Edgar Filing: TRIPLE-S MANAGEMENT CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2015

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

For the transition period from___to___

COMMISSION FILE NUMBER: 001-33865

Triple-S Management Corporation

Puerto Rico		66-0555678
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico		00920
(Address of principal executive offices)		(Zip code)

(787) 749-4949

(Registrant’s telephone number, including area code)

Not applicable

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

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

☑Yes ☐No

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

☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	Smaller reporting company ☐

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

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

Title of each class		Outstanding at September 30, 2015
Common Stock Class A, $1.00 par value		2,377,689
Common Stock Class B, $1.00 par value		22,970,356

Table of Contents

Triple-S Management Corporation

FORM 10-Q

For the Quarter Ended September 30, 2015

Table of Contents

Part I – Financial Information			3

	Item 1.	Financial Statements	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Cautionary Statement Regarding Forward-Looking Information		35
	Overview		35
	Recent Developments		37
	Recent Accounting Standards		38
	Managed Care Membership		38
	Consolidated Operating Results		39
	Managed Care Operating Results		42
	Life Insurance Operating Results		45
	Property and Casualty Operating Results		47
	Liquidity and Capital Resources		49

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

	Item 4.	Controls and Procedures	51

Part II – Other Information			51

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 3.	Defaults Upon Senior Securities	52

	Item 4.	Mine Safety Disclosures	52

	Item 5.	Other Information	52

	Item 6.	Exhibits	52

SIGNATURES			53

Table of Contents

Part I – Financial Information

Item 1.

Financial Statements

Triple-S Management Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(Dollar amounts in thousands, except per share data)

	September 30, 2015			December 31, 2014
Assets
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities	$	1,114,962		$	1,115,899
Equity securities		201,959			197,756
Securities held to maturity, at amortized cost:
Fixed maturities		2,927			2,944
Policy loans		7,758			7,260
Cash and cash equivalents		194,457			110,037
Total investments and cash		1,522,063			1,433,896
Premiums and other receivables, net		282,758			315,622
Deferred policy acquisition costs and value of business acquired		187,028			184,100
Property and equipment, net		73,849			78,343
Deferred tax asset		70,520			68,695
Goodwill		25,397			25,397
Other assets		53,200			39,683
Total assets	$	2,214,815		$	2,145,736
Liabilities and Stockholders' Equity
Claim liabilities	$	472,981		$	390,086
Liability for future policy benefits		345,703			328,293
Unearned premiums		78,440			82,656
Policyholder deposits		116,588			118,912
Liability to Federal Employees' Health Benefits Program (FEHBP)		23,698			15,666
Accounts payable and accrued liabilities		180,036			162,458
Deferred tax liability		21,561			28,456
Long-term borrowings		62,237			74,467
Liability for pension benefits		82,507			86,716
Total liabilities		1,383,751			1,287,710
Stockholders’ equity:
Triple-S Management Corporation stockholders' equity
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 2,377,689 at September 30, 2015 and December 31, 2014, respectively		2,378			2,378
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 22,970,356 and 24,654,497 shares at September 30, 2015 and December 31, 2014, respectively		22,970			24,654
Additional paid-in capital		87,623			121,405
Retained earnings		699,301			661,345
Accumulated other comprehensive income		19,409			48,776
Total Triple-S Management Corporation stockholders' equity		831,681			858,558
Non-controlling interest in consolidated subsididary		(617	)		(532	)
Total stockholders' equity		831,064			858,026
Total liabilities and stockholders’ equity	$	2,214,815		$	2,145,736

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

Triple-S Management Corporation

Condensed Consolidated Statements of Earnings (Unaudited)

(Dollar amounts in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2015			2014		2015			2014
Revenues:
Premiums earned, net	$	746,718		$	520,766	$	2,033,383		$	1,606,353
Administrative service fees		6,163			30,253		39,835			89,509
Net investment income		10,618			11,816		32,534			35,314
Other operating revenues		862			939		2,656			3,283
Total operating revenues		764,361			563,774		2,108,408			1,734,459
Net realized investment gains (losses):
Total other-than-temporary impairment losses on securities		(1,627	)		-		(4,489	)		(462	)
Net realized gains, excluding other-than-temporary impairment losses on securities		66			3,108		19,748			7,624
Total net realized investment gains (losses) on sale of securities		(1,561	)		3,108		15,259			7,162
Other income, net		2,289			367		5,131			1,188
Total revenues		765,089			567,249		2,128,798			1,742,809
Benefits and expenses:
Claims incurred		634,909			433,853		1,705,237			1,311,601
Operating expenses		125,887			121,036		380,086			369,992
Total operating costs		760,796			554,889		2,085,323			1,681,593
Interest expense		1,979			2,273		6,235			6,974
Total benefits and expenses		762,775			557,162		2,091,558			1,688,567
Income before taxes		2,314			10,087		37,240			54,242
Income tax expense (benefit)		(1,850	)		5,432		(631	)		15,205
Net income		4,164			4,655		37,871			39,037
Less: Net loss attributable to non-controlling interest		30			68		85			117
Net income attributable to Triple-S Management Corporation	$	4,194		$	4,723	$	37,956		$	39,154
Earnings per share attributable to Triple-S Management Corporation
Basic net income per share	$	0.17		$	0.17	$	1.46		$	1.44
Diluted net income per share	$	0.16		$	0.17	$	1.46		$	1.44

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

Triple-S Management Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollar amounts in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net income	$	4,164		$	4,655		$	37,871		$	39,037
Other comprehensive income (loss), net of tax:
Net unrealized change in fair value of available for sale securities, net of taxes		(4,821	)		(6,789	)		(32,071	)		34,593
Defined benefit pension plan:
Actuarial loss, net		1,016			622			2,919			1,976
Prior service credit, net		(77	)		(68	)		(215	)		(212	)
Total other comprehensive income (loss), net of tax		(3,882	)		(6,235	)		(29,367	)		36,357
Comprehensive income (loss)		282			(1,580	)		8,504			75,394
Comprehensive loss attributable to non-controlling interest		30			68			85			117
Comprehensive income (loss) attributable to Triple-S Management Corporation	$	312		$	(1,512	)	$	8,589		$	75,511

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

Triple-S Management Corporation

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollar amounts in thousands)

	2015			2014
Balance at January 1	$	858,558		$	785,381
Share-based compensation		5,520			1,617
Stock issued upon the exercise of stock options		179			2,885
Repurchase and retirement of common stock		(41,165	)		(9,044	)
Comprehensive income		8,589			75,511
Total Triple-S Management Corporation stockholders' equity		831,681			856,350
Non-controlling interest in consolidated subsididary		(617	)		(295	)
Balance at September 30	$	831,064		$	856,055

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

Triple-S Management Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands)

	Nine months ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	37,871		$	39,037
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,031			15,974
Net amortization of investments		4,956			4,597
Additions to the allowance for doubtful receivables		11,425			5,968
Deferred tax benefit		(5,140	)		676
Net realized investment gain on sale of securities		(15,259	)		(7,162	)
Share-based compensation		5,520			1,617
(Increase) decrease in assets:
Premium and other receivables, net		10,983			(4,400	)
Deferred policy acquisition costs and value of business acquired		(2,928	)		(3,272	)
Deferred taxes		869			390
Other assets		(13,602	)		5,830
Increase (decrease) in liabilities:
Claim liabilities		82,895			(20,614	)
Liability for future policy benefits		17,410			17,893
Unearned premiums		(4,216	)		(5,618	)
Policyholder deposits		2,557			2,621
Liability to FEHBP		8,032			5,720
Accounts payable and accrued liabilities		18,066			1,548
Net cash provided by operating activities		171,470			60,805

(Continued)

Table of Contents

Triple-S Management Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands)

	Nine months ended September 30,
	2015			2014
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold	$	307,545		$	150,049
Fixed maturities matured/called		38,323			27,892
Equity securities sold		81,176			70,803
Securities held to maturity - fixed maturities matured/called		639			2,929
Other investments		-			8,925
Acquisition of investments:
Securities available for sale:
Fixed maturities		(360,588	)		(211,129	)
Equity securities		(81,901	)		(23,731	)
Securities held to maturity - fixed maturities		(623	)		(865	)
Other investments		(2,139	)		(583	)
Net outflows from policy loans		(498	)		(352	)
Net capital expenditures		(5,628	)		(3,801	)
Net cash used in (provided by) investing activities		(23,694	)		20,137
Cash flows from financing activities:
Change in outstanding checks in excess of bank balances		(5,262	)		(6,754	)
Repayments of long-term borrowings		(12,230	)		(1,486	)
Repurchase and retirement of common stock		(40,983	)		(5,995	)
Proceeds from policyholder deposits		5,587			6,413
Surrenders of policyholder deposits		(10,468	)		(6,436	)
Net cash used in financing activities		(63,356	)		(14,258	)
Net increase in cash and cash equivalents		84,420			66,684
Cash and cash equivalents:
Beginning of period		110,037			74,356
End of period	$	194,457		$	141,040

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(1)	Basis of Presentation

The accompanying condensed consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited. In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries. The condensed consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

In the opinion of management, all adjustments, consisting of a normal recurring nature necessary for a fair presentation of such condensed consolidated interim financial statements, have been included. The results of operations for the three months and nine months ended September 30, 2015 are not necessarily indicative of the results for the full year ending December 31, 2015.

(2)	Recent Accounting Standards

On April 7, 2015, the Financial Accounting Standards Board (FASB) issued guidance addressing the different balance sheet presentation requirements for debt issuance costs and debt discount and premiums. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not significantly affected. This guidance is effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2015. We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial position or results of operations.

On May 1, 2015, the FASB issued guidance addressing the current diversity in practice regarding the manner in which certain investments measured at net asset value with redemption dates in the future, including periodic redemption dates, are categorized within the fair value hierarchy. This guidance eliminates the requirement to categorize within the fair value hierarchy investments for which fair values are measured at net asset value using the practical expedient. Additionally, it eliminates the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value practical expedient. This guidance is effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2015. We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial position or results of operations.

On May 21, 2015, the FASB issued guidance to make targeted improvements to short-duration insurance contracts requiring insurance entities to disclose for annual reporting periods, among other information about the liability for unpaid claims and claim adjustment expenses, (1) incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years, including the most recent reporting period presented in the statement of financial position). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary information; and (2) for each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies). On August 12, 2015, the FASB issued guidance deferring the effective date of the above described amendments. This guidance is now effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2017. We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial position or results of operations.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the three months and nine months ended September 30, 2015 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.

(3)	Investment in Securities

The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for available-for-sale and held-to-maturity securities by major security type and class of security at September 30, 2015 and December 31, 2014, were as follows:

	September 30, 2015
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Securities available for sale:
Fixed maturities:
Obligations of government-sponsored enterprises	$	115,932	$	1,123	$	-		$	117,055
U.S. Treasury securities and obligations of U.S. government instrumentalities		171,488		1,616		-			173,104
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		25,235		270		-			25,505
Municipal securities		598,659		40,984		(94	)		639,549
Corporate bonds		119,541		12,549		-			132,090
Residential mortgage-backed securities		948		61		-			1,009
Collateralized mortgage obligations		25,923		729		(2	)		26,650
Total fixed maturities		1,057,726		57,332		(96	)		1,114,962
Equity securities - mutual funds		179,893		23,081		(1,015	)		201,959
Total	$	1,237,619	$	80,413	$	(1,111	)	$	1,316,921

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2014
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Securities available for sale:
Fixed maturities:
Obligations of government-sponsored enterprises	$	129,649	$	1,014	$	(19	)	$	130,644
U.S. Treasury securities and obligations of U.S. government instrumentalities		94,480		648		(28	)		95,100
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		35,115		138		-			35,253
Municipal securities		585,088		49,181		(50	)		634,219
Corporate bonds		147,224		17,744		(134	)		164,834
Residential mortgage-backed securities		6,808		311		-			7,119
Collateralized mortgage obligations		46,921		1,809		-			48,730
Total fixed maturities		1,045,285		70,845		(231	)		1,115,899
Equity securities - mutual funds		150,799		47,049		(92	)		197,756
Total	$	1,196,084	$	117,894	$	(323	)	$	1,313,655

	September 30, 2015
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities held to maturity:
U.S. Treasury securities and obligations of U.S. government instrumentalities	$	621	$	197	$	-	$	818
Residential mortgage-backed securities		191		17		-		208
Certificates of deposit		2,115		-		-		2,115
Total	$	2,927	$	214	$	-	$	3,141

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2014
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities held to maturity:
U.S. Treasury securities and obligations of U.S. government instrumentalities	$	622	$	198	$	-	$	820
Residential mortgage-backed securities		217		21		-		238
Certificates of deposit		2,105		-		-		2,105
Total	$	2,944	$	219	$	-	$	3,163

Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2015 and December 31, 2014 were as follows:

