we arein compliance with these covenants. Failure to meet these covenants may trigger the acceleratedpayment of the secured loans’ outstanding balances. Principal repayments on these loans are expectedto be paid out from our operating and investing cash flows.We have an interest rate swap agreement, which changes the variable rate of one of our creditagreements and fixes the rate at 4.72%. We continually monitor existing and alternative financingsources to support our capital and liquidity needs.We anticipate that we will have sufficient liquidity to support our currently expected needs.***Planned Capital Expenditures***During 2005, our managed care business began a project to change a significant part of itsoperations computer system. This project is expected to cost approximately $40.0 million and isexpected to be completed by 2011. Our managed care business expects to incur costs of approximately$15.6 million during 2007 in this project. We estimate that $11.3 million of the costs incurred in2007 will be capitalized over the system’s useful life and the remaining amount will beexpensed. This amount is expected to be paid out of the operating cash flows of our managed carebusiness.***Contractual Obligations***Our contractual obligations impact our short and long-term liquidity and capital resourceneeds. However, our future cash flow prospects cannot be reasonably assessed based solely on suchobligations. Future cash outflows, whether contractual or not, will vary based on our futureneeds. While some cash outflows are completely fixed (such as commitments to repay principal andinterest on borrowings), most are dependent on future events (such as the payout pattern of claimliabilities which have been incurred but not reported).The table below describes the payments due under our contractual obligations, aggregated by type ofcontractual obligation, including the maturity profile of our debt, operating leases and otherlong-term liabilities, and excludes an estimate of the future cash outflows related to thefollowing liabilities: **•** Liability for future policy benefits — This liability was excluded because wedo not expect to make payments in the future until the occurrence of an insurable event,such as death or disability, or because the occurrence of a payment triggering event, suchas the surrender of a policy or contract, is not under our control. The determination of thetiming of payment of this liability is not reasonably fixed and determinable since theinsurable event has not yet occurred. As of December 31, 2006, our liability for futurepolicy benefits amounted to $180.4 million.  **•** Unearned premiums — This amount accounts for the premiums collected prior tothe end of coverage period and does not represent a future cashoutflow. As of December 31,2006, we had $113.6 million in unearned premiums.  **•** Policyholder deposits — The cash outflows related to these instruments are notincluded because they do not have defined maturities, such that the timing of payments andwithdrawals is uncertain. There are currently no significant policyholder deposits in payingstatus. As of December 31, 2006, our policyholder deposits had a carrying amount of $45.4million.  **•** Other long-term liabilities — Due to the indeterminate nature of their cashoutflows, $56.2 million of other long-term liabilities are not reflected in the followingtable, including $32.3 million of liability for the pension benefits and $13.6 million inliabilities to the Federal Employees Health Benefit Plan. Page 50

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                                    **Contractual obligations by year***(Dollar amounts in millions)* **Total** **2007** **2008** **2009** **2010** **2011** **Thereafter**                              Long-term borrowings (1) $326.8   23.7   12.7   12.5   12.5   12.4   253.0 Operating leases  16.8   4.6   3.6   3.1   2.6   2.7   0.2 Purchase obligations (2)  135.5   132.0   0.3   0.5   0.4   0.4   1.9 Claim liabilities (3)  282.6   193.0   50.9   11.6   10.2   6.5   10.4    $761.7   353.3   67.5   27.7   25.7   22.0   265.5  (1) As of December 31, 2006, our long-term borrowings consist of our managed care subsidiary’s6.3% senior unsecured notes payable (which are unconditionally guaranteed as to payment ofprincipal, premium, if any, and interest by us), our 6.6% senior unsecured notes payable, our6.7% senior unsecured notes payable, and loans payable to acommercial bank. Total contractualobligations for long-term borrowings include the current maturitiesof long term debt. For the6.3%, 6.6% and 6.7% senior unsecured notes, scheduled interest payments were included in thetotal contractual obligations for long-term borrowings until the maturity dates of the notesin 2019, 2020, and 2021, respectively. We may redeem the notes starting five years afterissuance; however no redemption is considered in this schedule. The interest payments relatedto our loans payable were estimated using the interest rate applicable as of December 31, 2006for each of the loans. The actual amount of interest payments of the loans payable will differfrom the amount included in this schedule due to the loans’ variable interest ratestructure. See the “Financing and Financing Capacity” section for additional informationregarding our long-term borrowings. (2) Purchase obligations represent payments required by us under material agreements to purchasegoods or services that are enforceable and legally binding and where all significant terms arespecified, including: quantities to be purchased, price provisions and the timing of thetransaction. Other purchase orders made in the ordinary course of business for which we are notliable are excluded from the table above. Estimated pension plan contributions amounting to$5.0 million were included within the total purchase obligations. However, this amount is anestimate which may be subject to change in view of the fact that contribution decisions areaffected by various factors such as market performance, regulatory and legal requirements andplan funding policy. (3) Claim liabilities represent the amount of our claims processed and incomplete as well as anestimate of the amount of incurred but not reported claims andloss-adjustment expenses. Thisamount does not include an estimate of claims to be incurred subsequent to December 31,2006. The expected claims payments are an estimate and may not necessarily present the actualclaims payments to be made by us. Also, the estimated claims payments included in the tableabove do not include $32.1 million of reserves ceded underreinsurance contracts. Sincereinsurance contracts do not relieve us from our obligations to policyholders, in the eventthat any of the reinsurance companies is unable to meet its obligations under the existingreinsurance agreements, we would be liable for such defaulted amounts.***Off-Balance Sheet Arrangements***We have no off-balance sheet arrangements that have or are reasonably likely to have a current orfuture material effect on our financial condition, revenues, expenses, results of operations,liquidity, capital expenditures or capital resources.***Restriction on Certain Payments by the Corporation’s Subsidiaries***Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance of theCommonwealth of Puerto Rico. These regulations, among other things, require insurance companies tomaintain certain levels of capital, thereby restricting the amount of earnings that can bedistributed by the insurance subsidiaries to TSM. Our managed care subsidiary is required to haveminimum capital of $1.0 million, our life insurance subsidiary is required to have minimum capitalof $2.5 million and our property and casualty insurance subsidiary is required to have minimumcapital of $3.0 million. As of December 31, 2006, our insurance subsidiaries were in compliance withsuch minimum capital requirements.These regulations are not directly applicable to us, as a holding company, since we are not aninsurance company.Our credit agreements restrict the amount of dividends that we and our subsidiaries can declare orpay to stockholders. Under to the credit agreements, dividend payments cannot be made in excess ofthe accumulated retained earnings of the paying entity.We do not expect that any of the previously described dividend restrictions will have a significanteffect on our ability to meet our cash obligations. Page 51

