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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.



Overview

We are one of the most significant players in the managed care industry in 
Puerto Rico and have over 55 years of experience in this industry. We offer a 
broad portfolio of managed care and related products in the Commercial, 
Medicaid 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 Insurance Plan (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 health benefits in designated service regions in 
Puerto Rico. 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, 2016 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 June 30, 2017, we served approximately 
1,006,000 members across all regions of Puerto Rico. For the six months ended 
June 30, 2017 and 2016, our managed care segment represented approximately 92% 
of our total consolidated premiums earned. We also have significant positions 
in the life insurance and property and casualty insurance markets.

We participate in the managed care market through our subsidiaries, Triple-S 
Salud, Inc. (TSS), Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. 
(TSB). TSS, TSA and TSB are Blue Cross Blue Shield Association (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, Costa 
Rica, the British Virgin Islands, and Anguilla.

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).

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. See note 13 of the Condensed Consolidated Financial 
Statements included in Quarterly Report on Form 10-Q.

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 and the Government of 
Puerto Rico Health Insurance Plan. Premiums are derived from insurance 
contracts and administrative service fees are derived from self-funded 
contracts, under which we provide a range of services, including claims 
administration, billing and membership services, among others. Revenues also 
include premiums earned from the sale of property and casualty and life 
insurance contracts, and investment income and revenues derived from other 
segments. Substantially all of our earnings are generated in Puerto Rico.

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

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

Recent Developments

Puerto Rico Economy

During the past decade, Puerto Rico has been facing economic and fiscal 
challenges and its economy has been contracting. In response to the 
Commonwealth of Puerto Rico (the “Commonwealth”) fiscal and economic crisis, on 
June 30, 2016, the U.S. Congress enacted the Puerto Rico Oversight, Management 
and Economic Stability Act (“PROMESA”), which, among other things, established 
a Federally-appointed oversight board (the “Oversight Board”) comprised of 
seven members with ample powers over the finances of the Commonwealth and its 
instrumentalities. PROMESA also established a temporary stay on litigation to 
enforce rights or remedies related to financial liabilities of the 
Commonwealth, its instrumentalities and municipalities, which expired on May 1, 
2017. Finally, PROMESA established two separate mechanisms to restructure the 
debts of the Commonwealth, its public corporations and municipalities. The 
first mechanism permits modifications of financial indebtedness with the 
consent of a supermajority of affected financial creditors. The second 
mechanism, known as Title III, is a court-supervised debt-adjustment process, 
which is modeled after Chapter 9 of the U.S. Bankruptcy Code.

On February 28, 2017, the Governor of Puerto Rico submitted a 10-year fiscal 
plan to the Oversight Board, for its review and approval. After certain 
revisions, a final plan was approved by the Oversight Board on March 13, 2017, 
which includes spending reductions of $25.7 billion. The plan implies larger 
concessions from bondholders since there would be approximately $8 billion 
available for debt service payments over the next 10 years, compared to around 
$35 billion that is owed over that period. The plan also proposes (i) certain 
significant changes to the Commonwealth’s healthcare delivery model in order to 
reduce expenses and (ii) the elimination of subsidies to the municipalities, 
many of which have contracts for the provision of healthcare or other insurance 
products with our subsidiaries. The Oversight Board also required and approved 
fiscal plans for several government instrumentalities, including the Puerto 
Rico Aqueduct and Sewer Authority, the Puerto Rico Electric Power Authority 
(“PREPA”), and the Puerto Rico Highways and Transportation Authority (“PRHTA”), 
among others.