	September 30, 2015
	Less than 12 months							12 months or longer						Total
	Estimated Fair Value		Gross Unrealized Loss			Number of Securities		Estimated Fair Value		Gross Unrealized Loss		Number of Securities		Estimated Fair Value		Gross Unrealized Loss			Number of Securities
Securites available for sale:
Fixed maturities:
Municipal securities	$	23,340	$	(94	)		4	$	-	$	-		-	$	23,340	$	(94	)		4
Collateralized mortgage obligations		1,621		(2	)		1		-		-		-		1,621		(2	)		1
Total fixed maturities		24,961		(96	)		5		-		-		-		24,961		(96	)		5
Equity securities - mutual funds		40,286		(1,015	)		8		-		-		-		40,286		(1,015	)		8
Total for securities available for sale	$	65,247	$	(1,111	)		13	$	-	$	-		-	$	65,247	$	(1,111	)		13

	December 31, 2014
	Less than 12 months							12 months or longer							Total
	Estimated Fair Value		Gross Unrealized Loss			Number of Securities		Estimated Fair Value		Gross Unrealized Loss			Number of Securities		Estimated Fair Value		Gross Unrealized Loss			Number of Securities
Securites available for sale:
Fixed maturities:
Obligations of government-sponsored enterprises	$	43,105	$	(19	)		2	$	-	$	-			-	$	43,105	$	(19	)		2
U.S. Treasury securities and obligations of U.S. governmental instrumentalities		39,966		(28	)		2		-		-			-		39,966		(28	)		2
Municipal securities		6,749		(24	)		3		6,693		(26	)		3		13,442		(50	)		6
Corporate bonds		17,053		(50	)		4		20,405		(84	)		4		37,458		(134	)		8
Total fixed maturities		106,873		(121	)		11		27,098		(110	)		7		133,971		(231	)		18
Equity securities - mutual funds		7,773		(92	)		2		-		-			-		7,773		(92	)		2
Total for securities available for sale	$	114,646	$	(213	)		13	$	27,098	$	(110	)		7	$	141,744	$	(323	)		20

The Corporation regularly monitors and evaluates the difference between the amortized cost and estimated fair value of investments. For investments with a fair value below amortized cost, the process includes evaluating: (1) the length of time and the extent to which the estimated fair value has been less than amortized cost for fixed maturity securities, or cost for equity securities, (2) the financial condition, near-term and long-term prospects for the issuer, including relevant industry conditions and trends, and implications of rating agency actions, (3) the Company’s intent to sell or the likelihood of a required sale prior to recovery, (4) the recoverability of principal and interest for fixed maturity securities, or cost for equity securities, and (5) other factors, as applicable. This process is not exact and requires further consideration of risks such as credit and interest rate risks. Consequently, if an investment’s cost exceeds its estimated fair value solely due to changes in interest rates, other-than temporary impairment may not be appropriate.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Due to the subjective nature of the Corporation’s analysis, along with the judgment that must be applied in the analysis, it is possible that the Corporation could reach a different conclusion whether or not to impair a security if it had access to additional information about the investee. Additionally, it is possible that the investee’s ability to meet future contractual obligations may be different than what the Corporation determined during its analysis, which may lead to a different impairment conclusion in future periods.

If after monitoring and analyzing impaired securities, the Corporation determines that a decline in the estimated fair value of any available-for-sale or held-to-maturity security below cost is other-than-temporary, the carrying amount of the security is reduced to its fair value in accordance with current accounting guidance. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.

The Corporation’s process for identifying and reviewing invested assets for other-than temporary impairments during any quarter includes the following:

•

Identification and evaluation of securities that have possible indications of other-than-temporary impairment, which includes an analysis of all investments with gross unrealized investment losses that represent 20% or more of their cost and all investments with an unrealized loss greater than $100.

•

Review and evaluation of any other security based on the investee’s current financial condition, liquidity, near-term recovery prospects, implications of rating agency actions, the outlook for the business sectors in which the investee operates and other factors. This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of their cost.

•	Consideration of evidential matter, including an evaluation of factors or triggers that may or may not cause individual investments to qualify as having other-than-temporary impairments.

•	Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision; and

•	Equity securities are considered to be impaired when a position is at an unrealized loss for a period longer than 6 months.

The Corporation reviews the investment portfolios under the Corporation’s impairment review policy. Given market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and material other-than-temporary impairments may be recorded in future periods. The Corporation from time to time may sell investments as part of its asset/liability management process or to reposition its investment portfolio based on current and expected market conditions.

Municipal Securities: The unrealized losses on the Corporation’s investments in U.S. municipal securities were mainly caused by fluctuations in interest rates and general market conditions. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. In addition, these investments have investment grade ratings. Because the decline in fair value is attributable to changes in interest rates and not credit quality; because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

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

Equity securities - mutual funds: Investments in mutual funds with an unrealized loss as of September 30, 2015 are not considered other-than-temporarily impaired because the funds have been in an unrealized loss position for less than six months or the unrealized loss is small (less than $100 and/or 20%). During the three months and nine months ended September 30, 2015, we recorded an other-than-temporary impairment for a total amount of $479 on positions which were at an unrealized loss for a period longer than six months.

Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: Our holdings in Puerto Rico municipals can be divided in (1) escrowed bonds with a fair value of $16,088 and a gross unrealized gain of $45, and (2) bonds issued by the Puerto Rico Sales Tax Financing Corporation (Cofina) with a fair value of $9,417 and a gross unrealized gain of $225 after the other-than-temporary impairment on some of the Cofina holdings.

Besides holdings in escrowed bonds, which are backed by US Government securities and therefore have an implicit AA+/Aaa rating, our exposure is in senior lien bonds issued by Cofina. Below we will discuss the Cofina structure and security, recent events and our impairment conclusion.

Cofina bonds are backed by a sales tax levied on the island, which effective July 1, 2015 was increased to 11.5% from an original rate of 7%. The revenue of the incremental rate of 450 basis points flows directly into the General Fund of the Commonwealth. The revenue of the original rate of 7% follows the flow of funds as described below. Effective October 1, 2015, a 4% sales tax on services provided between businesses and on professional services was introduced.

Of the original 7% tax rate, 1.5% is a separated revenue stream for municipalities. Of the remaining 5.5%, the larger of 2.75% or a base amount is pledged to the sales tax bonds. In terms of flow of funds, the 5.5% remaining revenue is first used for debt service on senior lien bonds, then for debt service on subordinate bonds and the excess flows into the General Fund. Effective for government fiscal year 2015-16, the flow of funds has been somewhat revised to benefit Cofina. The municipality portion of 0.5% is first directed to Cofina in order to satisfy the above mentioned base amount. Once this base amount is reached, the municipality portion catches up by receiving the amounts which were previously diverted towards Cofina.

Sales tax revenues are dependent on the Puerto Rico economic situation and the sales tax base amount mentioned above would need to grow over time to cover debt service, especially to cover the longer maturities. However, the Company mostly owns shorter duration Cofina senior bonds, for which debt service coverage based on current revenues is ample.

According to the Government Development Bank, legal opinions from the Puerto Rico’s Secretary of Justice, Bond Counsel and Underwriters’ Counsel, pledged sales tax revenues do not constitute available resources of the Commonwealth. In other words, these revenues are not subject to the so called Puerto Rico general obligations (GO) debt “clawback” under the Commonwealth’s constitution, which provides that certain revenues used to support various bond issues are available to be applied first to the payment of GO debt if needed. This suggests that Cofina bonds could be somewhat isolated from the other Puerto Rico credits.

General Obligation bonds and Cofina are generally considered to have the strongest legal protections. However, it seems that the Puerto Rico government is moving towards a consolidated debt restructuring across all issuers (see below). Cofina could either be directly included in this restructuring or the GO bond holders could challenge the separation of the sales tax revenue stream.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Despite various initiatives to improve its fiscal situation, more recently the Puerto Rico Government has changed its historical position and indicated that it is unable to support its debt burden. A study of the financial situation by former officials at the International Monetary Fund and the World Bank, published in June 2015, concluded that the debt load is unsustainable and that a debt restructuring can no longer be avoided. Subsequently, Puerto Rico’s Governor said that the debt was “not payable” and that the Puerto Rico Government would probably seek significant concessions from all of the island’s creditors, which could include deferring some debt payments for a number of years. The Governor also appointed a working group, which is asked to devise fiscal reforms and work on a debt restructuring.

As a first step towards debt restructuring, the Government held a meeting with creditors on July 14, 2015, but offered no specifics with regards to which obligations might be restructured. Officials acknowledged the need for capital market access, indicated that liquidity would be very tight in the beginning of the new fiscal year and mentioned that certain measures had been taken, including the issuance of $400,000 TRANs to certain Government entities and advances from Puerto Rico’s retirement system. Despite these measures, on August 1, 2015, the Puerto Rico Public Finance Corporation failed to remit enough cash to its paying agent to satisfy its entire debt service obligation. This is the first time that Puerto Rico has defaulted on any of its bonded debt obligations, showing its constrained liquidity position.

On September 9, 2015, the working group published its Fiscal and Economic Growth plan, which detailed a $27,800,000 cumulative financing gap over the next 5 fiscal years. The report contains recommendations to reduce this gap to $14,000,000 through revenue increases, expenditure reductions and measures to stimulate economic growth. However, the working group notes that these recommendations are subject to significant political and execution risks. Moreover, the report states that even if projected results are achieved, the Commonwealth cannot meet all of its debt service requirements as currently scheduled due to a lack of liquidity. According to the working group plan, the Commonwealth projects that it will exhaust its liquidity in November 2015.

The report further outlines the need for a broad debt restructuring, which includes General Obligation and Cofina debt. Since this is likely to be difficult, particularly in the absence of a legal framework, the working group recommends the Commonwealth to make a voluntary exchange offer to its creditors. As a reaction to the report, S&P downgraded General Obligation bonds and Cofina to CC, combined with a negative outlook.

The working group report also mentions that even if certain revenues are clawed back from tax-supported debt (i.e. Cofina), available resources may be insufficient to service all principal and interest on debt that has Constitutional priority (i.e. General Obligation bonds). This statement implies that Cofina debt and revenues are treated as that of the Commonwealth. In other words, Cofina revenues would be subject to “clawback”, contrary to prior stated opinions.

On September 24, 2015, a document was released by the working group, detailing an overview of the proposed restructuring process and the restructuring principles. In line with previous recommendations, it proposes a voluntary exchange offer and a single comprehensive transaction, including creditors of many entities. Constitutional priority of General Obligation debt is again mentioned.

On October 15, 2015, the Governor and the working group introduced legislation to create the Puerto Rico Fiscal Oversight and Economic Recovery Board (the Oversight Board). It is expected that along with the working group, the Oversight Board will facilitate a return to long-term fiscal sustainability and economic growth and provide Puerto Rico’s creditors with assurance that conditions agreed to as part of any comprehensive debt restructuring agreement, as well as compliance with the working group’s Fiscal and Economic Growth Plan (FEGP), will be monitored by an independent, non-political body. This Act will require the working group to submit a proposed Commonwealth-wide, consolidated five-year fiscal and economic growth plan to the Oversight Board for approval at the later of the end of the second quarter of 2016 or after all of the members of the Oversight Board have taken office.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

We considered our investments in Cofina bonds other-than-temporarily impaired as of September 30, 2015, because: (a) the financial position of the Commonwealth has deteriorated further, evidenced by a lack of liquidity and market access, and (b) the Puerto Rico government is moving towards a consolidated debt restructuring, which could include Cofina or could jeopardize the separation of the sales tax revenue stream. As a result, during the three months and nine months ended September 30, 2015, we recorded an other-than-temporary impairment related to these positions amounting to $1,148 and $4,010, respectively.

Maturities of investment securities classified as available for sale and held to maturity at September 30, 2015 were as follows:

	September 30, 2015
	Amortized cost		Estimated fair value
Securities available for sale:
Due in one year or less	$	39,481	$	39,936
Due after one year through five years		342,844		349,685
Due after five years through ten years		131,785		140,820
Due after ten years		516,745		556,862
Residential mortgage-backed securities		948		1,009
Collateralized mortgage obligations		25,923		26,650
	$	1,057,726	$	1,114,962
Securities held to maturity:
Due in one year or less	$	2,115	$	2,115
Due after ten years		621		818
Residential mortgage-backed securities		191		208
	$	2,927	$	3,141

Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Information regarding realized and unrealized gains and losses from investments for the three months and nine months ended September 30, 2015 and 2014 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Realized gains (losses):
Fixed maturity securities:
Securities available for sale:
Gross gains from sales	$	868		$	1,600		$	7,205		$	3,303
Gross losses from sales		(136	)		(1,934	)		(540	)		(3,891	)
Gross losses from other-than-temporary impairments		(1,148	)		-			(4,010	)		(462	)
Total debt securities		(416	)		(334	)		2,655			(1,050	)
Equity securities:
Securities available for sale:
Gross gains from sales		126			3,488			14,000			8,104
Gross losses from sales		(792	)		(46	)		(917	)		(1,317	)
Gross losses from other-than-temporary impairments		(479	)		-			(479	)		-
Total equity securities		(1,145	)		3,442			12,604			6,787
Net realized gains (losses) on securities available for sale		(1,561	)		3,108			15,259			5,737
Gross gain from other investment		-			-			-			1,425
Net realized investment gains (losses)	$	(1,561	)	$	3,108		$	15,259		$	7,162

The other-than-temporary impairments on fixed maturity securities are attributable to credit losses. The other-than-temporary impairments on equity securities are attributable to broad equity market movement.