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 ***Solvency Regulation***To monitor the solvency of the operations, the BCBSA requires us and our managed care subsidiary tocomply with certain specified levels of RBC. RBC is designed to identify weakly capitalizedcompanies by comparing each company’s adjusted surplus to its required surplus (RBC ratio). TheRBC ratio reflects the risk profile of insurance companies. At December 31, 2006, both we and ourmanaged care subsidiary’s estimated RBC ratio was above the 200% of our RBC required by the BCBSAand the 375% of our RBC level required by the BCBSA to avoid monitoring.***Other Contingencies****Legal Proceedings*Various litigation claims and assessments against us have arisen in the course of our business,including but not limited to, our activities as an insurer and employer. Furthermore, theCommissioner of Insurance, as well as other Federal and Puerto Rico government authorities,regularly make inquiries and conduct audits concerning our compliance with applicable insurance andother laws and regulations.Based on the information currently known by our management, in its opinion, the outcomes of suchpending investigations and legal proceedings are not likely to have a material adverse effect onour financial position, results of operations and cash flows. However, given the inherentunpredictability of these matters, it is possible that an adverse outcome in certain matters could,from time to time, have an adverse effect on our operating results and/or cash flows. See “Item 3— Legal Proceedings”.*Guarantee Associations*To operate in Puerto Rico, insurance companies, such as our insurance subsidiaries, are required toparticipate in guarantee associations, which are organized to pay policyholders contractualbenefits on behalf of insurers declared to be insolvent. These associations levy assessments, upto prescribed limits, on a proportional basis, to all member insurers in the line of business inwhich the insolvent insurer was engaged. During 2006, 2005 and 2004, we paid assessments inconnection with insurance companies declared insolvent in the amount of $0.8 million, $1.0 millionand $1.1 million, respectively. It is the opinion of management that any possible future guaranteeassociation assessments will not have a material effect on our operating results and/or cash flows,although there is no ceiling on these payment obligations.Pursuant to the Puerto Rico Insurance Code, our property and casualty insurance subsidiary is amember of Sindicato de Aseguradores para la Suscripción Conjunta de Seguros de ResponsabilidadProfesional Médico-Hospitalaria (SIMED) and of the Sindicato de Aseguradores de ResponsabilidadProfesional para Médicos. Both syndicates were organized for the purpose of underwritingmedical-hospital professional liability insurance. As a member, the property and casualtyinsurance segment shares risks with other member companies and, accordingly, is contingently liablein the event the previously mentioned syndicates cannot meet their obligations. During 2006, 2005and 2004, no assessment or payment was made for this contingency. It is the opinion of managementthat any possible future syndicate assessments will not have a material effect on our operatingresults and/or cash flows, although there is no ceiling on these payment obligations.In addition, pursuant to Article 12 of Rule LXIX of the Insurance Code, our property and casualtyinsurance subsidiary is a member of the Compulsory Vehicle Liability Insurance Joint UnderwritingAssociation (the Association). The Association was organized in 1997 to underwrite insurancecoverage of motor vehicle property damage liability risks effective January 1, 1998. As aparticipant, the segment shares the risk proportionally with other members based on a formulaestablished by the Insurance Code. During the three-year period ended December 31, 2006, theAssociation distributed good experience refunds. The segment received refunds amounting to $0.8million, $0.9 million and $0.8 million in 2006, 2005, and 2004, respectively.**Critical Accounting Estimates**Our consolidated financial statements and accompanying notes included in this Annual Report on Form10-K have been prepared in accordance with generally accepted accounting principles applied on aconsistent basis. The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. We continually evaluate the accountingpolicies and estimates we use to prepare our consolidated financial statements. In general,management’s estimates are based on historical experience and various other assumptions it believesto be reasonable under the circumstances. The following is an explanation of our accountingpolicies considered most significant by management. These accounting Page 52

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 policies require us to make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Such estimates and assumptions could change in thefuture as more information is known. Actual results could differ materially from those estimates.The policies discussed below are considered by management to be critical to an understanding of ourfinancial statements because their application places the most significant demands on management’sjudgment, with financial reporting results relying on estimation about the effect of matters thatare inherently uncertain. For all these policies, management cautions that future events may notnecessarily develop as forecasted, and that the best estimates routinely require adjustment.Management believes that the amounts provided for these critical accounting estimates are adequate.***Claim Liabilities***Claim liabilities as of December 31, 2006 by segment were as follows:                           **Property and**    **Managed** **Life** **Casualty**  *(Dollar amounts in millions)* **Care** **Insurance** **Insurance** **Consolidated**                  Claims processed and incomplete (1) $72.0   26.3   48.9   147.2 Unreported losses (2)  108.0   8.5   34.2   150.7 Unpaid loss-adjustment expenses (3)  5.3   0.3   11.2   16.8    $185.3   35.1   94.3   314.7   (1) The liability for claims processed and incomplete represents those claims that have beenincurred and reported to us that remain unpaid as of the balance sheet date. This amountincludes claims that have been investigated and adjusted but have not been paid as well asthose reported claims that have not gone through the investigation and adjustment process. (2) The liability for estimated unreported losses is the amount needed to provide for theestimated ultimate cost of settling those claims related to insured events that have occurredbut have not been reported to us. (3) The liability for unpaid loss-adjustment expenses is the amount needed to provide for theestimated ultimate cost required to investigate and adjust claims related to insured eventsthat have occurred as of the balance sheet date, whether or not the claims have been reportedto us at that date.Management continually evaluates the potential for changes in its claim liabilities estimates, bothpositive and negative, and uses the results of these evaluations to adjust recorded claimliabilities and underwriting criteria. Our profitability depends in large part on our ability toaccurately predict and effectively manage the amount of claims incurred, particularly those of themanaged care segment and the losses arising from the property and casualty and life insurancesegment. Management regularly reviews its premiums and benefits structure to reflect ourunderlying claims experience and revised actuarial data; however, several factors could adverselyaffect our underwriting results. Some of these factors are beyond management’s control and couldadversely affect its ability to accurately predict and effectively control claims incurred.Examples of such factors include changes in health practices, economic conditions, change inutilization trends, healthcare costs, the advent of natural disasters, and malpractice litigation.Costs in excess of those anticipated could have a material adverse effect on our results ofoperations.We recognize claim liabilities as follows:*Managed Care Segment*At December 31, 2006, claim liabilities for the managed care segment amounted to $185.3 million andrepresented 58.9% of our total consolidated claim liabilities and 18.5% of our total consolidatedliabilities.Liabilities for reported but incomplete claims are recorded at the contractual rate. Liabilitiesfor unreported losses are determined employing actuarial methods that are commonly used by managedcare actuaries and meet Actuarial Standards of Practice, which require that the claim liabilitiesbe adequate under moderately adverse circumstances. The segment determines the amount of theliability for unreported losses by following a detailed actuarial process that entails using bothhistorical claim payment patterns as well as emerging medical cost trends to project a bestestimateof claim liabilities. Under this process, historical claims incurred dates are compared to actualdates of claims payment. This information is analyzed to create “completion” or “development”factors that represent the average percentage of total incurred claims that have been paid througha given date after being incurred. Completion factors are applied to claims paid through thefinancial statement date to estimate the ultimate claim expense incurred for the current period.Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claimsfrom the estimate of the total expected claims incurred. Page 53