On May 3, 2017, after not reaching an agreement with its creditors, the 
Oversight Board filed an order seeking the protection of the provisions of 
Title III of PROMESA for the Commonwealth. Subsequently, the Oversight Board 
filed Title III petitions with respect to the Puerto Rico Sales Tax Financing 
Corporation (“COFINA” by its Spanish acronym), which issued the sales and use 
tax-backed bonds, the Employee Retirement System, PRHTA and PREPA. While the 
proceedings under Title III of PROMESA are ongoing, all enforcement and 
collection actions against the Commonwealth and these instrumentalities by its 
creditors are stayed. As a result of this court-supervised debt-adjustment 
process, the principal and interest payments due on general obligation, sales 
and use tax-backed bonds, and bonds from these government instrumentalities 
will likely be restructured and such restructuring could lead to significant 
additional losses on such holdings. Further, on May 30, 2017, pursuant to a 
court order under COFINA’s Title III proceeding, funds held by the trustee of 
the COFINA bonds have not been applied for the payment of such bonds pending 
the resolution of various legal disputes. On June 6, 2017, S&P downgraded 
COFINA to “D”. Although as of the date hereof, these entities are the only 
instrumentalities for which the Oversight Board has sought the restructuring 
authority provided by PROMESA, in the future, the Oversight Board may use the 
restructuring mechanisms of PROMESA for other instrumentalities of the 
Commonwealth, including it municipalities.

Although the Oversight Board has not sought the protection of Title III of 
PROMESA for the Puerto Rico Health Insurance Administration (“ASES” by its 
Spanish acronym), the instrumentality responsible for the administration of the 
Government’s health plan, ASES may be affected by the Commonwealth’s fiscal 
plan and the proceedings commenced for the Commonwealth under Title III of 
PROMESA because its state-based funding is solely dependent on appropriations 
from the Government’s general fund. Notwithstanding the Government’s statement 
in recent legislation that its public policy includes guaranteeing the 
continuity of public services in essential areas such as health, security, 
education, social work and development, among others, it is uncertain how the 
Commonwealth’s Title III proceeding will affect ASES and the contracts 
administered by it.

If the liquidity of the Government of Puerto Rico, its agencies, municipalities 
and public corporations becomes significantly affected as a result of their 
inability to raise funding in the market or generate enough revenues, we may 
face credit losses in our premium and fees receivables from these and other 
government related entities. As of June 30, 2017, the Company had premiums and 
other receivables of $63.6 million from the Government of Puerto Rico, 
including its agencies, municipalities and public corporations with a related 
allowance for doubtful receivables of $14.9 million. We also hold several 
positions categorized as Obligations of the Commonwealth of Puerto Rico, 
including one COFINA bond, which are susceptible to the aforementioned recent 
developments in the economy, see note 3 to the unaudited consolidated financial 
statements included in this Quarterly Report on Form 10-Q.

Legislation

On July 23, 2017, the Commonwealth enacted Act 47-2017 (“Act 47”), which, among 
other things, imposes restrictions on utilization review (“UR”) processes 
related to hospitalizations and the ability of managed care organizations 
(“MCO”s), to conduct internal review processes at any level of appeal. Act 47 
also creates a statutory cause of action against MCOs for intervening with the 
“diagnostic and medical treatment of a patient” making them joint and severally 
liable in those cases in which the patient suffers damages as a direct or 
indirect result of such intervention. Act 47 orders the Puerto Rico Patient's 
Advocate Office and the Puerto Rico Health Insurance Administration (“ASES”), 
to adopt the necessary regulations to ensure compliance with the provisions of 
Act 47 within 60 days of its enactment. Act 47 specifically orders ASES to 
regulate UR according to the United States’ national standards. We are closely 
monitoring how Act 47 and its regulations will impact the Company.


Puerto Rico Government Health Reform Program

On June 30, 2017, TSS agreed to extend its contract with ASES for the provision 
of health services in the Metro North and West regions of the Puerto Rico 
Government’s health insurance program, which expired on June 30, 2017, for a 
three-month period beginning July 1, 2017 and ending September 30, 2017. This 
extension is intended to ensure the continuity of services while the parties 
conclude negotiations for the renewal of the contract through the remainder of 
the Puerto Rico Government’s 2017-2018 fiscal year, which ends June 30, 2018. 
Under the contract extension, ASES will increase its payment to TSS from a rate 
of $165.93 to $183.38 per member per month (PMPM) for the Metro North region 
and from $138.37 to $148.99 PMPM for the West region. The new rates reflect 
cost and utilization trends for the 2016-2017 fiscal year and are subject to 
CMS approval, which is expected to occur during the 90 day extension period. 
ASES will continue to pay current PMPM rates until CMS approves new PMPM rates, 
at which time ASES will pay the cumulative difference between both rates. Upon 
reaching an agreement on outstanding terms of the contract renewal, the new 
rates will also apply for the remainder of the 2017-2018 fiscal year.


Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Operating Revenues

Consolidated premiums earned, net for the three months ended June 30, 2017 
decreased by $6.2 million, or 0.9%, to $722.9 million when compared to the 
three months ended June 30, 2016. This decrease primarily reflects lower 
premiums in the Managed Care segment by $7.6 million mainly due to lower 
Medicare risk score revenue adjustments and lower membership in the segment’s 
Medicaid and Commercial businesses. These decreases were partially offset by 
higher Life Insurance premiums, and by the Medicaid profit sharing accrual 
recorded during the three months ended June 30, 2016.

Net Realized Investment Gains

Consolidated net realized investment gains are the result of sales of debt and 
equity securities classified as available for sale, following our 
asset/liability management and tax planning strategies. The net realized gains 
for the period ending June 30, 2016 were partially offset by $1.4 million 
other-than-temporary impairments related to certain equity investments.

Other Income, Net

The $3.2 million decrease in consolidated other income reflects the collection 
of interest charged for late payment related to the current Medicaid contract 
during the three months ended June 30, 2016.


Claims Incurred

Consolidated claims incurred decreased by $10.8 million, or 1.7%, to $611.3 
million during the three months ended June 30, 2017, mostly due to lower claims 
in the Managed Care segment. The decrease in Managed Care claims primarily 
reflects lower claims incurred in the segment’s Commercial and Medicaid 
businesses primarily driven by lower enrollment, better claim experience in the 
Commercial business, offset in part by higher pharmacy claims trends in the 
Medicare and Medicaid businesses, and enhanced benefits in the Medicare 2017 
offerings. The consolidated loss ratio decreased by 70 basis points to 84.6%.

Operating Expenses

Consolidated operating expenses during the three months ended June 30, 2017 
decreased by $2.4 million, or 2.0%, to $118.7 million. The lower operating 
expenses are mostly the result of the decrease in the Health Insurance 
Providers Fee (HIP fee) of $10.7 million due to the 2017 tax holiday, offset by 
increase in general operating expenses totaling approximately $8.1 million. For 
the three months ended June 30, 2017, the consolidated operating expense ratio 
decreased 20 basis points to 16.3%.

Income Taxes

Consolidated income tax expense decreased by $2.2 million, to an expense of 
$1.5 million for the three months ended June 30, 2017. The year over year 
change primarily results from the prior year reassessment done by the Property 
and Casualty segment of the tax rate used to measure several temporary 
differences, which increased the deferred tax rate from 20% to 39%, resulting 
in an increase to the 2016 deferred tax expense of $2.6 million.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Operating Revenues

Consolidated premiums earned, net for the six months ended June 30, 2017 
decreased by $42.4 million, or 2.9%, to $1,425.2 million when compared to the 
six months ended June 30, 2016. This decrease primarily reflects lower premiums 
in the Managed Care segment by $45.7 million mainly due to lower membership in 
the segment’s Medicaid and Commercial businesses.

Net Realized Investment Gains

Consolidated net realized investment gains are the result of sales of debt and 
equity securities classified as available for sale, following our 
asset/liability management and tax planning strategies. The net realized gains 
for the period ended June 30, 2016 were partially offset by $1.4 million 
other-than-temporary impairments related to certain equity investments.

Other Income, Net

The $1.6 million decrease in consolidated other income reflects the collection 
of interest charged for late payment related to the current Medicaid contract 
during the six months ended June 30, 2016.