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Changes in net unrealized gains (losses):
Recognized in accumulated other comprehensive income:
Fixed maturities – available for sale	$	6,379		$	(2,873	)	$	(13,378	)	$	37,044
Equity securities – available for sale		(12,018	)		(5,783	)		(24,891	)		3,164
	$	(5,639	)	$	(8,656	)	$	(38,269	)	$	40,208
Not recognized in the consolidated financial statements:
Fixed maturities – held to maturity	$	15		$	3		$	(5	)	$	16

The deferred tax asset (liability) on unrealized gains (losses) change recognized in accumulated other comprehensive income during the nine months ended September 30, 2015 and 2014 was $6,198 and ($5,615), respectively.

As of September 30, and December 31, 2014, no individual investment in securities exceeded 10% of stockholders’ equity.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The components of net investment income were as follows:

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Fixed maturities	$	9,012	$	9,587	$	26,953	$	28,826
Equity securities		1,169		1,850		4,293		5,466
Policy loans		146		150		412		408
Cash equivalents and interest-bearing deposits		26		39		89		65
Other		265		190		787		549
Total	$	10,618	$	11,816	$	32,534	$	35,314

(4)	Premiums and Other Receivables, Net

Premiums and other receivables, net as of September 30, 2015, and December 31, 2014 were as follows:

	September 30, 2015		December 31, 2014
Premiums	$	107,097	$	131,496
Self-insured group receivables		64,365		62,189
FEHBP		12,303		12,384
Agent balances		22,720		25,300
Accrued interest		10,841		11,737
Reinsurance recoverable		47,360		50,686
Unsettled sales		-		10,456
Other		52,051		47,742
		316,737		351,990
Less allowance for doubtful receivables:
Premiums		25,364		28,983
Other		8,615		7,385
		33,979		36,368
Total premiums and other receivables, net	$	282,758	$	315,622

As of September 30, 2015 and December 31, 2014, the Company had premiums and other receivables of $82,412 and $89,904, respectively, from the Government of Puerto Rico, including its agencies, municipalities and public corporations. The related allowance for doubtful receivables as of September 30, 2015 and December 31, 2014 were $18,955 and $11,614, respectively.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(5)	Fair Value Measurements

Assets recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by current accounting guidance for fair value measurements and disclosures, are as follows:

Level Input:		Input Definition:
Level 1		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2		Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

Level 3		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The Corporation uses observable inputs when available. Fair value is based upon quoted market prices when available. The Corporation limits valuation adjustments to those deemed necessary to ensure that the security’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.

The fair value of investment securities is estimated based on quoted market prices for those or similar investments. Additional information pertinent to the estimated fair value of investment in securities is included in note 3.

The following tables summarize fair value measurements by level at September 30, 2015 and December 31, 2014 for assets measured at fair value on a recurring basis:

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Securities available for sale:
Fixed maturity securities
Obligations of government-sponsored enterprises	$	-	$	117,055	$	-	$	117,055
U.S. Treasury securities and obligations of U.S government instrumentalities		173,104		-		-		173,104
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		-		25,505		-		25,505
Municipal securities		-		639,549		-		639,549
Corporate bonds		-		132,090		-		132,090
Residential agency mortgage-backed securities		-		1,009		-		1,009
Collateralized mortgage obligations		-		26,650		-		26,650
Total fixed maturities		173,104		941,858		-		1,114,962
Equity securities - mutual funds		173,778		19,005		9,176		201,959

Total	$	346,882	$	960,863	$	9,176	$	1,316,921

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Securities available for sale:
Fixed maturity securities
Obligations of government-sponsored enterprises	$	-	$	130,644	$	-	$	130,644
U.S. Treasury securities and obligations of U.S government instrumentalities		95,100		-		-		95,100
Obligations of the Commonwealth of Puerto Rico and its instrumentalities		-		35,253		-		35,253
Municipal securities		-		634,219		-		634,219
Corporate bonds		-		164,834		-		164,834
Residential agency mortgage-backed securities		-		7,119		-		7,119
Collateralized mortgage obligations		-		48,730		-		48,730
Total fixed maturities		95,100		1,020,799		-		1,115,899
Equity securities - mutual funds		160,461		23,946		13,349		197,756

Total	$	255,561	$	1,044,745	$	13,349	$	1,313,655

The fair value of fixed maturity and equity securities included in the Level 2 category were based on market values obtained from independent pricing services, which utilize evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and when available loan performance data. Because many fixed income securities do not trade on a daily basis, the models used by independent pricing service providers to prepare evaluations apply available information, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. The independent pricing service providers monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The fair value of the investments in partnerships included in the Level 3 category was based on the net asset value (NAV) which is affected by the changes in the fair market value of the investments held in these partnerships.

Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. Transfers between levels, if any, are recorded as of the actual date of the event or change in circumstance that caused the transfer. There were no transfers in and/or out of Level 3 and between Levels 1 and 2 during the three months and nine months ended September 30, 2015 and 2014.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2015 and 2014 is as follows:

	Three months ended
	September 30, 2015								September 30, 2014
	Fixed Maturity Securities		Equity Securities			Total			Fixed Maturity Securities		Equity Securities			Total
Beginning balance	$	-	$	9,083		$	9,083		$	-	$	16,859		$	16,859
Realized gains		-		125			125			-
Unrealized gain (loss) in other accumulated comprehensive income		-		18			18			-		(962	)		(962	)
Capital distributions		-		(175	)		(175	)		-		(2,676	)		(2,676	)
Purchases		-		125			125			-		233			233
Ending balance	$	-	$	9,176		$	9,176		$	-	$	13,454		$	13,454

	Nine months ended
	September 30, 2015								September 30, 2014
	Fixed Maturity Securities		Equity Securities			Total			Fixed Maturity Securities		Equity Securities			Total
Beginning balance	$	-	$	13,349		$	13,349		$	-	$	17,910		$	17,910
Realized gains		-		1,537			1,537			-		-			-
Unrealized loss in other accumulated comprehensive income		-		(3,284	)		(3,284	)		-		(356	)		(356	)
Capital distributions		-		(2,740	)		(2,740	)		-		(4,677	)		(4,677	)
Purchases		-		314			314			-		577			577
Ending balance	$	-	$	9,176		$	9,176		$	-	$	13,454		$	13,454

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

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

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

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

(i)	Policy Loans

Policy loans have no stated maturity dates and are part of the related insurance contract. The carrying amount of policy loans approximates fair value because their interest rate is reset periodically in accordance with current market rates.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(ii)	Policyholder Deposits

The fair value of policyholder deposits is the amount payable on demand at the reporting date, and accordingly, the carrying value amount approximates fair value.

(iii)

Long-term Borrowings

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

(iv)	Repurchase Agreement

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

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on our condensed consolidated balance sheets at September 30, 2015 and December 31, 2014 are as follows:

	September 30, 2015
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
Assets:
Policy loans	$	7,758	$	-	$	7,758	$	-	$	7,758

Liabilities:
Policyholder deposits	$	116,588	$	-	$	116,588	$	-	$	116,588
Long-term borrowings:
Loans payable to bank - variable		13,237		-		13,237		-		13,237
6.6% senior unsecured notes payable		24,000		-		21,420		-		21,420
Repurchase agreement		25,000		-		25,086		-		25,086
Total long-term borrowings		62,237		-		59,743		-		59,743
Total liabilities	$	178,825	$	-	$	176,331	$	-	$	176,331

	December 31, 2014
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
Assets:
Policy loans	$	7,260	$	-	$	7,260	$	-	$	7,260

Liabilities:
Policyholder deposits	$	118,912	$	-	$	118,912	$	-	$	118,912
Long-term borrowings:
Loans payable to bank - variable		14,467		-		14,467		-		14,467
6.6% senior unsecured notes payable		35,000		-		33,513		-		33,513
Repurchase agreement		25,000		-		25,337		-		25,337
Total long-term borrowings		74,467		-		73,317		-		73,317
Total liabilities	$	193,379	$	-	$	192,229	$	-	$	192,229

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(6)	Claim Liabilities

The activity in the total claim liabilities for the three months and nine months ended September 30, 2015 and 2014 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Claim liabilities at beginning of period	$	462,186		$	414,708		$	390,086		$	420,421
Reinsurance recoverable on claim liabilities		(39,156	)		(39,832	)		(40,635	)		(37,557	)
Net claim liabilities at beginning of period		423,030			374,876			349,451			382,864
Incurred claims and loss-adjustment expenses:
Current period insured events		631,135			432,509			1,700,653			1,334,208
Prior period insured events		(2,315	)		(5,002	)		(13,597	)		(40,285	)
Total		628,820			427,507			1,687,056			1,293,923
Payments of losses and loss-adjustment expenses:
Current period insured events		561,269			421,395			1,345,082			1,079,312
Prior period insured events		56,699			21,347			257,543			237,834
Total		617,968			442,742			1,602,625			1,317,146
Net claim liabilities at end of period		433,882			359,641			433,882			359,641
Reinsurance recoverable on claim liabilities		39,099			40,166			39,099			40,166
Claim liabilities at end of period	$	472,981		$	399,807		$	472,981		$	399,807

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

The credit in the incurred claims and loss-adjustment expenses for prior period insured events for the three and nine months ended September 30, 2015 and 2014 is due primarily to better than expected cost and utilization trends. Reinsurance recoverable on unpaid claims is reported within the premium and other receivables, net in the accompanying consolidated financial statements.

The claims incurred disclosed in this table exclude the portion of the change in the liability for future policy benefits expense, which amounted to $6,089 and $18,181 during the three months and nine months ended September 30, 2015, respectively. The change in the liability for future policy benefits during the three months and nine months ended September 30, 2014 amounted to $6,346 and $17,678.

(7)	Income Taxes

Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns with its subsidiaries. The Corporation and its subsidiaries are subject to Puerto Rico income taxes. The Corporation’s insurance subsidiaries are also subject to U.S. federal income taxes for foreign source dividend income.

Managed Care and Property and Casualty corporations are taxed essentially the same as other corporations, with taxable income primarily determined on the basis of the statutory annual statements filed with the insurance regulatory authorities. The corporations are also subject to an alternative minimum income tax, which is calculated based on the formula established by existing tax laws. Any alternative minimum income tax paid may be used as a credit against the excess, if any, of regular income tax over the alternative minimum income tax in future years.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The Corporation, through one of its Managed Care corporations, has a branch in the U.S. Virgin Islands that is subject to a 5% premium tax on policies underwritten therein. As a qualified foreign insurance company, the Company is subject to income taxes in the U.S. Virgin Islands, which has implemented a mirror tax law based on the U.S. Internal Revenue Code. The branch operations in the U.S. Virgin Islands had certain net operating losses for U.S. Virgin Islands tax purposes for which a valuation allowance has been recorded.

Companies within our Life Insurance segment operate as qualified domestic life insurance companies and are subject to the alternative minimum tax and taxes on its capital gains.

All other corporations within the group are subject to Puerto Rico income taxes as regular corporations, as defined in the P.R. Internal Revenue Code, as amended. The holding company within the Triple-S Advantage, Inc. (TSA) group of companies is a U.S.-based corporation and is subject to U.S. federal income taxes. This U.S.-based corporation within our group has not provided U.S. deferred taxes on an outside basis difference created as a result of the business combination of TSA and cumulative earnings of its Puerto Rico-based subsidiaries that are considered to be indefinitely reinvested. The total outside basis difference at December 31, 2014 is estimated at $54,000. We do not intend to repatriate earnings to fund U.S. and Puerto Rico operations nor do any transaction that would cause a reversal of that outside basis difference. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability if such outside basis difference was reversed.

On July 1, 2014, the Governor of Puerto Rico signed into law Act No. 77 including multiple amendments to the Puerto Rico tax code that had a direct impact on the tax liabilities of individual and corporate taxpayers. The amendments to the Puerto Rico tax code include, among others, changes to the corporate tax rate on long-term capital gains, which was increased from 15% to 20% for all transactions occurring after June 30, 2014.

Act No. 77 of 2014 also included changes to the gross receipts tax, (1) eliminating the additional gross receipts tax as a component of the corporate alternative minimum tax commencing on January 1, 2014 and thereafter, and (2) adding a new gross receipts tax. Although the new gross receipts tax will be an additional tax on the Corporation’s gross income, it will be deductible for purposes of computing taxable income, but only to the extent that the new gross receipts tax is paid on or before the filing date of the income tax return. On December 22, 2014, the Governor of Puerto Rico signed into law Act No. 238, which amended the Puerto Rico tax code to include, among others that this gross receipt tax is not applicable for fiscal years beginning after December 31, 2014. The impact of the amendments to the gross receipts tax was not significant to the results of operations.