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 The majority of unpaid claims, both reported and unreported, for any period are those claims whichare incurred in the final months of the period. Since the percentage of claims paid during theperiod with respect to claims incurred in those months is generally very low, the above-describedcompletion factor methodology is less reliable for such months. In order to complement theanalysis to determine the unpaid claims, historical completion factors and payment patterns areapplied to incurred and paid claims for the most recent twelve months and compared to the priortwelve month period. Incurred claims for the most recent twelve months also take into accountrecent claims expense levels and health care trend levels, or “trend factors”. Using all of theabove methodologies, our actuaries determine based on the different circumstances the unpaid claimsas of the end of any period.Because the reserve methodology is based upon historical information, it must be adjusted for knownor suspected operational and environmental changes. These adjustments are made by our actuariesbased on their knowledge and their estimate of emerging impacts to benefit costs and payment speed.Circumstances to be considered in developing our best estimate of reserves include changes inutilization levels, unit costs, mix of business, benefit plan designs, provider reimbursementlevels, processing system conversions and changes, claim inventory levels, regulatory andlegislative requirements, claim processing patterns and claim submission patterns. A comparison ofprior period liabilities to re-estimated claim liabilities based on subsequent claims developmentis also considered in making the liability determination. In the actuarial process, the methodsand assumptions are not changed as reserves are recalculated, but rather the availability ofadditional paid claims information drives our changes in the re-estimate of the unpaid claimliability. Changes in such development are recorded as a change to current period benefit expense.The re-estimates or recasts are done monthly for the previous four calendar quarters. On average,about 75% of the claims are paid the first quarter following the incurrence date and about 10% arepaid during the second quarter, for a total of 85% paid during the first six months following theincurrence date.Management regularly reviews its assumptions regarding claim liabilities and makes adjustments toclaims incurred when necessary. If management’s assumptions regarding cost trends and utilizationare significantly different than actual results, our statement of earnings and financial positioncould be impacted in future periods. Changes to prior year estimates may result in an increase inclaims incurred or a reduction of claims incurred in the period the change is made. Further, dueto the considerable variability of health care costs, adjustments to claims liabilities are made ineach period and are sometimes significant as compared to the net income recorded in that period.Prior year development of claim liabilities is recognized immediately upon the actuary’s judgmentthat a portion of the prior year liability is no longer needed or that an additional liabilityshould have been accrued. Health care trends are monitored in conjunction with the claim reserveanalysis. Based on these analyses, rating trends are adjusted to anticipate future changes inhealth care cost or utilization. Thus, the managed care segment incorporates those trends as partof the development of premium rates in an effort to keep premium rating trends in line with claimstrends.As described above, completion factors and trend factors can have a significant impact ondetermination of our claim liabilities. The following example provides the estimated impact on ourDecember 31, 2006 claim liabilities, assuming the indicated hypothetical changes in completion andtrend factors:*(Dollar amounts in millions)*             **Completion Factor****1** **Claims Trend Factor****2****(Decrease) Increase** **(Decrease) Increase**  **In unpaid claim** **In claims trend** **In unpaid claim****In completion factor** **liabilities** **factor** **liabilities**                (0.6)% $7.2   (0.6)% $9.3 (0.4)%  4.8   (0.4)%  6.2 (0.2)%  2.4   (0.2)%  3.1 0.2%  (2.4)  0.2%  (3.1)0.4%  (4.7)  0.4%  (6.2)0.6%  (7.1)  0.6%  (9.3) 1 Assumes (decrease) increase in the completion factors for themost recent twelve months.2 Assumes (decrease) increase in the claims trend factors for themost recent twelve months.The segments’ reserving practice is to consistently recognize the actuarial best estimate as theultimate liability for claims within a level of confidence required by actuarial standards.Management believes that the methodology for determining the best estimate for claim liabilities ateach reporting date has been consistently applied.Amounts incurred related to prior years vary from previously estimated liabilities as the claimsare ultimately settled. Liabilities at any year-end are continually reviewed and re-estimated asinformation regarding actual claims payments, Page 54

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 or run-out, becomes known. This information iscompared to the originally established year-end liability. Negative amounts reported for incurredclaims related to prior years result from claims being settled for amounts less than originallyestimated. The reverse is true of reserve shortfalls. Medical claim liabilities are usuallydescribed as having a “short tail”, which means that they are generally paid within several monthsof the member receiving service from the provider. Accordingly, the majority, or approximately95%, of any redundancy or shortfall relates to claims incurred in the previous calendar year-end,with the remaining 5% related to claims incurred prior to the previous calendar year-end. In 2004,the managed care segment’s claim payment patterns were affected by a slowdown in claims submissionfrom providers due to HIPAA coding changes that occurred during the latter half of 2003 and by theeffect of tropical storm Jeanne, which limited access to providers during the months of Septemberand October 2004. The first event affects historical completion factors while the second eventchanged utilization trends. Management has not noted any significant emerging trends in claimfrequency and severity, other than those described above, and the normal fluctuation in utilizationtrends from year to year.The following table shows the variance between the segment’s total incurred claims as reported andthe total incurred claims for such years had they been determined retrospectively (the “Incurredclaims related to current period insured events” for the year shown plus or minus the “Incurredclaims related to prior period insured events” for the following year as included in note 9 to theaudited consolidated financial statements). This table shows that the segments’ estimates of thisliability have approximated the actual development.             *(Dollar amounts in millions* **2005** **2004** **2003**              Total incurred claims:            As reported (1) $1,148.2   1,062.7   1,026.0 On a retrospective basis  1,137.5   1,070.4   1,021.9  Variance $10.7   (7.7)  4.1  Variance to total incurred claims as reported  0.9%  -0.7%  0.4% (1) Includes total claims incurred less adjustments for prior year reserve development.Management expects that substantially all of the development of the 2006 estimate of medical claimspayable will be known during 2007 and that the variance of the total incurred claims on aretrospective basis when compared to reported incurred claims will be similar to the prior years.In the event this segment experiences an unexpected increase in health care cost or utilizationtrends, we have the following options to cover claim payments: **•** Through the management of our cash flows and investment portfolio.  **•** We have the ability to increase the premium rates throughout the year in themonthly renewal process, when renegotiating the premiums for the following contract yearof each group as they become due. We consider the actual claims trend of each group whendetermining the premium rates for the following contract year.  **•** We have available short-term borrowing facilities that from time to timeaddress differences between cash receipts and disbursements.For additional information on our credit facilities, see section “Financing and Financing Capacity”of this Item.*Life Insurance Segment*At December 31, 2006, claim liabilities for the life insurance segment amounted to $35.1 millionand represented 11.2% of total consolidated claim liabilities and 3.5% of our total consolidatedliabilities.The claim liabilities related to the life insurance segment are based on methods and underlyingassumptions in accordance with GAAP and applicable actuarial standards. The estimate of claimliabilities for this segment is based on the amount of benefits contractually determined and onactuarial estimates of the amount of loss inherent in that period’s claims, including losses forwhich claims have not been reported. This estimate relies on actuarial observations of ultimateloss experience for similar historical events. Principal assumptions used in the establishment ofclaim liabilities for this segment are mortality, morbidity and claim submission patterns, amongothers.Claim reserve reviews are generally conducted on a quarterly basis, in light of continually updatedinformation, and include participation of the segment’s external actuaries. Our actuaries reviewreserves using the current inventory of policies and claims data. These reviews incorporate avariety of actuarial methods, judgments and analysis.The key assumption with regard to claim liabilities for our life insurance segment is related toclaims included prior to the end of the year, but not yet reported to our subsidiary. A liabilityfor these claims is estimated based upon Page 55