Claims Incurred

Consolidated claims incurred decreased by $16.6 million, or 1.3%, to $1,232.2 
million during the six months ended June 30, 2017, mostly due to lower claims 
in the Managed Care segment. The decrease in Managed Care claims primarily 
reflects lower claims incurred in the segment’s Commercial and Medicaid 
businesses primarily driven by lower enrollment, better claim experience in the 
Commercial business, offset in part by higher pharmacy claims trends in the 
Medicare and Medicaid businesses, and enhanced benefits in the Medicare 2017 
offerings. The consolidated loss ratio increased by 140 basis points to 86.5%.


Operating Expenses

Consolidated operating expenses during the six months ended June 30, 2017 
decreased by $14.5 million, or 5.9%, to $229.6 million as compared to the 
operating expenses during the six months ended June 30, 2016. The lower 
operating expenses and expense ratio are mostly the result of the decrease in 
the HIP Fee of $21.6 million due to the 2017 moratorium offset by increase in 
general operating expenses totaling approximately $6.7 million. For the six 
months ended June 30, 2017, the consolidated operating expense ratio decreased 
50 basis points to 16.0%.

Income Taxes

Consolidated income taxes decreased by $10.6 million, to a net benefit of $5.2 
million for the six months ended June 30, 2017. The year over year change in 
income taxes primarily results from a loss before taxes incurred in the 2017 
period in the Managed Care segment.


Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Medical Operating Revenues

Medical premiums earned for the three months ended June 30, 2017 decreased by 
$7.6 million, or 1.1%, to $661.7 million when compared to the medical premiums 
earned during the three months ended June 30, 2016. This decrease is 
principally the result of the following: • Premiums earned by the Commercial 
business decreased by $11.7 million, or 5.4%, to $203.3 million. This 
fluctuation primarily reflects lower fully-insured member enrollment during the 
quarter of approximately 61,800 member months and $3.6 million related to the 
suspension of the HIP fee pass-through; offset by an increase in average 
premium rates of approximately 5%.

• Premiums earned by the Medicare business decreased by $6.5 million, or 2.4%, 
to $266.6 million, primarily reflecting a lower risk score revenue adjustment 
in 2017 by $17.5 million, lower average premium rates due to a reduction in the 
2017 Medicare reimbursement rates; offset in part by an increase in member 
month enrollment of approximately 12,000 lives.


Premiums earned by the Medicaid business amounted to $191.8 million, $10.6 
million, or 5.8% higher than the same period last year. Increase primarily 
reflects the $14.6 million profit sharing accrual that decreased premiums 
during the 2016 period and the $11.6 million premium collection related to our 
compliance with the contract’s incentive metrics. These increases were 
partially offset by lower fully-insured member months enrollment by 
approximately 37,000 lives, the 4% decrease in the average premium rates that 
went into effect July 1, 2016, and $2.6 million related to the suspension of 
the HIP fee pass-through as a result of the 2017 moratorium.


Medical Claims Incurred

Medical claims incurred during the three months ended June 30, 2017 decreased 
by $11.0 million, or 1.9%, to $579.2 million when compared to the three months 
ended June 30, 2016. The medical loss ratio (MLR) of the segment decreased 70 
basis points during the 2017 period, to 87.5%. This fluctuation is primarily 
attributed to the net effect of the following: • The medical claims incurred of 
the Commercial business decreased by $28.2 million, or 14.7%, during the 2017 
period mostly driven by lower enrollment. The MLR, at 80.6%, was 860 basis 
point lower than the same quarter last year. Adjusting for the effect of prior 
period reserve developments, the Commercial MLR would have been 83.1%, 450 
basis points lower than the adjusted MLR for last year primarily reflecting 
claim trends that are lower than our premium trends following the continuity of 
our underwriting discipline.

• The medical claims incurred of the Medicare business increased by $5.9 
million, or 2.5%, during the 2017 period and its MLR increased by 430 basis 
points, to 90.9%. Adjusting for the effect of prior period reserve developments 
in 2017 and 2016 and moving the risk score revenue adjustments to their 
corresponding period, the Medicare MLR would have been approximately 94.3% this 
quarter, about 300 basis points higher than last year, primarily reflecting 
higher trends in Part B drugs, pharmacy benefits and the improvement of 
benefits in 2017 products taking advantage of the HIP fee moratorium.