Act No. 77 also allowed corporations to elect, during the period running from July 1, 2014 to October 31, 2014, to prepay at a reduced income tax rate of 12% on the increase in value of long-term capital assets. On December 22, 2014 and March 30, 2015, the Governor of Puerto Rico signed into law Act No. 238 and Act No. 44, respectively, providing further amendments to the provisions set forth by Act No. 77, extending the period to prepay at the reduced tax rate of 12% on the increase in value of long-term capital assets until April 30, 2015. In connection with this law, on April 15, 2015, the group of corporations that comprise TSM entered into a Closing Agreement with the Puerto Rico Department of Treasury. The Closing Agreement, among other matters, was related with the payment of the preferential tax rate on the increase in value of some of its long-term capital assets, as permitted by Act No. 238 of 2014 and Act No. 44 of 2015. The agreement also covered certain tax attributes of the Corporation. During the nine months ended September 30, 2015, as a result of the aforementioned tax laws and the Closing Agreement, the Company: (1) obtained a benefit from the lower tax rate provided under these statutes, (2) reassessed the realizability of some of its deferred taxes and (3) recorded a tax benefit of $3,129.

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

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(8)	Pension Plan

The components of net periodic benefit cost for the three months and nine months ended September 30, 2015 and 2014 were as follows:

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Components of net periodic benefit cost:
Service cost	$	1,160		$	885		$	3,217		$	2,835
Interest cost		2,322			2,042			6,544			6,435
Expected return on assets		(2,350	)		(1,847	)		(6,564	)		(5,848	)
Amortization of prior service benefit		(126	)		(111	)		(352	)		(348	)
Amortization of actuarial loss		1,665			1,019			4,784			3,239
Net periodic benefit cost	$	2,671		$	1,988		$	7,629		$	6,313

Employer Contributions: As of September 30, 2015, the Corporation has contributed $8,000 to the pension program in 2015.

(9)	Stock Repurchase Program

In October 2014 the Company’s Board of Directors authorized a $50,000 repurchase program of its Class B common stock. Repurchases are conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the three months ended September 30, 2015, the Company repurchased and retired under this program 683,133 shares at an average per share price of $22.19, for an aggregate cost of $14,996. During the nine months ended September 30, 2015, the Company repurchased and retired under this program 1,894,794 shares at an average per share price of $21.85, for an aggregate cost of $40,983.

(10)	Comprehensive Income

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

	Net unrealized gain on securities			Liability for pension benefits			Accumulated other comprehensive income
Balance at January 1, 2015	$	101,467		$	(52,691	)	$	48,776
Other comprehensive income before reclassifications		(17,269	)		-			(17,269	)
Amounts reclassified from accumulated other comprehensive income		(14,802	)		2,704			(12,098	)
Net current period change		(32,071	)		2,704			(29,367	)
Balance at September 30, 2015	$	69,396		$	(49,987	)	$	19,409

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(11)	Share-Based Compensation

Share-based compensation expense recorded during the three months and nine months ended September 30, 2015 was $2,321 and $5,520, respectively. Share-based compensation expense recorded during the three months and nine months ended September 30, 2014 was $396 and $1,617, respectively. There was no cash received from stock option exercises during the nine months ended September 30, 2015 and 2014. During the nine months ended September 30, 2015 and September 30, 2014, 7,235 and 174,090 shares, respectively were repurchased and retired as a result of non-cash exercises of stock options.

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

The following table sets forth the computation of basic and diluted earnings per share for the three months and nine months ended September 30, 2015 and 2014:

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Numerator for earnings per share:
Net income attributable to TSM available to stockholders	$	4,194	$	4,723	$	37,956	$	39,154
Denominator for basic earnings per share:
Weighted average of common shares		25,388,077		27,081,142		25,932,049		27,142,910
Effect of dilutive securities		72,983		59,961		88,688		109,896
Denominator for diluted earnings per share		25,461,060		27,141,103		26,020,737		27,252,806
Basic net income per share attributable to TSM	$	0.17	$	0.17	$	1.46	$	1.44
Diluted net income per share attributable to TSM	$	0.16	$	0.17	$	1.46	$	1.44

(13)	Contingencies

Our business is subject to numerous laws and regulations promulgated by Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla governmental authorities. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. The Commissioner of Insurance of Puerto Rico, as well as other Federal, Puerto Rico, USVI, Costa Rica, BVI, and Anguilla government authorities, regularly make inquiries and conduct audits concerning the Company's compliance with such laws and regulations. Penalties associated with violations of these laws and regulations may include significant fines and exclusion from participating in certain publicly funded programs and may require the Company to comply with corrective action plans or changes in our practices.

As of September 30, 2015, we are involved in various legal actions arising in the ordinary course of business. We are also defendants in various other litigations and proceedings, some of which are described below. Where the Company believes that a loss is both probable and estimable, such amounts have been recorded. During the three months period ended September 30, 2015, the Company increased its contingencies estimate by $4,400 to have an accrual of $5,000 in connection with expected fines and/or other sanctions related to certain legal and regulatory matters, which is presented within the consolidated operating expenses. Although we believe our estimates of such losses are reasonable, these estimates could change as a result of further developments in these matters. In other cases, it is at least reasonably possible that the Company may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Company is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution. The outcome of legal proceedings is inherently uncertain and pending matters for which accruals have not been established have not progressed sufficiently to enable us to estimate a range of possible loss, if any. Given the inherent unpredictability of these matters, it is possible that an adverse outcome in one or more of these matters could have a material adverse effect on the consolidated financial condition, operating results and/or cash flows of the Company.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have rights to acquire shares of the Company on favorable terms pursuant to agreements previously entered by our predecessor managed care subsidiary, Seguros de Servicios de Salud de Puerto Rico, Inc. (SSS), with physicians or dentists who joined our provider network to sell such new provider shares of SSS at a future date (Share Acquisition Agreements) or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.

Claims by Heirs of Former Shareholders

The Company and Triple-S Salud, Inc. (TSS) are defending eight individual lawsuits, all filed in state court, from persons who claim to have inherited a total of 112 shares of the Company or one of its predecessors or affiliates (before giving effect to the 3,000-for-one stock split). While each case presents unique facts and allegations, the lawsuits generally allege that the redemption of the shares by the Company pursuant to transfer and ownership restrictions contained in the Company's (or its predecessors' or affiliates') articles of incorporation and bylaws was improper.

In one of these cases, entitled Vera Sánchez, et al, v. Triple-S, the plaintiffs argued that the redemption of shares was fraudulent and was not subject to the two-year statute of limitations contained in the local securities law. The Puerto Rico’s Court of First Instance dismissed the claim and determined it was time barred under the local securities law. On January 27, 2012, the Puerto Rico Court of Appeals upheld the dismissal. On October 1, 2013, the Puerto Rico Supreme Court reversed the dismissal, holding that the two-year statute of limitations contained in the local securities law did not apply and returning it to the Court of First Instance. Discovery is ongoing.

In the second case, entitled Olivella Zalduondo, et al, v. Seguros de Servicios de Salud, et al, Puerto Rico’s Court of First Instance granted the Company’s motion to dismiss on grounds that the complaint was time-barred under the two-year statute of limitations of the local securities laws. On appeal, the Court of Appeals affirmed the decision of the lower court. On January 8, 2013, the Puerto Rico Supreme Court ruled that the applicable statute of limitations is the fifteen-year period of the Puerto Rico’s Civil Code for collection of monies. On January 28, 2013, the Company filed a motion for reconsideration which was subsequently denied. On March 26, 2013, plaintiffs amended their complaint, which was answered by the Company on April 16, 2013. Subsequently, the Company has filed motions to compel discovery and is awaiting court’s decision on the matter.

In the third case, entitled Heirs of Dr. Juan Acevedo, et al, v. Triple-S Management Corporation, et al, the Puerto Rico Court of First Instance denied our motion for summary judgment based on its determination that there are material issues of fact in controversy. In response to our appeal, the Puerto Rico Court of Appeals confirmed the decision of the Puerto Rico’s Court of First Instance and denied a subsequent plea for reconsideration. Both parties have filed motions for summary judgment and, consequently, their respective oppositions. The parties are awaiting the court’s decision on their respective motions for summary judgment.

The fourth case, entitled Montilla López, et al, v. Seguros de Servicios de Salud, et al, was filed on November 29, 2011. The Company filed a motion to dismiss on the grounds that the claim is time barred under the local securities laws, which was denied by the court on January 24, 2013. After two amendments to plaintiff’s complaint, the Company filed its response on June 13, 2013. A hearing is scheduled for December 8, 2015. Discovery is ongoing.

The fifth case, entitled Cebollero Santamaría v. Triple-S Salud, Inc., et al, was filed on March 26, 2013, and the Company filed its response on May 16, 2013. On October 29, 2013, the Company filed a motion for summary judgment on the grounds that the claim is time-barred under the fifteen-year statute of limitations of the Puerto Rico Civil Code for collection of monies and, in the alternative, that plaintiff failed to state a claim for which relief can be granted which was denied by the court. On November 2, 2015, the Company filed a motion of Certiorari to the Puerto Rico Court of Appeals. Discovery is ongoing.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The sixth case, entitled Irizarry Antonmattei, et al, v. Seguros de Servicios de Salud, et al, was filed on April 16, 2013 and the Company filed its response on June 21, 2013. After several pleas, including a motion to dismiss filed by the Company, plaintiff amended their complaint. On November 5, 2013, the Company moved to dismiss the first amended complaint. On May 16, 2014, plaintiffs filed a motion for summary judgment, which the Company opposed on May 28, 2014. On June 16, 2014, the court ordered plaintiffs to file a memoranda of law and struck plaintiff’s motion for summary judgment. On September 18, 2014, the court denied our motion to dismiss the amended complaint. On September 29, 2014, the Company filed a motion for reconsideration, which was denied by the court on November 4, 2014. On December 4, 2014, the Company filed a petition of Certiorari to the Puerto Rico Court of Appeals of Puerto Rico, which was denied on April 1, 2015. A pretrial hearing is scheduled for June 16, 2016. Discovery is ongoing.

The seventh case, entitled Allende Santos, et al, v. Triple-S Salud, et al, was filed on March 28, 2014. On July 2, 2014, the Company filed its response. A hearing is scheduled for January 20, 2016. Discovery is ongoing.

The eighth case, entitled Gallardo Mendez, et al, v. Triple-S Management Corporation, was filed on December 30, 2014. On March 13, 2015, the Company filed a motion to dismiss. After an extension of time granted by the court, plaintiff did not file an opposition. Therefore, on June 16, 2015, the court deemed our motion to dismiss unopposed. We are awaiting further court proceedings.

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

Joint Underwriting Association Litigations

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

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

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

On December 30, 2011, TSP and other insurance companies filed a joint motion to dismiss, which was opposed by plaintiffs on February 17, 2012. On October 2, 2012, the court issued an order certifying the class. On October 12, 2012, several defendants, including TSP, filed an appeal before the U.S. Court of Appeals for the First District, requesting the court to vacate the District Court's certification order. The First Circuit denied the authorization to file the writ of appeals. Discovery has been completed. On November 3, 2014, all defendants, including TSP, filed a joint motion to decertify the class and, on November 17, 2014, a joint motion for summary judgment requesting the dismissal of the claim.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

On February 2, 2015, the court ordered the stay of class notice proceedings. On March 10, 2015, plaintiff filed their opposition to the joint motion. The parties have filed several pleas in connection with the summary judgment, the petition to decertify the class and discovery matters. We are awaiting further court proceedings.

In re Blue Cross Blue Shield Antitrust Litigation

TSS is a co-defendant with multiple Blue Plans and the Blue Cross Blue Shield Association (BCBSA) in a multi-district class action litigation filed on July 24, 2012 that alleges that the exclusive service area (ESA) requirements of the Primary License Agreements with Plans violate antitrust law, and the plaintiffs in these suits seek monetary awards and in some instances, injunctive relief barring ESAs. Those cases have been centralized in the United States District Court for the Northern District of Alabama. Prior to centralization, motions to dismiss were filed by several plans, including TSS. Plaintiffs opposed TSS’ motion to dismiss. On April 9, 2014, the Court held an argumentative hearing to discuss the motions to dismiss. On June 18, 2014, the court denied TSS’ motion to dismiss. TSS refilled its motion to dismiss, asserting lack of personal jurisdiction and improper venue, which plaintiff opposed. An argumentative hearing was held May 19, 2015, and subsequently, the court denied the motions to dismiss. Discovery is ongoing. Also, on June 23, 2015, plaintiffs filed suit in the United States District Court of Puerto Rico, which we believe does not preclude TSS’ jurisdictional arguments. The Company has joined BCBSA in vigorously contesting these claims.

Claims Relating to the Provision of Health Care Services

TSS is defendant in several claims for collection of monies in connection with the provision of health care services. Among them are individual complaints filed before the Puerto Rico Health Insurance Administration (ASES) by six community health centers alleging TSS’ breached their contracts with respect to certain capitation payments and other monetary claims. Such claims have an aggregate value of approximately $9,600. Discovery is ongoing, and given their early stage, the Company cannot assess the probability of an adverse outcome or the reasonable financial impact that any such outcome may have on the Company. TSS believes many of these complaints are time-barred and will continue to conduct a vigorous defense.