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 experience with regards to amounts reported subsequent tothe close of business in prior years. There are uncertainties attendant to these estimates;however, in recent years our estimates have proved to be slightly conservative.*Property and Casualty Insurance Segment*At December 31, 2006, claim liabilities for the property and casualty insurance segment amounted to$94.3 million and represented 30.0% of the total consolidated claim liabilities and 9.4% of ourtotal consolidated liabilities.Estimates of the ultimate cost of claims and loss-adjustment expenses of this segment are basedlargely on the assumption that past developments, with appropriate adjustments due to known orunexpected changes, are a reasonable basis on which to predict future events and trends, andinvolve a variety of actuarial techniques that analyze current experience, trends and otherrelevant factors. Property and casualty insurance claim liabilities are categorized and tracked byline of business. Medical malpractice policies are written on a claims-made basis. Policieswritten on a claims-made basis require that claims be reported during the policy period. Otherlines of business are written on an occurrence basis.Individual case estimates for reported claims are established by a claims adjuster and are changedas new information becomes available during the course of handling the claim. Our property andcasualty business, other than medical malpractice, is primarily short-tailed business, where losses(e.g. paid losses and case reserves) are generally reported quickly.Claim reserve reviews are generally conducted on a quarterly basis, in light of continually updatedinformation, and include the participation of the segment’s external actuaries. Our actuariescertify reserves for both current and prior accident years using current claims data. Thesereviews incorporate a variety of actuarial methods, judgments, and analysis. For each line ofbusiness, a variety of actuarial methods are used, with the final selections of ultimate lossesthat are appropriate for each line of business selected based on the current circumstancesaffecting that line of business. These selections incorporate input from management, particularlyfrom the claims, underwriting and operations divisions, about reported loss cost trends and otherfactors that could affect the reserve estimates.Key assumptions are based on the consideration that past emergence of paid losses and case reservesis credible and likely indicative of future emergence and ultimate losses. A key assumption is theexpected loss ratio for the current accident year. This expected loss ratio is generallydetermined through a review of the loss ratios of prior accident years and expected changes toearned pricing, loss costs, mix of business, and other factors that are expected to impact the lossratio for the current accident year. Another key assumption is the development patterns for paidand reported losses (also referred to as the loss emergence and settlement patterns). The reservesfor unreported claims for each year are determined after reviewing the indications produced by eachactuarial projection method, which, in turn, rely on the expected paid and reported developmentpatterns and the expected loss ratio for that year.AtDecember 31, 2006, the actuarial reserve range determined by the actuaries was from $90.4million to $101.0 million. Management reviews the results of the reserve estimates in order todetermine any appropriate adjustments in the recording of reserves. Adjustments to reserveestimates are made after management’s consideration of numerous factors, including but not limitedto the magnitude of the difference between the actuarial indication and the recorded reserves,improvement or deterioration of actuarial indications in the period, the maturity of the accidentyear, trends observed over the recent past and the level of volatility within a particular line ofbusiness. In general, changes are made more quickly to more mature accident years and lessvolatile lines of business. Varying the net expected loss ratio by +/-1% in all lines of businessfor the six most recent accident years would increase/decrease the claims incurred by approximately$4.6 million and $3.6 million, respectively.***Liability for Future Policy Benefits***Our life insurance segment establishes, and carries as liabilities, actuarially determined amountsthat are calculated to meet its policy obligations when a policy matures or surrenders, an insureddies or becomes disabled or upon the occurrence of other covered events. The segment computes theamounts for actuarial liabilities in conformitywith GAAP.Liabilities for future policy benefits for whole life and term insurance products are computed bythe net level premium method, using interest assumptions ranging from 5.0 percent to 5.4 percentand withdrawal, mortality and morbidity assumptions appropriate at the time the policies wereissued (or when a block of business was purchased, as applicable). Accident and health reservesare stated at amounts determined by estimates on individual claims and estimates of unreportedclaims based on past experience. Liabilities for universal life policies are stated atpolicyholder account values before surrender charges. Deferred annuity reserves are carried at theaccount value.The liabilities for all products, except for universal life and deferred annuities, are based upona variety of actuarial assumptions that are uncertain. The most significant of these assumptionsare the level of anticipated death and health claims. Other assumptions that are less significantto the appropriate level of the liability for future policy benefits are anticipated policypersistency rates, investment yields, and operating expense levels. These are reviewed frequentlyby Page 56

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 our subsidiary’s external actuaries, to assure that the current level of liabilities for futurespolicy benefits is sufficient, in combination with anticipated future cash flows, to provide forall contractual obligations. Note that, for all products except for universal life and deferredannuities, according to SFAS No. 60, *Accounting and Reporting by Insurance Enterprises*, the basisfor the liability for future policy benefits is established at the issue of each contract and wouldonly change if our segment’s experience deteriorates to the point that the level of the liabilityis not adequate to provide for future policy benefits. To date, our analysis indicates that thisevent is not likely.Based upon the most recent actuarial reviews of all of these assumptions, we do not anticipatematerial changes to the level of these liabilities in the future.***Deferred Policy Acquisition Costs and Value of Business Acquired***Certain costs for acquiring life and property and casualty insurance business are deferred.Acquisition costs related to the managed care business are expensed as incurred.The costs of acquiring new life business, principally commissions, and certain variableunderwriting, agency and policy issue expenses of our life insurance segment, have been deferred.These costs, including value of business acquired (VOBA) recorded upon our acquisition of GA Life,are amortized to income over the premium-paying period of the related whole life and term insurancepolicies in proportion to the ratio of the expected annual premium revenue to the expected totalpremium revenue, and over the anticipated lives of universal life policies in proportion to theratio of the expected annual gross profits to the expected total gross profits. The expectedpremiums revenue and gross profits are based upon the same mortality and withdrawal assumptionsused in determining the liability for future policy benefits. For universal life policies, changesin the amount or timing of expected gross profits result in adjustments to the cumulativeamortization of these costs. The effect on the amortization of deferred policy acquisition costsfor revisions to estimated gross profits is reported in earnings in the period such estimated grossprofits are revised.The schedules of amortization of the life insurance deferred policy acquisition costs (DPAC) andthe VOBA are based upon actuarial assumptions regarding future events that are uncertain. For allproducts, other than universal life and deferred annuities, the most significant of theseassumptions are the level of contract persistency and investment yield rates. Note that for theseproducts according to FASB No. 60 the basis for the amortization of DPAC and VOBA are establishedat the issue of each contract and would only change if our segment’s experience deteriorates to thepoint that the level of the liability is not adequate to provide for future policy benefits. Todate, our analysis indicates that this event is not likely. For the universal life and deferredannuity products, amortization schedules are based upon the level of historic and anticipated grossprofit margins, from the date of each contract’s issued (or purchase, in the case of VOBA). Theseschedules are based upon several actuarial assumptions that are uncertain, are reviewed annuallyand are modified if necessary. The most significant of these assumptions are anticipateduniversal life claims, investment yield rates and contract persistency. Based upon the most recentactuarial reviews of all of the assumptions, we do not acticipatematerial changes to the level ofthese amortization schedules in the futures.The property and casualty business acquisition costs consist of commissions incurred during theproduction of business and are deferred and amortized ratably over the terms of the policies.***Impairment of Investments***Impairment of an investment exists if a decline in the estimated fair value below the amortizedcost of the security is deemed to be other than temporary. An impairment review of securities todetermine if impairment exists is subjective and requires a high degree of judgment. Managementregularly reviews each investment security for impairment based on criteria that include the extentto which cost exceeds estimated fair value, general market conditions (like changes ininterest rates), our ability and intent to hold the security until recovery in estimated fairvalue, the duration of the estimated fair value decline and the financial condition and specificprospects for the issuer. Management regularly performs market research and monitors marketconditions to evaluate impairment risk. A decline in the estimated fair value of anyavailable-for-sale or held-to-maturity security below cost, which is deemed to be other thantemporary, results in a reduction of the carrying amount to its fair value. The impairment ischarged to operations when that determination is made and a new cost basis for the security isestablished.During the years ended December 31, 2006 and 2005 we recognized other-than-temporary impairmentsamounting to $2.1 and $1.4 million, respectively, on one of our equity securities classified asavailable for sale. No other-than-temporary impairment was recognized in 2004. As of December 31,2006, of the total amount of investments in securities of $869.1 million, $83.4 million, or 10%,are classified as trading securities, and thus are recorded at fair value with changes estimatedfair value recognized in the statement of operations. The remaining $785.7 million is classifiedas either available-for-sale or held-to-maturity and consists of high-quality investments. Of thisamount, $664.4 million, or 85%, are securities in U.S. Treasury securities, obligations of U.S.government-sponsored enterprises, obligations of the Commonwealth of Puerto Rico, mortgage backedand collateralized mortgage obligations that are U.S. agency-backed, and obligations of U.S. andPuerto Rican government instrumentalities. The remaining Page 57