On June 5, 2014, ASES initiated an administrative hearing against TSS moved by a primary medical group for alleged outstanding claims related to services provided to Medicaid beneficiaries from 2005 to 2010, totaling approximately $3,000. On June 19, 2014, TSS filed its response. On June 25, 2014, the hearing officer ordered the parties to file a joint working plan and schedule, which the parties are executing. Discovery is ongoing. TSS will continue to conduct a vigorous defense.

On April 17, 2015, ASES notified the complaint of a medical service provider demanding payment amounting $5,073. Claimant alleges that TSS did not pay the claims, paid them incorrectly, or recovered payments from the provider for which TSS did not have the right. TSS answered the complaint and counterclaimed. The parties are conducting meetings to assess the possibility to resolve this matter outside the administrative forum. TSS denies any wrongdoing and will continue to defend this matter vigorously.

Regulatory Matters

Our business is subject to review by regulators in Puerto Rico, U.S. Virgin Islands, British Virgin Islands, and Costa Rica. Also, our Medicare and Medicaid segments are subject to the review of federal regulatory authorities. These regulatory authorities conduct regular reviews of many aspects of our business, including, but not limited to, legal and regulatory compliance, business practices, privacy issues, delivery of services, among others. These reviews could result in fines or other sanctions being imposed on us or may require us to adopt corrective action plans or changes in our practices. Also, they could have a material adverse effect on our reputation and business, including mandatory disclosure to the media, significant increases in the cost of managing and remediating incidents and material fines, contract termination, penalties and litigation awards, among other consequences, any of which could have a material and adverse effect on our results of operations, financial position and cash flows.

Specifically, the Office of Civil Rights of the U.S. Department of Health and Human Services (OCR) is conducting a review in connection with a data breach occurred in 2010 related to health information of individuals insured at the time under the Government of Puerto Rico Medicaid Program. The OCR has not issued its determination on this matter.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

Also, ASES and OCR are conducting investigations in connection with privacy-related incidents related to Medicare Advantage and dual Medicare/Medicaid beneficiaries. As part of one of these investigations, which involves 13,336 dual Medicare/Medicaid beneficiaries, on February 11, 2014, ASES’s notified TSS of its intention to impose a civil monetary penalty of $6,800 and other administrative sanctions. Subsequently, on March 11, 2014, the Company filed a notice of removal in the federal District Court for the District of Puerto Rico. On April 10, 2014, ASES filed a motion to remand which was granted by the court. Consequently this matter is being addressed in an administrative hearing with ASES. On June 18, 2015, as part of the administrative proceedings, the hearing officer concluded that ASES’s intent to impose a civil monetary penalty is not a final administrative determination. The hearing officer has granted the parties until November 30, 2015 to dialog and determine next steps. Also, the Company is currently a defendant in four claims filed at the Puerto Rico Court of First Instance, in which plaintiffs assert emotional damages in connection with the incident. The Company is vigorously defending each of these claims.

Based on recent developments, the Company expects fines and/or other sanctions in connection with the investigations disclosed in this note.

Audits

The Company is subject to numerous audits in connection with the provision of services to private and governmental entities. These audits may include numerous aspects of our business, including claim payment practices, contractual obligations, service delivery, third-party obligations, and business practices, among others. Deficiencies in audits could have a material adverse effect on our reputation and business, including termination of contracts, significant increases in the cost of managing and remediating deficiencies, payment of contractual penal clauses, and others, any of which could have a material and adverse effect on our results of operations, financial position and cash flows.

On July 2, 2014, ASES notified TSS that the results of an audit conducted in connection with the government health plan contract for several periods between October 2005 to September 2013, reflected overpayment of premiums made to TSS pursuant to prior contracts with ASES in the amount of $7,900. The alleged overpayments were related to duplicated payments or payments made for deceased members, and requested the reimbursement of the alleged overpayment. TSS contends that ASES request for reimbursement has no merits on several grounds, including a 2011 settlement between both parties covering the majority of the amount claimed by ASES, and that ASES, under the terms of the contracts, was responsible for certifying the membership. On March 24, 2015, the court ruled that the scope of the 2011 settlement agreement did not preclude ASES from recovering “future claims” including the alleged improper payments. TSS moved for reconsideration and for the formulation of additional finding of facts, which was denied. On June 18, 2015, TSS filed a petition for Certiorari before the Puerto Rico Court of Appeals, which was denied on August 31, 2015. On September 24, 2015 the TSS filed for reconsideration. TSS also amended its claim to include the Puerto Rico Health Department (PRHD), as it asserts the PRHD is an indispensable party for the resolution of this matter. With this amendment, TSS seeks payment of approximately $5,000 as, if ASES’s allegations are considered correct, premiums paid to TSS should have been higher than what ASES actually paid given the additional risk assumed by TSS. The Company will continue to conduct a vigorous defense of this matter.

(14)	Segment Information

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

The Managed Care segment participates in the Commonwealth of Puerto Rico Health Insurance Plan (similar to Medicaid) (Medicaid) program to provide health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the government of Puerto Rico, by administering the provision of the physical health component in designated service regions in Puerto Rico. We served all eight service regions on an administrative service only basis (ASO) until March 31, 2015. Administrative service fees related to this contract during the nine months ended September 30, 2015 and 2014 amounted to $24,367 and $71,711, respectively. Effective April 1, 2015, we started to provide healthcare services to only two regions of the Medicaid program on a risk based model. The new risk based model Medicaid contract with the Government of Puerto Rico contains a profit sharing clause, whereby TSS shares with the Government of Puerto Rico the excess of a 2.5% percent profitability threshold as established in the contract. Of this excess profit, TSS is entitled to retain 50%, subject to the compliance with certain quality metrics. Any excess profit is recorded as a reduction in premiums earned, net in the accompanying condensed consolidated statements of earnings. Operating income under the new model during the three months and nine months ended September 30, 2015 amounted to $2,847 and $10,118.

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

The following tables summarize the operations by reportable segment for the three months and nine months ended September 30, 2015 and 2014:

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Operating revenues:
Managed Care:
Premiums earned, net	$	689,532		$	462,765		$	1,857,216		$	1,431,762
Administrative service fees		6,163			30,253			39,835			89,509
Intersegment premiums /service fees		(248	)		1,267			4,257			4,108
Net investment income		2,727			3,625			8,444			11,235
Total managed care		698,174			497,910			1,909,752			1,536,614
Life Insurance:
Premiums earned, net		35,636			35,817			109,661			105,507
Intersegment premiums		54			13			185			195
Net investment income		5,840			5,907			17,724			17,558
Total life insurance		41,530			41,737			127,570			123,260
Property and Casualty Insurance:
Premiums earned, net		21,550			22,184			66,506			69,084
Intersegment premiums		153			153			460			460
Net investment income		1,951			2,237			6,172			6,345
Total property and casualty insurance		23,654			24,574			73,138			75,889
Other segments: *
Intersegment service revenues		2,770			2,392			7,932			6,923
Operating revenues from external sources		905			940			2,768			3,285
Total other segments		3,675			3,332			10,700			10,208
Total business segments		767,033			567,553			2,121,160			1,745,971
TSM operating revenues from external sources		15			14			45			81
Elimination of intersegment premiums		41			(1,433	)		(4,902	)		(4,763	)
Elimination of intersegment service fees		(2,770	)		(2,392	)		(7,932	)		(6,923	)
Other intersegment eliminations		42			32			37			93
Consolidated operating revenues	$	764,361		$	563,774		$	2,108,408		$	1,734,459

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

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Operating income:
Managed care	$	(2,169	)	$	903		$	6,288		$	32,928
Life insurance		4,300			5,642			14,402			16,051
Property and casualty insurance		2,593			2,295			6,553			7,516
Other segments *		(219	)		(751	)		(503	)		(1,002	)
Total business segments		4,505			8,089			26,740			55,493
TSM operating revenues from external sources		15			14			45			81
TSM unallocated operating expenses		(3,397	)		(1,655	)		(10,937	)		(10,002	)
Elimination of TSM intersegment charges		2,442			2,437			7,237			7,294
Consolidated operating income		3,565			8,885			23,085			52,866
Consolidated net realized investment gains		(1,561	)		3,108			15,259			7,162
Consolidated interest expense		(1,979	)		(2,273	)		(6,235	)		(6,974	)
Consolidated other income, net		2,289			367			5,131			1,188
Consolidated income before taxes	$	2,314		$	10,087		$	37,240		$	54,242

Depreciation and amortization expense:
Managed care	$	3,227		$	4,634		$	9,987		$	13,617
Life insurance		261			181			810			598
Property and casualty insurance		88			122			278			369
Other segments*		120			260			365			776
Total business segments		3,696			5,197			11,440			15,360
TSM depreciation expense		197			199			591			614
Consolidated depreciation and amortization expense	$	3,893		$	5,396		$	12,031		$	15,974

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

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

	September 30, 2015			December 31, 2014
Assets:
Managed care	$	1,022,379		$	975,999
Life insurance		776,085			764,268
Property and casualty insurance		343,277			362,620
Other segments *		25,658			22,682
Total business segments		2,167,399			2,125,569
Unallocated amounts related to TSM:
Cash, cash equivalents, and investments		40,155			44,157
Property and equipment, net		19,774			20,415
Other assets		38,084			37,851
		98,013			102,423
Elimination entries-intersegment receivables and others		(50,597	)		(82,256	)
Consolidated total assets	$	2,214,815		$	2,145,736

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

Table of Contents

Triple-S Management Corporation

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

(15)	Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued. No events, other than those described in these notes, have occurred that require adjustment or disclosure pursuant to current Accounting Standards Codification.

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refers to Triple-S Management Corporation and its subsidiaries. The MD&A included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and nine months ended September 30, 2015. Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2014 and the MD&A included therein, and our unaudited consolidated financial statements and accompanying notes as of and for the three months and nine months ended September 30, 2015 included in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding Forward-Looking Information

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

Overview

We are one of the most significant players in the managed care industry in Puerto Rico and have over 50 years of experience in this industry. We offer a broad portfolio of managed care and related products in the Commercial and Medicare Advantage markets. In the Commercial market we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Reform (a government of Puerto Rico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.) (Medicaid), by administering the provision of the physical health component in designated service regions in Puerto Rico. We served all eight regions on an administrative service only basis (ASO) until March 31, 2015. Effective April 1, 2015, we started to provide healthcare services in the Metro North and West regions of the Government's Health Plan on an at-risk basis. For the nine months ended September 30, 2015, operating income generated in the Medicaid business represented 32% of our consolidated operating income, compared to 26% for the same period in 2014. See details of the Medicaid contract in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 under the sub-caption “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.”

We have the exclusive right to use the Blue Cross Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands, Costa Rica, the British Virgin Islands and Anguilla. As of September 30, 2015, we served approximately 1,100,000 members across all regions of Puerto Rico. For the nine months ended September 30, 2015, our managed care segment represented approximately 91% of our total consolidated premiums earned, net and approximately 27% of our operating income. We also have significant positions in the life insurance and property and casualty insurance markets in Puerto Rico. Our life insurance segment had a market share of approximately 10% (in terms of direct premiums) during the year ended December 31, 2014. Our property and casualty segment had a market share of approximately 8% (in terms of direct premiums) during the year ended December 31, 2014.

Table of Contents

We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS) and Triple-S Advantage, Inc. (TSA). TSS, TSA and Triple-S Blue, Inc. (TSB) are Blue Cross Blue Shield Association (BCBSA) BCBSA licensees, which provides us with exclusive use of the Blue Cross and Blue Shield name and mark throughout Puerto Rico, the U.S. Virgin Islands, British Virgin Islands, Anguilla and Costa Rica.

We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc., and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP), each one representing approximately 6% and 3%, respectively, of our consolidated premiums earned, net for the nine months ended September 30, 2015.

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

	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in millions)	2015			2014			2015			2014
Premiums earned, net:
Managed care	$	689.8		$	463.2		$	1,858.2		$	1,432.8
Life insurance		35.7			35.8			109.9			105.7
Property and casualty insurance		21.7			22.3			67.0			69.5
Intersegment premiums earned		(0.5	)		(0.5	)		(1.7	)		(1.6	)
Consolidated premiums earned, net	$	746.7		$	520.8		$	2,033.4		$	1,606.4
Administrative service fees:
Managed care	$	5.6		$	31.1		$	43.2		$	92.6
Intersegment administrative service fees		0.6			(0.8	)		(3.4	)		(3.1	)
Consolidated administrative service fees	$	6.2		$	30.3		$	39.8		$	89.5
Operating income:
Managed care	$	(2.2	)	$	0.9		$	6.3		$	32.9
Life insurance		4.3			5.7			14.4			16.1
Property and casualty insurance		2.6			2.3			6.6			7.5
Intersegment and other		(1.1	)		-			(4.2	)		(3.6	)
Consolidated operating income	$	3.6		$	8.9		$	23.1		$	52.9

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

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

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

Table of Contents

Recent Developments

Puerto Rico Government Related Business

During recent years, Puerto Rico has been facing economic and fiscal challenges and its economy has been contracting. For an update on the latest events with regards to the fiscal situation, see note 3 to the accompanying unaudited condensed consolidated financial statements, Investment in Securities.