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 $121.3 million, or 15%, are fromcorporate fixed and equity securities. Gross unrealized losses as of December 31, 2006 of theavailable-for-sale and held-to-maturity portfolios amounted to $14.5 million.The impairment analysis as of December 31, 2006 and 2005 indicated that, other than the equitysecurity for which an other-than-temporary impairment was recognized, none of the securities whosecarrying amount exceeded its estimated fair value was other-than-temporarily impaired as of thatdate; however, several factors are beyond management’s control, such as the following: financialcondition of the issuer, movement of interest rates, specific situations within corporations, amongothers. Over time, the economic and market environment may provide additional insight regardingthe estimated fair value of certain securities, which could change management’s judgment regardingimpairment. This could result in realized losses related to other-than-temporary declines beingcharged against future income. Taking into account the quality of the securities in the investmentportfolio, the amount of unrealized losses within the available-for-sale and held-to-maturityportfolios, and past experience, management believes that, the amount of likely future impairmentsin the next year should not be material.Our fixed maturity securities are sensitive to interest rate fluctuations, which impact the fairvalue of individual securities. Our equity securities are sensitive to equity price risks, forwhich potential losses could arise from adverse changes in the value of equity securities. Foradditional information on the sensitivity of our investments, see “Item 7A — Quantitative andQualitative Disclosures About Market Risk” in this Annual Report on Form 10-K.A detail of the gross unrealized losses on investment securities and the estimated fair value ofthe related securities, aggregated by investment category and length of time that individualsecurities have been in a continuous unrealized loss position as of December 31, 2006 and 2005 isincluded in note 4 to the audited consolidated financial statements.***Allowance for Doubtful Receivables***We estimate the amount of uncollectible receivables in each period and establish an allowance fordoubtful receivables. The allowance for doubtful receivables amounted to $18.2 million and $12.2million as of December 31, 2006 and 2005, respectively. The amount of the allowance is based onthe age of unpaid accounts, information about the customer’s creditworthiness and other relevantinformation. The estimates of uncollectible accounts are revised each period, and changes arerecorded in the period they become known. In determining the allowance, we use predeterminedpercentages applied to aged account balances, as well as individual analysis of large accounts.These percentages are based on our collection experience and are periodically evaluated. Asignificant change in the level of uncollectible accounts would have a material effect on ourresults of operations.In addition to premium-related receivables, we evaluate the risk in the realization of otheraccounts receivable, including balances due from third parties related to overpayment of medicalclaims and rebates, among others. These amounts are individually analyzed and the allowancedetermined based on the specific collectivity assessment and circumstances of each individual case.We consider this allowance adequate to cover potential losses that may result from our inability tosubsequently collect the amounts reported as accounts receivable. However, such estimates maychange significantly in the event that unforeseen economic conditions adversely impact the abilityof third parties to repay the amounts due to us.***Other Significant Accounting Policies***We have other accounting policies that are important to an understanding of the financialstatements. See note 2 to the audited consolidated financial statements.**Recently Issued Accounting Standards**Statement of Financial Accounting Standards (SFAS) No. 159, *The Fair Value Option for FinancialAssets and Financial Liabilities*, was issued in February 2007. This statement permits entities tochoose to measure many financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. The objective of this statement is to improvefinancial reporting by providing entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. This statement also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. This statement does not affect anyexisting accounting literature that requires certain assets and liabilities to be carried at fairvalue and does not establish requirements for recognizing and measuring dividend income, interestincome, or interest expense. This statement does not eliminate disclosure requirements included inother accounting standards. This statement is effective as of the beginning of an entity’s firstfiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning ofa fiscal year that begins on or before November 15, 2007, provided the entity also elects to applythe provisions SFAS No. 157, *Fair Value Measurements*. We are currently evaluating the effect ofthis statement on our consolidated financial statements. Page 58

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 In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB)No. 108 addressing how the effects of prior-year uncorrected financial statement misstatementsshould be considered in current year financial statements. SAB No. 108 requires registrants toquantify misstatements using both balance sheet and income statement approaches in evaluatingwhether or not a misstatement is material. SAB No. 108 is effective for fiscal years ended afterNovember 15, 2006. The adoption of this SAB did not have a material impact on the our consolidatedfinancial statements.SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans*, wasissued in September 2006. This statement changes financial reporting by requiring employers torecognize the overfunded or underfunded status of a defined benefit postretirement plan as an assetor liability in its statement of financial position and to recognize changes in that funded statusin the year in which the changes occur through comprehensive income. This statement also changesfinancial reporting by requiring employers to measure the funded status of a plan as of the date ofits year-end statement of financial position. An employer with publicly traded equity securitiesis required to initially recognize the funded status of a defined benefit postretirement plan andto provide required disclosures as of the end of the fiscal year ended after December 15, 2006. Anemployer without publicly traded equity is required to recognize the funded status of a definedbenefit pension plan and to provide required disclosures as of the end of the fiscal year endingafter June 15, 2007. The requirement to measure plan assets and benefit obligations as of the dateof the employer’s fiscal year-end statement of financial position is effective for fiscal yearsending after December 15, 2008. We adopted the provisions of this statement in the consolidatedfinancial statements as of December 31, 2006 as further discussed in note 18 to our auditedconsolidated financial statements.SFAS No. 157, *Fair Value Measurements*, was issued in September 2006. This statement defines fairvalue, establishes a framework for measuring fair value and expands disclosures about fair valuemeasurements. This statement does not require any new fair value measurements; it applies underother accounting statements that require or permit fair value measurements. This statement iseffective for financial statements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. Except for certain exceptions, the provisions of thisstatement are to be applied prospectively as of the beginning of the fiscal year in which it isinitially applied. We are currently evaluating the effect of this statement on our consolidatedfinancial statements.FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes an Interpretation of FASBStatement No. 109*, was issued in June 2006. This Interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statements in accordance withSFAS No. 109, *Accounting for Income Taxes*. This interpretation prescribes a recognition thresholdand measurement attribute for the financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. This Interpretation is effective for fiscal yearsbeginning after December 15, 2006. The adoption of this Interpretation is not expected to have amaterial impact on our consolidated financial statements.SFAS No. 156, *Accounting for Servicing of Financial Assets*, an amendment of SFAS No. 140, wasissued in March 2006. This statement amends SFAS No. 140, *Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities*, with respect to the accounting forseparately recognized servicing assets and servicing liabilities. This Statement is effective asof the beginning of the first fiscal year that begins after September 15, 2006. The adoption ofSFAS No. 156 is not expected to have an impact on our consolidated financial statements.SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments*, an amendment of FASB StatementsNo. 133 and 140, was issued in February 2006. This statement amends SFAS No. 133, *Accounting forDerivatives and Hedging Activities*, and SFAS No. 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities*, and allows an entity to re-measure at fairvalue a hybrid financial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation from the host, if the holder irrevocably elects to account for thewhole instrument on a fair value basis. Subsequent changes in the fair value of the instrumentwould be recognized in earnings. This statement also clarifies certain issues included in theamended SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instrumentsacquired and issued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The adoption of SFAS No. 155 is not expected to have an impact on ourconsolidated financial statements.**Item 7A. Quantitative and Qualitative Disclosures About Market Risk.**We are exposed to certain market risks that are inherent in our financial instruments, whicharise from transactions entered into in the normal course of business. We are also subject toadditional market risk with respect to certain of our financial instruments. We must effectivelymanage, measure, and monitor the market risk associated with our invested assets and interest ratesensitive liabilities. We have established and implemented comprehensive policies and proceduresto minimize the effects of potential market volatility. Page 59