If the liquidity of the Government of Puerto Rico, its agencies, municipalities and public corporations becomes significantly affected as a result of the inability to raise funding in the market or generate enough revenues, we may face credit losses in our premium and fees receivable from these and other government related entities, which could be significant.

At September 30, 2015, the Company had premiums and other receivables of $82.4 million from the Government of Puerto Rico, including its agencies, municipalities and public corporations with a related allowance for doubtful receivables of $19.0 million.

Managed Care – Puerto Rico Health Reform Program (Medicaid)

On April 1, 2015 and continuing under the current agreement until June 30, 2017, we commenced providing medical, mental, pharmacy, and dental healthcare services on an at-risk basis to Medicaid subscribers in the Metro North and West regions of the government of Puerto Rico’s health insurance program, which includes approximately 430,000 subscribers. Up to March 31, 2015, TSS participated in this program as a third party administrator responsible for the provisions of administrative services to subscribers in all service regions, approximately 1,400,000 members.

See Item 1A. Risk Factors—Risks Related to Our Business – “We are dependent on a small number of government contracts to generate a significant amount of the revenues of our managed care business.’’ included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Managed Care – Medicare Advantage

On October 8, 2015, the Centers for Medicare & Medicaid Services (CMS) published the 2016 STAR Ratings. Contract H4005, the Triple-S Advantage Preferred Provider Organization (PPO) contract, scored 3.5 out of 5 STARS, an increase of 0.5 versus the prior year. Contract H5774, the Triple-S Advantage Health Maintenance Organization (HMO) contract, scored 3.0 out of 5.0 STARS, sustaining the rating from the previous year, but demonstrating the importance of the novation process from the last year where H4012 and H5732 contracts where merged into H5774. Those consolidated contracts had scored in prior years 2.5, running the risk of them been canceled by CMS.

See Item 1A. Risk Factors—Risks Related to the Regulation of Our Industry – “As a Medicare Advantage program participant, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties, and our Medicare Advantage contracts may be terminated or our operations may be required to change in a manner that has a material impact on our business.” included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Table of Contents

Recent Accounting Standards

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

Managed Care Membership

	As of September 30,
	2015		2014
Managed care enrollment:
Commercial ¹		552,471		600,287
Medicare²		124,004		120,367
Medicaid ³		423,944		1,416,390
Total		1,100,419		2,137,044
Managed care enrollment by insurance arrangement:
Fully-insured		919,374		525,951
Self-insured		181,045		1,611,093
Total		1,100,419		2,137,044

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

(2)	Includes Medicare Advantage membership for 2015 and 2014, and stand-alone PDP plan membership only for 2014.

(3)	Membership for 2015 is on at-risk basis and for 2014 on a self-insured basis. Effective April 1, 2015, membership decreased since we started providing services to only two regions on an at-risk basis and no longer provide services for the other six regions on a self-insured basis.

Table of Contents

Consolidated Operating Results

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

	Three months ended September 30,					Nine months ended September 30,
(Dollar amounts in millions)	2015			2014		2015			2014
Revenues:
Premiums earned, net	$	746.7		$	520.8	$	2,033.4		$	1,606.4
Administrative service fees		6.2			30.3		39.8			89.5
Net investment income		10.6			11.8		32.5			35.3
Other operating revenues		0.9			0.9		2.7			3.3
Total operating revenues		764.4			563.8		2,108.4			1,734.5
Net realized investment gains (losses)		(1.6	)		3.1		15.3			7.1
Other income, net		2.3			0.4		5.1			1.2
Total revenues		765.1			567.3		2,128.8			1,742.8
Benefits and expenses:
Claims incurred		634.9			433.9		1,705.2			1,311.6
Operating expenses		125.9			121.0		380.1			370.0
Total operating expenses		760.8			554.9		2,085.3			1,681.6
Interest expense		2.0			2.3		6.3			7.0
Total benefits and expenses		762.8			557.2		2,091.6			1,688.6
Income before taxes		2.3			10.1		37.2			54.2
Income tax expense (benefit)		(1.9	)		5.4		(0.7	)		15.2
Net income		4.2			4.7		37.9			39.0
Less: net loss attributable to non-controlling interest		-			-		0.1			0.1
Net income attributable to TSM	$	4.2		$	4.7	$	38.0		$	39.1

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Operating Revenues

Consolidated premiums earned, net for the three months ended September 30, 2015 increased by $225.9 million, or 43.4%, to $746.7 million when compared to the three months ended September 30, 2014. This increase primarily reflects higher premiums in the Managed Care segment by $226.8 million after the change in the Medicaid business model from an ASO model to a fully insured model and higher premiums in the Medicare business, offset in part by lower fully-insured membership in our Commercial accounts. Property and Casualty premiums decreased by $0.6 million while the Life insurance premiums were substantially at the same level experienced in the 2014 period.

The consolidated administrative service fees decreased by $24.1 million, or 79.5%, when compared to the same period in 2014, mostly as a result of the change in the Medicaid business model from an ASO model to a fully insured model.

Net Realized Investment Gains (Losses)

Consolidated net realized investment losses of $1.6 million during the 2015 period are primarily the result of other-than-temporary impairments mainly related to certain investments in Puerto Rico government obligations.

Table of Contents

Other Income

Consolidated other income for the three months ended September 30, 2015 increased by $1.9 million when compared to the three months ended September 30, 2014, mostly due to income generated from a private equity investment during the 2015 period.

Claims Incurred

Consolidated claims incurred increased by $201.0 million, or 46.3%, to $634.9 million during the three months ended September 30, 2015 when compared to the claims incurred during the three months ended September 30, 2014, mostly due to higher claims in the Managed Care segment primarily reflecting the claims incurred in the segment’s Medicaid business after the change from an ASO model to a fully insured model. Medicare claims also increased during this period primarily due to higher pharmacy costs. The consolidated loss ratio increased by 170 basis points to 85.0%.

Operating Expenses

Consolidated operating expenses during the three months ended September 30, 2015 increased by $4.9 million, or 4.0%, to $125.9 million as compared to the operating expenses during the three months ended September 30, 2014. The higher operating expenses are mainly related with a $4.4 million contingency accrual recorded in the 2015 period as well as increased professional service fees, partially offset by the impact of the cost containment initiatives, including lower personnel costs resulting from a year over year reduction in headcount, and lower operating expenses after the change in the Medicaid business contract from eight regions under an ASO arrangement to a fully-insured model in only two regions. The contingency accrual reflects our estimate of the outcome of certain legal and regulatory matters based on the advice of our legal counsel. As we have previously disclosed we are involved in various regulatory proceedings. Our attorneys continuously assess the risks related to these contingencies and given their current stage, they have recommended an increase on our reserve, which we have taken in the third quarter. Despite the increase in operating expenses, the consolidated operating expense ratio decreased 530 basis points to 16.7% for the 2015 period reflecting higher premium revenues.

Income Tax Expense (Benefit)

Consolidated income tax expense (benefit) during the three months ended September 30, 2015 decreased by $7.3 million, to a benefit of $1.9 million for the three months ended September 30, 2015. The year over year change in income tax expense (benefit) primarily results from the lower income before tax in 2015, mostly in the Managed Care segment which has a higher effective tax rate, and the impact of a change in enacted tax rates in the 2014 period. The three months ended September 30, 2014 include a $6.3 million one-time adjustment increasing the consolidated deferred tax liability related to investments classified as available for sale after the July 1, 2014 enactment of Puerto Rico tax legislation that increased the corporate tax rate over long term capital gains, from 15% to 20%, for all transactions occurring after June 30, 2014.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Operating Revenues

Consolidated premiums earned, net for the nine months ended September 30, 2015 increased by $427.0 million, or 26.6%, to $2,033.4 million when compared to the nine months ended September 30, 2014. This increase primarily reflects higher premiums in the Managed Care segment by $425.4 million after the change in the Medicaid business model effective April 1, 2015, from an ASO model to a fully insured model and higher premiums in the Medicare business, offset in part by lower fully-insured membership in our Commercial accounts. Life insurance premiums increased by $4.2 million while Property and Casualty premiums decreased by $2.5 million during the 2015 period.

The consolidated administrative service fees of $39.8 million decreased by $49.7 million, or 55.5%, when compared to the same period in 2014, mostly as a result of change in the Medicaid business model from an ASO model to a fully insured model.

Net Realized Investment Gains

Consolidated net realized investment gains of $15.3 million during the 2015 period are the result of net realized gains from the sale of debt and equity securities classified as available for sale, following our asset/liability management and tax planning strategies. The net realized gains were partially offset by $4.5 million other-than-temporary impairments mostly related to certain investments in Puerto Rico government obligations.

Table of Contents

Claims Incurred

Consolidated claims incurred increased by $393.6 million, or 30.0%, to $1,705.2 million during the nine months ended September 30, 2015 when compared to the claims incurred during the 2014 period, mostly due to higher claims in the Managed Care segment. This increase primarily reflects the claims incurred in the segment’s Medicaid business after the change from an ASO model to a fully insured model as well to an increase in the Medicare business claims stemming from higher utilization trends and higher pharmacy costs during 2015. These increases were partially offset by lower claims incurred in the Commercial business, which reflects the business’s lower member month enrollment. The claims of the Life Insurance segment increased by $5.4 million, while Property and Casualty Insurance claims experienced a decrease of $2.2 million. The consolidated loss ratio increased by 230 basis points to 83.9%.

Operating Expenses

Consolidated operating expenses during the nine months ended September 30, 2015 increased by $10.1 million, or 2.7%, to $380.1 million as compared to the operating expenses during the nine months ended September 30, 2014. The higher operating expenses are mainly related to increases in the provision for doubtful receivables and the Health Insurance Providers Fee, a $4.4 million contingency accrual recorded in the 2015 period as well as to higher professional services incurred during the nine months ended September 30, 2015. These increases were partially offset by the impact of the cost containment initiatives, including lower personnel costs resulting from a year over year reduction in headcount and lower expenses related to the change in the Medicaid business contract from eight regions under an ASO to a fully-insured model in only two regions. The contingency accrual reflects our estimate of the outcome of certain legal and regulatory matters based on the advice of our legal counsel. As we have previously disclosed we are involved in various regulatory proceedings. Our attorneys continuously assess the risks related to these contingencies and given their current stage, they have recommended an increase on our reserve, which we have taken in the third quarter. Despite the increase in operating expenses, the consolidated operating expense ratio decreased 350 basis points to 18.3% for the 2015 period.

Income Tax Expense (Benefit)

Consolidated income tax expense (benefit) for the nine months ended September 30, 2015 decreased by $15.9 million, to a benefit of $0.7 million, as compared to the income tax expense of $15.2 million for the nine months ended September 30, 2014. Consequently, the effective tax rate decreased from 28.0% during the nine months ended September 30, 2014 to a benefit rate of 1.9% during the nine months ended September 30, 2015. The lower income tax expense (benefit) primarily results from the following:

•

The 2014 period includes a one-time $6.3 million adjustment increasing the consolidated deferred tax liability related to investments classified as available for sale after the July 1, 2014 enactment of Puerto Rico tax legislation that increased the corporate tax rate over long-term capital gains, from 15% to 20%, for all transactions occurring after June 30, 2014.

•

During the nine months ended September 30, 2015, the Company executed a Closing Agreement between TSM and its subsidiaries and the Puerto Rico Treasury Department in connection with the extension up to April 30, 2015 of local law that provided a temporary preferential tax rate in capital asset transactions during the second quarter of 2015. These events allowed the Company to record a $3.1 million benefit resulting from the enacted lower taxable rate and the reassessment of the realizability of some of its deferred taxes.

•	The 2015 period has a lower income before tax year over year, primarily in the Managed Care segment, which has a higher effective tax rate than our other segments.