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 **Market Risk Exposure**We have exposure to market risk mostly in our investment activities. For purposes of thisdisclosure, “market risk” is defined as the risk of loss resulting from changes in interest ratesand equity prices. Analytical tools and monitoring systems are in place to assess each one of theelements of market risks.As in other insurance companies, investment activities are an integral part of our business.Insurance statutes regulate the type of investments that the insurance segments are permitted tomake and limit the amount of funds that may be invested in some types of securities. We have adiversified investment portfolio with a large portion invested in investment-grade, fixed incomesecurities.Our investment philosophy is to maintain a largely investment-grade fixed income portfolio, provideadequate liquidity for expected liability durations and other requirements, and maximize totalreturn through active investment management.Weevaluate the interest rate risk of our assets and liabilities regularly, as well as theappropriateness of investments relative to our internal investment guidelines. We operate withinthese guidelines by maintaining a diversified portfolio, both across and within asset classes.We have a finance committee, composed of members of the board of directors, which monitors andapproves investment policies and procedures. Investment decisions are centrally managed byinvestment professionals based on the guidelines established by the finance committee. Theinvestment portfolio is managed following those policies and procedures.Our investment portfolio is predominantly comprised of U.S. Treasury securities, obligations ofU.S. government-sponsored enterprises, obligations of state and political subdivisions, obligationsof the Commonwealth of Puerto Rico and obligations from U.S. and Puerto Rican governmentinstrumentalities. These investments comprised approximately 76% of the total portfolio value asof December 31, 2006, of which 12% consisted of U. S. agency-backed mortgage backed securities andcollateralized mortgage obligations. The remaining balance of the investment portfolio consists ofan equity securities portfolio that seeks to replicate the S&P 500 Index, a large-cap growth index,a large-cap value index, mutual funds, investments in local stocks from well-known financialinstitutions and investments in corporate bonds.We use a sensitivity analysis to measure the market risk related to our holdings of invested assetsand other financial instruments. This analysis estimates the potential changes in fair value ofthe instruments subject to market risk. The sensitivity analysis was performed separately for eachof our market risk exposures related to our trading and other than trading portfolios. Thissensitivity analysis is an estimate and should not be viewed as predictive of our future financialperformance. Our actual losses in any particular year could exceed the amounts indicated in thefollowing paragraphs. Limitations related to this sensitivity analysis include: **•** the market risk information is limited by the assumptions and parametersestablished in creating the related sensitivity analysis, including the impact ofprepayment rates on mortgages; and  **•** the model assumes that the composition of assets and liabilities remainsunchanged throughout the year.Accordingly, we use such models as tools and not as a substitute for the experience and judgment ofour management.**Interest Rate Risk**Our exposure to interest rate changes results from our significant holdings of fixed maturitysecurities. Investments subject to interest rate risk are held in our other-than-trading portfolios. We are also exposed to interest rate risk from our two variableinterest credit agreements and from our policyholder deposits.**Equity Price Risk**Our investments in equity securities expose us to equity price risks, for which potential lossescould arise from adverse changes in the value of equity securities. Financial instruments subjectto equity prices risk are held in our trading and other-than-trading portfolios. Page 60

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 **Risk Measurement*****Trading Portfolio***Our trading securities are a source of market risk. As of December 31, 2006, our trading portfoliowas comprised of investments in publicly-traded common stocks. The securities in the tradingportfolio are believed by management to be high quality and are diversified across industries andreadily marketable. Trading securities are recorded at fair value, and changes in fair value areincluded in operations. The fair value of the investments in trading securities is exposed toequity price risk. Assuming an immediate decrease of 10% in the market value of these securities asof December 31, 2006 and 2005, the hypothetical loss in the fair value of these investments wouldhave been approximately $8.3 million and $7.8 million, respectively.***Other than Trading Portfolio***Our available-for-sale and held-to-maturity securities are also a source of market risk. As ofDecember 31, 2006 approximately 92% and 100% of our investments in available-for-sale andheld-to-maturity securities, respectively, consisted of fixed income securities. The remainingbalance of the available-for-sale portfolio is comprised of equity securities. Available-for-salesecurities are recorded at fair value and changes in the fair value of these securities, net of therelated tax effect, are excluded from operations and are reported as a separate component of othercomprehensive income (loss) until realized. Held-to-maturity securities are recorded at amortized costand adjusted for the amortization or accretion of premiums or discounts. The fair value of theinvestments in the other-than-trading portfolio is exposed to both interest rate risk and equityprice risk.*Interest Rate Risk*We have evaluated the net impact to the fair value of our fixed income investments of a significantone-time change in interest rate risk using a combination of both statistical and fundamentalmethodologies. From these shocked values a resultant market price appreciation/depreciation can bedetermined after portfolio cash flows are modeled and evaluated over instantaneous 100, 200 and 300basis point rate shifts. Techniques used in the evaluation of cash flows include Monte Carlosimulation through a series of probability distributions over 200 interest rate paths. Necessaryprepayment speeds are compiled using Salomon Brothers Yield Book, which sources numerous factors inderiving speeds, including but not limited to: historical speeds, economic indicators, streetconsensus speeds, etc. Securities evaluated by us under these scenarios include mortgagepass-through certificates and collateralized mortgage obligations of U.S. agencies, and privatelabel structures, provided that cash flows information is available. The following table setsforth the result of this analysis for the years ended December 31, 2006 and 2005.*(Dollar amounts in millions)*               **Expected** **Amount of** **%****Change in Interest Rates** **Fair Value** **Decrease** **Change**  **December 31, 2006:**            Base Scenario $749.7          +100 bp  716.6   (33.1)  (4.4)% +200 bp  685.8   (63.9)  (8.5)% +300 bp  657.1   (92.6)  (12.4)%  **December 31, 2005:**            Base Scenario $560.1          +100 bp  532.4   (27.7)  (4.9)% +200 bp  512.0   (48.1)  (8.6)% +300 bp  492.7   (67.4)  (12.0)% We believe that an interest rate shift in a 12-month period of 100 basis points represents amoderately adverse outcome, while a 200 basis point shift is significantly adverse and a 300 basispoint shift is unlikely given historical precedents. Although we classify 88% of our fixed incomesecurities as available-for-sale, our cash flows and the intermediate duration of our investmentportfolio should allow us to hold securities until maturity, thereby avoiding the recognition oflosses, should interest rates rise significantly. Page 61