Table of Contents

Managed Care Operating Results

	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in millions)	2015			2014			2015			2014
Operating revenues:
Medical premiums earned, net:
Commercial	$	210.6		$	215.6		$	634.9		$	668.3
Medicare		279.4			247.6			818.0			764.5
Medicaid		199.8			-			405.3			-
Medical premiums earned, net		689.8			463.2			1,858.2			1,432.8
Administrative service fees		5.6			31.1			43.2			92.6
Net investment income		2.7			3.6			8.4			11.2
Total operating revenues		698.1			497.9			1,909.8			1,536.6
Medical operating costs:
Medical claims incurred		605.5			404.1			1,614.0			1,223.6
Medical operating expenses		94.8			92.9			289.5			280.1
Total medical operating costs		700.3			497.0			1,903.5			1,503.7
Medical operating income	$	(2.2	)	$	0.9		$	6.3		$	32.9
Additional data:
Member months enrollment:
Commercial:
Fully-insured		1,119,344			1,223,825			3,388,436			3,816,561
Self-funded		544,881			591,835			1,680,435			1,828,121
Total Commercial member months		1,664,225			1,815,660			5,068,871			5,644,682
Medicare:
Medicare Advantage		370,702			320,102			1,073,726			957,618
Stand-alone PDP		-			40,739			-			123,484
Total Medicare member months		370,702			360,841			1,073,726			1,081,102
Medicaid:
Fully-insured		1,279,692			-			2,583,204			-
Self-insured		-			4,231,233			4,229,082			12,626,015
Total Medicaid member months		1,279,692			4,231,233			6,812,286			12,626,015
Total member months		3,314,619			6,407,734			12,954,883			19,351,799
Medical loss ratio		87.8	%		87.2	%		86.9	%		85.4	%
Operating expense ratio		13.6	%		18.8	%		15.2	%		18.4	%

Table of Contents

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Medical Operating Revenues

Medical premiums earned for the three months ended September 30, 2015 increased by $226.6 million, or 48.9%, to $689.8 million when compared to the medical premiums earned during the three months ended September 30, 2014. This increase is principally the result of the following:

•

Medical premiums generated by the Medicaid business amounted to $199.8 million during the three months ended September 30, 2015 after the change in the Medicaid business model, from an ASO model to a fully insured model effective April 1, 2015. The premiums for this quarter include a reduction of approximately $7.8 million of estimated return premiums related to the Medicaid contract’s profit sharing clause. At the end of the 15-month measurement period in 2016, the Company may be entitled to retain to 50% of any excess over the 2.5% profitability threshold established in the contract, subject to the compliance with certain quality metrics.

•

Medical premiums generated by the Medicare business increased during the three months ended September 30, 2015 by $31.8 million, or 12.8%, to $279.4 million. This fluctuation primarily results from higher member month enrollment in Medicare Advantage products, which carry a higher average premium rate and the higher risk score revenue as compared with 2014.

•

Medical premiums generated by the Commercial business decreased by $5.0 million, or 2.3%, to $210.6 million during the three months ended September 30, 2015. This fluctuation is primarily the result of a decrease in fully-insured member month enrollment by 104,481, or 8.5%, mainly in our rated groups and individual products and reflecting pricing sensitivity, cancellation of several commercial accounts and attrition in existing accounts as a result of the island’s challenging economic situation. The effect of the lower membership is partially offset by a 6.8% year over year increase in average premium rates.

Administrative service fees decreased by $25.5 million, or 82.0%, to $5.6 million during the three months ended September 30, 2015. This fluctuation is mainly due to the change in the Medicaid business model from an ASO contract, where administrative service fees are recorded, to a fully insured model, where medical premiums are recorded.

Medical Claims Incurred

Medical claims incurred during the three months ended September 30, 2015 increased by $201.4 million, or 49.8%, to $605.5 million when compared to the three months ended September 30, 2014. The medical loss ratio (MLR) of the segment increased 60 basis points during the 2015 period, to 87.8%. These fluctuations are primarily attributed to the net effect of the following:

•

Effective April 1, 2015, the Medicaid business changed from ASO model to a fully insured model. The medical claims incurred related to this contract for the three months ended September 30, 2015 amounted $184.9 million. The medical loss ratio of this segment was 92.5%. This MLR was impacted by the $7.8 million risk-sharing adjustment and favorable prior period reserve developments. Excluding the effect of this items, the MLR would have been 90.6%, which is similar for the target MLR for the contract.

•

The medical claims incurred of the Medicare business increased by $20.0 million, or 9.0%, during 2015 period and its MLR decreased by 300 basis points, to 86.4%. Excluding the effect of prior period reserve developments and risk-score adjustments in the 2015 and 2014 periods, the MLR presents an increase of 210 basis points, largely reflecting the impact of lower average per member per month premiums in Medicare Advantage products and higher pharmacy costs and utilization trends.

•

The medical claims incurred of the Commercial business decreased by $3.4 million, or 1.9%, during the 2015 period mostly due to the lower fully-insured member month offset in part by higher utilization trends. The Commercial MLR was 84.8%, which is 20 basis points higher than the MLR for the prior year. Excluding the effect of prior period reserve developments in 2015 and 2014, the MLR would have increased by 50 basis points, reflecting higher pharmacy costs.

Medical Operating Expenses

Medical operating expenses for the three months ended September 30, 2015 increased by $1.9 million, or 2.0%, to $94.8 million when compared to the three months ended September 30, 2014. The operating expense ratio decreased by 520 basis points, from 18.8% in 2014 to 13.6% in 2015 as a result of the increase in premiums revenue. The increase in medical operating expenses is mostly due to the net effect of a $4.4 million contingency accrual recorded in the 2015 period, an increase in the professional services related to Medicare risk scoring and our strategic transformation efforts and higher Health Insurer Providers Fee. These increases were partially offset by lower operating expenses in the Medicaid business, reflecting the decreased enrollment after the change in the contract from eight regions under an ASO arrangement to a fully-insured model in only two regions. The contingency accrual reflects our estimate of the outcome of certain legal and regulatory matters based on the advice of our legal counsel. As we have previously disclosed we are involved in various regulatory proceedings. Our attorneys continuously assess the risks related to these contingencies and given their current stage, they have recommended an increase on our reserve, which we have taken in the third quarter.

Table of Contents

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Medical Operating Revenues

Medical premiums earned for the nine months ended September 30, 2015 increased by $425.4 million, or 29.7%, to $1,858.2 million when compared to the medical premiums earned during the nine months ended September 30, 2014. This increase is principally the result of the following:

•

Medical premiums generated by the Medicaid business amounted to $405.3 million during the nine months ended September 30, 2015 after the change in the Medicaid business model, from an ASO model to a fully insured model effective April 1, 2015. The premiums earned for this quarter were reduced by approximately $7.8 million of estimated return premiums related to the Medicaid contract’s profit sharing clause. At the end of the 15-month measurement period in 2016, the Company may be entitled to retain 50% of any excess over the 2.5% profitability threshold established in the contract, subject to the compliance with certain quality metrics.

•

Medical premiums generated by the Medicare business increased during the nine months ended September 30, 2015 by $53.5 million, or 7.0%, to $818.0 million. This fluctuation primarily results from higher risk score revenue as compared with 2014 and the higher member month enrollment in Medicare Advantage products, which carry a higher average premium rate.

•

Medical premiums generated by the Commercial business decreased by $33.4 million, or 5.0%, to $634.9 million during the nine months ended September 30, 2015. This fluctuation is primarily the result of a decrease in fully-insured member month enrollment by 428,125, or 11.2%, mainly in our rated groups and individual products and reflecting pricing sensitivity, cancellation of several commercial accounts and attrition in existing accounts as a result of the island’s challenging economic situation. The effect of the lower membership is partially offset by a 7.0% year over year increase in average premium rates.

Administrative service fees decreased by $49.4 million, or 53.3%, to $43.2 million during the nine months ended September 30, 2015. This decrease is mainly due to the change in the Medicaid business model from an ASO contract, where administrative service fees are recorded, to a fully insured model, where medical premiums are recorded.

Medical Claims Incurred

Medical claims incurred during the nine months ended September 30, 2015 increased by $390.4 million, or 31.9%, to $1,614.0 million when compared to the nine months ended September 30, 2014. The MLR of the segment increased 150 basis points during the 2015 period, to 86.9%. These fluctuations are primarily attributed to the net effect of the following:

•

Effective April 1, 2015, the Medicaid business changed from ASO model to a fully insured model. The medical claims incurred related to this contract for the six months ended September 30, 2015 amounted $370.9 million. The medical loss ratio of this segment was 91.5%. This MLR was impacted by the $7.8 million risk-sharing adjustment and favorable prior period reserve developments. Excluding the effect of these items, the MLR would have been 89.8%.

•

The medical claims incurred of the Medicare business increased by $55.7 million, or 8.6%, during the 2015 period and its MLR increased by 130 basis points, to 86.3%. Excluding the effect of prior period reserve developments and risk-score adjustments in the 2015 and 2014 periods, the MLR presents an increase of 70 basis points, largely reflecting the impact of lower average per member per month premiums in Medicare Advantage products and higher pharmacy costs and utilization trends.

•

The medical claims incurred of the Commercial business decreased by $36.1 million, or 6.3%, during the 2015 period mostly due to the lower fully-insured member month enrollment. The Commercial MLR was 84.4%, which is 120 basis points lower than the MLR for the prior year. Excluding the effect of prior period reserve developments in 2015 and 2014, the MLR would have decreased by 40 basis points reflecting pricing adjustments that were proportionate with claim trends and improvement in the U.S. Virgin Islands MLR; offset in part by increased pharmacy costs.

Table of Contents

Medical Operating Expenses

Medical operating expenses for the nine months ended September 30, 2015 increased by $9.4 million, or 3.4%, to $289.5 million when compared to the nine months ended September 30, 2014. The operating expense ratio decreased by 320 basis points, from 18.4% in 2014 to 15.2% in 2015 as a result of the increase in premiums revenue. The increase in medical operating expenses is mostly due to the net effect of the $4.4 million contingency accrual recorded in the 2015 period, the increase in the provision for doubtful receivables, increase in the Health Insurance Providers Fee and an increase in professional services related to Medicare risk scoring and our strategic transformation efforts. These increases were partially offset by lower operating expenses in the Medicaid business after the change in the contract from eight regions under an ASO arrangement to a fully-insured model in only two regions. The contingency accrual reflects our estimate of the outcome of certain legal and regulatory matters based on the advice of our legal counsel. As we have previously disclosed we are involved in various regulatory proceedings. Our attorneys continuously assess the risks related to these contingencies and given their current stage, they have recommended an increase on our reserve, which we have taken in the third quarter.

Life Insurance Operating Results

	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in millions)	2105			2014			2105			2014
Operating revenues:
Premiums earned, net:
Premiums earned	$	38.2		$	37.7		$	115.1		$	112.9
Assumed earned premiums		-			0.7			2.2			0.7
Ceded premiums earned		(2.5	)		(2.6	)		(7.4	)		(7.9	)
Premiums earned, net		35.7			35.8			109.9			105.7
Net investment income		5.8			6.0			17.7			17.6
Total operating revenues		41.5			41.8			127.6			123.3
Operating costs:
Policy benefits and claims incurred		19.8			18.9			60.5			55.1
Underwriting and other expenses		17.4			17.2			52.7			52.1
Total operating costs		37.2			36.1			113.2			107.2
Operating income	$	4.3		$	5.7		$	14.4		$	16.1
Additional data:
Loss ratio		55.5	%		52.8	%		55.1	%		52.1	%
Operating expense ratio		48.7	%		48.0	%		48.0	%		49.3	%

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Operating Revenues

Premiums earned, net for the three months ended September 30, 2015 remained in line, decreasing only by $0.1 million, or 0.3% to $35.7 million when compared to the three months ended September 30, 2014.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred for the three months ended September 30, 2015 increased by $0.9 million, or 4.8%, to $19.8 million when compared to the three months ended September 30, 2014, mostly reflecting the higher claims incurred in the cancer line of business and an increase in the policy actuarial reserves, offset in part by a decrease in the claims assumed under retrocession reinsurance agreements. The loss ratio for the period increased from 52.8% in 2014 to 55.5% in 2015, or 270 basis points.

Underwriting and Other Expenses

Underwriting and other expenses for the three months period ended September 30, 2015 increased $0.2 million, or 1.2%, to $17.4 million when compared to the three months ended September 30, 2014. The increase is related to increased commissions and general expenses related to the development of the Costa Rica operations, partially offset by a lower Deferred Acquisitions Costs (DAC) and Value of Business Acquired (VOBA) amortization resulting from improved portfolio persistency when compared to the same period last year. The segment’s operating expense ratio increased 70 basis points from 48.0% in 2014 to 48.7% in 2015.

Table of Contents

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Operating Revenues

Premiums earned, net for the nine months ended September 30, 2015 increased by $4.2 million, or 4.0% to $109.9 million when compared to the nine months ended September 30, 2014 mostly reflecting premium growth in the segment’s individual life and cancer lines of business and major medical health premiums, as well as to an increase of $1.5 million of new premiums assumed on retrocession reinsurance agreements entered during the second quarter of 2014.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred for the nine months ended September 30, 2015 increased by $5.4 million, or 9.8%, to $60.5 million when compared to the nine months ended September 30, 2014, mostly reflecting $3.8 million of claims increase mostly in the cancer line of business and major medical health claims, and an increase of $1.3 million of claims assumed under retrocession reinsurance agreements, which carry a higher loss ratio. The loss ratio for the period increased from 52.1% in 2014 to 55.1% in 2015, or 300 basis points.