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 *Equity Price Risk*Our equity securities in the available-for-sale portfolio are comprised primarily of stock ofseveral Puerto Rican financial institutions and mutual funds. Assuming an immediate decrease of10% in the market value of these securities as of December 31, 2006 and 2005, the hypothetical lossin the fair value of these investments would have been approximately $6.2 million and $5.2 million,respectively.***Other Risk Measurement***We are subject to interest rate risk on our two variable interest credit agreements and ourpolicyholder. Shifting interest rates do not have a material effect on the fair value of theseinstruments. The two credit agreements have a variable interest rate structure, which reduces thepotential exposure to interest rate risk. The policyholder deposits have short-term interest rateguarantees, which also reduce the accounts’ exposure to interest rate risk.We have an interest-rate related derivative instrument to manage the variability caused by interestrate changes in the cash flows of one of its credit agreements. This swap changes thevariable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Shiftinginterest rates have an effect on the fair value of the interest rate swap agreement. We assessinterest rate risk by monitoring changes in interest rate exposures that may adversely impact thefair value of the interest rate swap agreement. We monitor interest rate risk attributable to bothour outstanding or forecasted debt obligations as well as our offsetting hedge position. As ofDecember 31, 2006 and 2005, the estimated fair value of the interest rate swap amounted to $0.5million and $0.6 million, respectively, and was included within “other assets” in the consolidatedbalance sheets. Assuming an immediate decrease of 10% in period-end rates as of December 31, 2006and 2005, the hypothetical loss in the estimated fair value of the interest rate swap is estimatedto approximate $0.1 million and $0.1 million, respectively.We have invested in other derivative instruments with a market value of approximately $14.0 millionand $13.3 million as of December 31, 2006 and 2005 in order to diversify our investment insecurities and participate in foreign stock markets.In 2005, we invested in two structured note agreements amounting to $5.0 million each, under whichthe interest income received is linked to the performance of the Dow Jones Euro STOXX 50 and Nikkei225 Equity Indices (the Indices). Under these agreements the principal invested by us isprotected, the only amount that varies according to the performance of the Indices is the interestto be received upon the maturity of the instruments. Should the Indices experience a negativeperformance during the holding period of the structured notes, no interest will be received and noamount will be paid to the issuer of the structured notes. The contingent interest paymentcomponent within the structured note agreements meets the definition of an embedded derivative. Inaccordance with the provisions of SFAS No. 133, *Accounting for Derivative Instruments and CertainHedging Activities*, as amended, the embedded derivative component of the structured note isseparated from the structured notes and accounted for separately as a derivative instrument. Thederivative component of the structured notes exposes us to credit risk and market risk. We minimizecredit risk by entering into transactions with counterparties that we believe to be high-qualitybased on their credit ratings. The market risk is managed by establishing and monitoringparameters that limit the types and degree of market risk that may be undertaken. As of December31, 2006 and 2005, the fair value of the derivative component of the structured notes amounted to$6.3 million and $5.3 million, respectively, and is included within “other assets” in theconsolidated balance sheets. Assuming an immediate decrease of 10% in the period-end Indices as ofDecember 31, 2006 and 2005, the hypothetical loss in the estimated fair value of the derivativecomponent of the structured notes would have been approximately $0.6 million and $0.5 million,respectively The investment component of the structured notes, which had a fair value of $7.6million and $8.0 million as of December 31, 2006 and 2005, respectively, is accounted for as aheld-to-maturity debt security and is included within “investment in securities” in theconsolidated balance sheet and its risk measurement is evaluated along the other investments in “—Other Than Trading Portfolio” above.**Item 8. Financial Statements and Supplementary Data.****Financial Statements**For our audited consolidated financial statements as of December 31, 2006 and 2005 and for thethree years ended December 31, 2006 see Index to financial statements in “Item 15 — Exhibits andFinancial Statement Schedules” to this Annual Report on Form 10-K. Page 62

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 **Selected Quarterly Financial Data**For the selected quarterly financial data corresponding to the years 2006 and 2005, see note 27 ofthe audited consolidated financial statements as of December 31, 2006, 2005 and 2004.**Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.**None.**Item 9A. Controls and Procedures.**Management, with the participation of the Chief Executive Officer and Chief Financial Officer,has evaluated the effectiveness of the Corporation’s disclosure controls and procedures as ofDecember 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective as of December 31,2006.**Item 9B. Other Information.**On March 6, 2007, the Board of Directors approved an amendment to the Corporation’s Amended andRestated By-Laws. Under the amendments, shareholders may now submitproposals, including nominations for directors, for both annual andspecial meetings of share holders. The amendments also specify whenshareholder proposals, including nominations for directors, will beconsidered timely by the Corporation and modify the requirements forproperty submitted shareholder nominations of directors. Finally, theamendments specify the rules by which the Corporation will conductmeetings of shareholders. The amendments were effective on the dateof their adoption by the Board of Directors. The complete text ofthe Amended and Restated By-Laws of the Corporation is available in Exhibit 3(ii) included in thisAnnual Report on Form 10-K.**Part III****Item 10. Directors, Executive Officers and Corporate Governance.**For the Code of Business Conduct and Ethics adopted by Corporation, see Exhibits 14.1(a) and14.1(b) to this Annual Report on Form 10-K.The remaining information required by this item is incorporated by reference to the sections “Boardof Directors,” “Executive Officers”, “Other Relationships, Transactions and Events”, “Section 16(a)Beneficial Ownership Reporting Compliance”, “Standing Committees — Nominations Committee”, and“Standing Committees — Audit Committee”, included in the Corporation’s definitive ProxyStatement.**Item 11. Executive Compensation.**The information required by this item is incorporated by reference to the sections“Compensation Discussion and Analysis”, “Compensation Committee Report”, “Summary CompensationTable”, “Directors’ Compensation”, “Compensation Committee Interlocks and Insider Participation”,and “Compensation Committee Report” included in the Corporation’s definitive Proxy Statement.**Item 12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**The information required by this item is incorporated by reference to the sections “PrincipalShareholders” and “Stock Ownership of Directors and Executive Officers” included in theCorporation’s definitive Proxy Statement. Page 63

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 **Item 13. Certain Relationships and Related Transactions, and Director Independence.**The information required by this item is incorporated by reference to the section “OtherRelationships, Transactions and Events” and “Board of Directors Independence” included in theCorporation’s definitive Proxy Statement.**Item 14. Principal Accountant Fees and Services**The information required by this item is incorporated by reference to the section “Disclosureof Auditor’s Fees” included in the Corporation’s definitive Proxy Statement.**Item 15. Exhibits and Financial Statements Schedules.****Financial Statements and Schedules**   ***Financial Statements*** ***Description*** F-1 Report of Independent Registered Public Accounting Firm   F-2 Consolidated Balance Sheets as of December 31, 2006 and 2005   F-3 Consolidated Statements of Earnings for the years endedDecember 31, 2006, 2005 and 2004   F-4 Consolidated Statements of Stockholders’ Equity andComprehensive Income for the years ended December 31, 2006,2005 and 2004   F-5 Consolidated Statements of Cash Flows for the years endedDecember 31, 2006, 2005 and 2004   F-7 Notes to Consolidated Financial Statements — December 31,2006, 2005 and 2004   ***Financial Statements Schedules*** ***Description*** S-1 Schedule II — Condensed Financial Information of the Registrant   S-2 Schedule III — Supplementary Insurance Information   S-3 Schedule IV — Reinsurance   S-4 Schedule V — Valuation and Qualifying AccountsSchedule I — Summary of Investments was omitted because the information is disclosed in the notesto the audited consolidated financial statements. Schedule VI — Supplemental InformationConcerning Property Casualty Insurance Operations was omitted because the schedule is notapplicable to the Corporation.**Exhibits**   ***Exhibits*** ***Description***   3(i) Articles of Incorporation of Triple-S Management Corporation asamended (English Translation).   3(ii) By-Laws of Triple-S Management Corporation as amended (EnglishTranslation).   10.1 Puerto Rico Health Insurance Contract for the Metro-North Region(incorporated herein by reference to Exhibit 10.1 to TSM’sQuarterly Report on Form 10-Q for the Quarter Ended June 30, 2003(File No. 0-49762)). Page 64