Underwriting and Other Expenses

Underwriting and other expenses for the nine months ended September, 2015 increased $0.6 million, or 1.2%, to $52.7 million when compared to the nine months ended September 30, 2014. The increase is related to increased commissions and general expenses, some related to the development of the Costa Rica operations, partially offset by a lower DAC and VOBA amortization reflecting improved portfolio persistency when compared to the same period last year. As a result of the larger increase in premiums during this period, the segment’s operating expense ratio improved 130 basis points from 49.3% in 2014 to 48.0% in 2015.

Table of Contents

Property and Casualty Insurance Operating Results

	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in millions)	2015			2014			2015			2014
Operating revenues:
Premiums earned, net:
Premiums written	$	32.3		$	33.2		$	99.3		$	104.5
Premiums ceded		(12.0	)		(13.5	)		(35.3	)		(38.3	)
Change in unearned premiums		1.4			2.6			3.0			3.3
Premiums earned, net		21.7			22.3			67.0			69.5
Net investment income		2.0			2.2			6.1			6.3
Total operating revenues		23.7			24.5			73.1			75.8
Operating costs:
Claims incurred		10.3			11.7			32.9			35.1
Underwriting and other expenses		10.8			10.5			33.6			33.2
Total operating costs		21.1			22.2			66.5			68.3
Operating income	$	2.6		$	2.3		$	6.6		$	7.5
Additional data:
Loss ratio		47.5	%		52.5	%		49.1	%		50.5	%
Operating expense ratio		49.8	%		47.1	%		50.1	%		47.8	%
Combined ratio		97.3	%		99.6	%		99.2	%		98.3	%

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Operating Revenues

Total premiums written during the three months ended September 30, 2015 decreased by $0.9 million, or 2.7%, to $32.3 million, mostly resulting from lower sales of Commercial products, primarily in the Commercial Auto and Commercial Package insurance products.

Premiums ceded to reinsurers during the three months ended September 30, 2015 decreased by $1.5 million, or 11.1%, to $12.0 million mostly due to lower current year non-proportional reinsurance premiums. The ratio of premiums ceded to premiums written decreased by 350 basis points, from 40.7% in 2014 to 37.2% in 2015. The change in unearned premiums presents a decrease of $1.2 for the three months ended September 30, 2015 mostly reflecting the segments lower volume of writings in 2015.

Claims Incurred

Claims incurred during the three months ended September 30, 2015 decreased by $1.4 million, or 12.0%, to $10.3 million. The loss ratio decreased by 500 basis points, to 47.5% during this period primarily as a result of favorable loss experience, particularly in the General Liability line of business.

Underwriting and Other Expenses

Underwriting and other operating expenses for the three months ended September 30, 2015 increased by $0.3 million, or 2.9%, to $10.8 million mostly due to an increase in salaries and benefits and a lower dividend distribution form the Joint Underwriters Association during the 2015 period. The operating expense ratio increased by 270 basis points, to 49.8%, when compared to the three months ended September 30, 2014.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Operating Revenues

Total premiums written during the nine months ended September 30, 2015 decreased by $5.2 million, or 5.0%, to $99.3 million, mostly resulting from lower sales of Commercial products, primarily in the Commercial Auto and Commercial Package insurance products.

Table of Contents

Premiums ceded to reinsurers during the nine months ended September 30, 2015 decreased by $3.0 million, or 7.8%, to $35.3 million due to lower non-proportional reinsurance cost and lower cession for commercial property in the current year. The ratio of premiums ceded to premiums written decreased by 120 basis points, from 36.7% in 2014 to 35.5% in 2015.

Claims Incurred

Claims incurred during the nine months ended September 30, 2015 decreased by $2.2 million, or 6.3%, to $32.9 million. The loss ratio decreased by 140 basis points, to 49.1% during this period mainly resulting from a decrease in losses in the Medical Malpractice line of business.

Underwriting and Other Expenses

Underwriting and other operating expenses for the nine months ended September 30, 2015 increased $0.4 million, or 1.2%, to $33.6 million mostly due to an increase in net commissions primarily due to a lower capitalization of acquisition costs. The operating expense ratio increased by 230 basis points, to 50.1%, when compared to the nine months ended September 30, 2014.

Table of Contents

Liquidity and Capital Resources

Cash Flows

A summary of our major sources and uses of cash for the periods indicated is presented in the following table:

	Nine months ended September 30,
(Dollar amounts in millions)	2015			2014
Sources of cash:
Cash provided by operating activities	$	171.5		$	60.8
Net proceeds of investment securities		-			24.3
Proceeds from policyholder deposits		5.6			6.4
Total sources of cash		177.1			91.5
Uses of cash:
Net purchases of investment securities		(17.6	)		-
Net capital expenditures		(5.6	)		(3.8	)
Repurchase and retirement of common stock		(41.0	)		(6.0	)
Repayments of long-term borrowings		(12.2	)		(1.5	)
Surrenders of policyholder deposits		(10.5	)		(6.4	)
Other		(5.8	)		(7.1	)
Total uses of cash		(92.7	)		(24.8	)
Net increase in cash and cash equivalents	$	84.4		$	66.7

Cash flow from operating activities increased by $110.7 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, principally due to an increase in premium collections by $396.9 million and a decrease in cash paid to suppliers and employees by $9.5 million, offset in part by higher claims paid by $282.3 million. The increase in premiums collected and claims paid is principally the result of the change in the Medicaid business model from ASO model to a fully insured model.

During the nine months ended September 30, 2015 we received $5.6 million in policyholder deposits, this represents a decrease of $0.8 million when compared to the prior year and is the result of lower sales of annuity products.

Net purchases of sales of investment securities were $17.6 million during the nine months ended September 30, 2015, primarily resulting from the net cash flows received from the purchases and sales of investment securities during the 2015 period following our asset/liability management strategy. During the nine months ended September 30, 2014 we had net proceeds of investments of $24.3 million.

Repurchase and retirement of common stock amounted to $41.0 million reflecting the repurchase and retirement of 1,894,794 shares of common stock during the nine months ended September 30, 2015 under the Corporation’s Class B common stock repurchase program.

Repayments of long-term borrowings increased by $12.2 during the nine months ended September 30, 2015, primarily due to an $11.0 million repayment of the senior unsecured notes principal.

The decrease in other uses of cash is attributed to the changes in the amount of outstanding checks over bank balances in the 2015 period.

Share Repurchase Program

In October 2014 the Company’s Board of Directors authorized a $50.0 million repurchase program of our Class B common stock. Repurchases were conducted through open-market purchases of Class B shares only, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2015, the Company repurchased and retired 1,894,794 shares of our Class B Common Stock at an average per share price of $21.85, for an aggregate cost of $41.0 million.

Table of Contents

Financing and Financing Capacity

We have several short-term facilities available to address timing differences between cash receipts and disbursements. These short-term facilities are mostly in the form of arrangements to sell securities under repurchase agreements. As of September 30, 2015, we had $135.0 million of available credit under these facilities. There are no outstanding short-term borrowings under these facilities as of September 30, 2015.

As of September 30, 2015, we had the following long-term borrowings:

•

On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes due December 2020 (the 6.6% notes). On October 1, 2010 and May 14, 2015 we repaid $25.0 million and $11.0 million, respectively, of the principal of these senior unsecured notes. Amount currently outstanding is $24.0 million.

•

On November 1, 2010, we entered into a $25.0 million arrangement to sell securities under repurchase agreements that matures in November 2015. This repurchase agreement pays interests on a quarterly basis at 1.96%. At September 30, 2015 investment securities available for sale with fair value of $27.1 million (face value of $27.1 million) were pledged as collateral under this agreement.

The 6.6% notes contain certain non-financial covenants. At September 30, 2015, we are in compliance with these covenants.

In addition, we are a party to a secured term loan with a commercial bank in Puerto Rico. This secured loan with original principal balance of $41.0 million, bears interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 100 basis points and requires monthly principal repayments of $0.1 million. As of September 30, 2015, this secured loan had an outstanding balance of $13.2 million and average annual interest rate of 1.25%. This secured loan is guaranteed by a first lien on our land, buildings and substantially all leasehold improvements, as collateral for the term of the agreements under a continuing general security agreement. This secured loan contains certain non-financial covenants that are customary for this type of facility, including, but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of September 30, 2015 we are in compliance with these covenants. Failure to meet these covenants may trigger the accelerated payment of the outstanding balance.

On November 4, 2015, TSS entered into a $50.0 million revolving loan agreement with a commercial bank in Puerto Rico. This unused line of credit has an interest rate of LIBOR plus 250 basis points, matures on November 4, 2016, and contains certain financial and non-financial covenants that are customary for this type of facility. The agreement stipulates that any unused balance would become unavailable should TSS stop collecting payments under the Medicaid contract for four consecutive weeks.

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

Further details regarding the senior unsecured notes and the credit agreements are incorporated by reference to “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business. We have exposure to market risk mostly in our investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in our exposure to financial market risks since December 31, 2014. A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)) of the Corporation and its subsidiaries. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of September 30, 2015, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.

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

Changes in Internal Controls Over Financial Reporting

No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended September 30, 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

For a description of our risk factors see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014.

Table of Contents

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

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

(Dollar amounts in millions, except per share data)	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs ¹		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs

July 1, 2015 to July 31, 2015		233,700	$	21.47		288,300	$	13.7
August 1, 2015 to August 31, 2015		215,433		23.15		215,433		8.7
September 1, 2015 to September 30, 2015		234,000		21.38		234,000		3.7

¹ In October 2014 the Company's Board of Directors authorized a $50.0 million Share Repurchase Program of its Class B common stock.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

(1) On November 3, 2015, the Board of Directors (the “Board”) of Triple-S Management Corporation (“the Company”), upon recommendation of the Corporate Governance and Nominating Committee of the Board, elected Mr. Roberto Santa María-Ros to serve as an independent director of the Company and fill the vacancy created by Mr. Francisco Toñarely-Barreto’s resignation as a director of the Corporation, which was reported in a Current Report on Form 8-K dated October 30, 2015. Mr. Santa María-Ros appointment to the Board will be effective on December 1, 2015 and for a term expiring on 2017.

Mr. Santa María-Ros was managing partner of the San Juan, Puerto Rico office of PricewaterhouseCooper LLP (“PwC”). He joined PwC in 1973 and was admitted to the partnership in 1988. In 2004, Mr. Santa María-Ros was appointed partner-in-charge of PwC’s audit practice division as well as Managing Partner of the San Juan office. Mr. Santa María-Ros served as Managing Partner of PwC’s San Juan office until his retirement in 2012. Mr. Santa María-Ros vast experience in the accounting and finance field will be a strong attribute for our Board.

The Board of Directors expects to appoint Mr. Santa María-Ros as a member of the Audit Committee of the Board at the Board’s next regular meeting to be held on or about December 12, 2015.

There is no arrangement or understanding between Mr. Santa María-Ros and any other person under which Mr. Santa María-Ros was appointed as a director of the Company. For service as a non-management director, Mr. Santa María will receive a fixed annual cash compensation of $80,000, paid in equal monthly installments, and equity compensation of $80,000, such equity compensation to be prorated for the portion of the year in which he serves as a director.

(2) On November 6, 2015, Triple-S Advantage, Inc., our Medicare Advantage subsidiary (“TSA”), executed a contract with Inovalon, Inc. (“Inovalon”), pursuant to which Inovalon will provide medical claims data analysis, medical records review, and other services related to the accuracy of Medicare Advantage risk adjustment data (the “Contract”).

The Contract will be effective as of January 1, 2016 and expires on December 31, 2017. Under the terms of the Contract, Inovalon will provide consulting and analytics services aimed to enhance the quality of service to members and providers in our Medicare Advantage products. Inovalon’s services under the Contract will include the identification and resolution of documentation and quality gaps in data, access to Inovalon’s proprietary reporting and analytics platform aimed to provide TSA additional business intelligence, analysis of claim-related data, and processing and analyzing risk adjustment data, among others.

Under the terms of the Contract, TSA will pay Inovalon a base processing fee and a per member per month fee based on the amount of members enrolled in TSA’s products. TSA estimates total fees to be paid under the Contract at approximately $17.6 million. The Contract contains representations and warranties and indemnity, termination and default provisions customary for these types of transactions. The foregoing summary of the terms and conditions of the Contract is subject to, and qualified in its entirety by the full text of the Contract included as Exhibit 10.1 filed with this Quarterly Report on Form 10-Q.

Item 6.

Exhibits

	Exhibits	Description

	10.1*	Master Services Agreement between Inovalon, Inc. and Triple-S Advantage Solutions, Inc.
	11	Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three months ended September 30, 2015 and 2014 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.
	31.1*	Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).
	31.2*	Certification of the Vice President and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).
	32.1*	Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350.
	32.2*	Certification of the Vice President and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.

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

*	Filed herein.

Table of Contents

SIGNATURES

Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			Triple-S Management Corporation

			Registrant

Date:	November 9, 2015	By:	/s/ Ramón M. Ruiz-Comas
			Ramón M. Ruiz-Comas
			President and Chief Executive Officer

Date:	November 9, 2015	By:	/s/ Amílcar L. Jordán-Pérez
			Amílcar L. Jordán-Pérez
			Vice President and Chief Financial Officer