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    ***Exhibits*** ***Description***   10.1 (a) Extension to the Puerto Rico Health Insurance Contract for theMetro-North Region (incorporated herein by reference to Exhibit10.1 to TSM’s Quarterly Report on Form 10-Q for the Quarter EndedSeptember 30, 2005 (File No. 0-49762)).   10.1 (b) Extension to the Puerto Rico Health Insurance Contract for theMetro-North Region, dated July 18, 2006, (incorporated herein byreference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Qfor the Quarter Ended June 30, 2006 (File No. 0-49762)).   10.1 (c) Extension to the Puerto Rico Health Insurance Contract for theMetro-North Region, dated October 31, 2006.   10.2 Puerto Rico Health Insurance Contract for the North Region(incorporated herein by reference to Exhibit 10.2 to TSM’sQuarterly Report on Form 10-Q for the Quarter Ended June 30, 2003(File No. 0-49762)).   10.2 (a) Extension to the Puerto Rico Health Insurance Contract for theNorth Region (incorporate herein by reference to Exhibit 10.2 toTSM’s Quarterly Report on Form 10-Q for the Quarter EndedSeptember 30, 2005 (File No. 0-49762)).   10.2 (b) Extension to the Puerto Rico Health Insurance Contract for theNorth Region, dated July 18, 2006, (incorporated herein byreference to Exhibit 10.2 to TSM’s Quarterly Report on Form 10-Qfor the Quarter Ended June 30, 2006 (File No. 0-49762)).   10.2 (c) Extension to the Puerto Rico Health Insurance Contract for theNorth Region, dated October 31, 2006.   10.3 Puerto Rico Health Insurance Contract for the South-West Region(incorporated herein by reference to Exhibit 10.3 to TSM’sQuarterly Report on Form 10-Q for the Quarter Ended June 30, 2003(File No. 0-49762)).   10.3 (a) Extension to the Puerto Rico Health Insurance Contract for theSouth-West Region (incorporate herein by reference to Exhibit10.3 to TSM’s Quarterly Report on Form 10-Q for the Quarter EndedSeptember 30, 2005 (File No. 0-49762)).   10.3 (b) Extension to the Puerto Rico Health Insurance Contract for theSouth-West Region, dated July 18, 2006, (incorporated herein byreference to Exhibit 10.2 to TSM’s Quarterly Report on Form 10-Qfor the Quarter Ended June 30, 2006 (File No. 0-49762)).   10.3 (c) Extension to the Puerto Rico Health Insurance Contract for theSouth-West Region, dated October 31, 2006.   10.4 Federal Employees Health Benefits Contract (incorporated hereinby reference to Exhibit 10.5 to TSM’s General Form ofRegistration of Securities on Form 10 (File No. 0-49762)).   10.5 Credit Agreement with FirstBank Puerto Rico in the amount of$41,000,000 (incorporated herein by reference to Exhibit 10.6 toTSM’s General Form of Registration of Securities on Form 10 (FileNo. 0-49762)).   10.6 Credit Agreement with FirstBank Puerto Rico in the amount of$20,000,000 (incorporated herein by reference to Exhibit 10.7 toTSM’s General Form of Registration of Securities on Form 10 (FileNo. 0-49762)).   10.7 Non-Contributory Retirement Program (incorporated herein byreference to Exhibit 10.8 to TSM’s General Form of Registrationof Securities on Form 10 (File No. 0-49762)).   10.8 License and other Agreements with Blue Shield (incorporatedherein by reference to Exhibit 10.10 to TSM’s General Form ofRegistration of Securities on Form 10 (File No. 0-49762)).   10.9 Employment Contract with Dr. Francisco Joglar-Pesquera(incorporated herein by reference to Exhibit 10.2 to TSM’sQuarterly Report on Form 10-Q Page 65

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    ***Exhibits*** ***Description***     for the Quarter Ended June 30, 2005 (File No. 0-49762)).   10.10 Stock Purchase Agreement by and between Triple-S ManagementCorporation and Great American Financial Resources, Inc. datedDecember 15, 2005 (incorporated herein by reference to Exhibit10.1 to TSM’s Current Report on Form 8-K filed on December 21,2005 (File No. 0-49762)).   10.11 Reinsurance Agreement between Great American Life AssuranceCompany of Puerto Rico and Seguros de Vida Triple-S, Inc. datedDecember 15, 2005 (incorporated herein by reference to Exhibit10.14 to TSM’s Annual Report on Form 10-K for the year endedDecember 31, 2005 (File No. 0-49762)).   10.12 6.30% Senior Unsecured Notes Due September 2019 Note PurchaseAgreement, dated September 30, 2004, between Triple-S ManagementCorporation, Triple-S, Inc. and various institutional accreditedinvestors (incorporated herein by reference to Exhibit 10.15 toTSM’s Annual Report on Form 10-K for the year ended December 31,2005 (File No. 0-49762)).   10.13 6.60% Senior Unsecured Notes Due December 2020 Note PurchaseAgreement, dated December 15, 2005, between Triple-S ManagementCorporation and various institutional accredited investors(incorporated herein by reference to Exhibit 10.16 to TSM’sAnnual Report on Form 10-K for the year ended December 31, 2005(File No. 0-49762)).   10.14 6.70% Senior Unsecured Notes Due December 2021 Note PurchaseAgreement, dated January 23, 2006, between Triple-S ManagementCorporation and various institutional accredited investors(incorporated herein by reference to Exhibit 10.1 to TSM’sQuarterly Report on Form 10-Q for the Quarter Ended March 31,2006 (File No. 0-49762)).   11.1 Statement re computation of per share earnings; an exhibitdescribing the computation of the earnings per share for theyears ended December 31, 2006, 2005 and 2004 has been omitted asthe detail necessary to determine the computation of earnings pershare can be clearly determined from the notes to theconsolidated financial statements.   12.1 Statement re computation of ratios; an exhibit describing thecomputation of the loss ratio, expense ratio and combined ratiofor the years ended December 31, 2006, 2005 and 2004 has beenomitted as the detail necessary to determine the computation ofearnings per share can be clearly determined from the materialcontained in Part II of this Annual Report on Form 10-K.   14.1 (a) Code of Business Conduct and Ethics   14.1 (b) Code of Ethics for Senior Financial Officers   21.1 List of Subsidiaries of the Corporation.   31.1 Certification of the President and Chief Executive Officerrequired by Rule 13a-14(a)/15d-14(a).   31.2 Certification of the Vice President of Finance and ChiefFinancial Officer required by Rule 13a-14(a)/15d-14(a).   32.1 Certification of the President and Chief Executive Officerrequired pursuant to 18 U.S. Section 1350.   32.2 Certification of the Vice President of Finance and ChiefFinancial Officer required pursuant to 18 U.S. Section 1350.All other exhibits for which provision is made in the applicable accounting regulation of theUnited States Securities and Exchange Commission are not required under the related instructions orare inapplicable, and therefore have been omitted. Page 66

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 **SIGNATURES**Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.           **Triple-S Management Corporation**