• The medical claims incurred in the Medicaid business increased by $11.3 
million, or 7.0%, during the 2017 period and its MLR increased by 100 basis 
points, to 90.3%. Adjusting for the effect of prior period reserve developments 
in 2017 and 2016, as well as for the impact of the profit sharing accrual and 
this year’s quality incentive premiums, the Medicaid MLR would have been 
approximately 96.0% this quarter, about 580 basis points higher than last year. 
The higher MLR primarily reflects increased pharmacy and outpatient claim 
trends and the lower premium rates that went into effect July 1, 2016.


Medical Operating Expenses

Medical operating expenses for the three months ended June 30, 2017 decreased 
by $3.3 million, or 3.6%, to $89.5 million when compared to the three months 
ended June 30, 2016. The operating expense ratio decreased by 30 basis points 
to 13.4% in 2017. The lower operating expenses and expense ratio are mostly the 
result of the decrease in the HIP Fee of $10.7 million due to the 2017 
moratorium offset by increase in personnel costs, general operating expenses of 
totaling approximately $6.9 million.


Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Medical Operating Revenues

Medical premiums earned for the six months ended June 30, 2017 decreased by 
$45.7 million, or 3.4%, to $1,302.2 million when compared to the medical 
premiums earned during the six months ended June 30, 2016. This decrease is 
principally the result of the following: • Premiums earned by the Commercial 
business decreased by $22.1 million, or 5.1%, to $408.4 million. This 
fluctuation primarily reflects lower fully-insured enrollment during the year 
of approximately 144,900 member months and $7.2 million related to the 
suspension of the HIP fee pass-through; offset by an increase in average 
premium rates of approximately 5%.

• Premiums earned by the Medicaid business decreased by $13.9 million, or 3.6% 
to $369.5 million. Decrease primarily reflects lower fully-insured member 
months enrollment by approximately 85,900 lives, and the 4.0% decrease in 
average premium rates that went into effect July 1, 2016. Also contributing to 
the lower premiums during this period was a $5.3 million related to the 
suspension of the HIP fee pass-through as a result of the 2017 moratorium. 
Decreases are partially offset by the impact of the profit sharing accrual in 
the 2016 period that decreased premiums by $10.6 million and by the $11.6 
million premium collection related to our compliance with the contract’s 
quality incentive metrics.

• Premiums earned by the Medicare business decreased by $9.7 million, or 1.8%, 
to $524.3 million. Decrease primarily reflects lower risk score revenue by 
$20.9 million as well as lower average premium rates due to a reduction in the 
2017 Medicare reimbursement rates. These decreases were partially offset by an 
increase in member month enrollment of approximately 11,000 lives.


Medical Claims Incurred

Medical claims incurred during the six months ended June 30, 2017 decreased by 
$20.0 million, or 1.7%, to $1,166.5 million when compared to the six months 
ended June 30, 2016. The MLR of the segment increased 160 basis points during 
the 2017 period, to 89.6%. This fluctuation is primarily attributed to the net 
effect of the following: • The medical claims incurred of the Commercial 
business decreased by $35.8 million, or 9.6%, during the 2017 period mostly 
driven by lower enrollment. The MLR, at 82.1%, was 390 basis point lower than 
the same period last year. Adjusting for the effect of prior period reserve 
developments, the Commercial MLR would have been 82.8%, 390 basis points lower 
than the adjusted MLR for last year primarily reflecting claim trends that are 
lower than our premium trends following the continuity of our underwriting 
discipline.

• The medical claims incurred in the Medicaid business increased by $3.0 
million, or 0.9%, during the 2017 period and its MLR increased by 420 basis 
points, to 93.9%. Adjusting for the effect of prior period reserve developments 
in 2017 and 2016, as well as for the impact of the profit sharing accrual and 
this year’s quality incentive premiums, the Medicaid MLR would have been 
approximately 95.4% this quarter, about 620 basis points higher than last year. 
The higher MLR primarily reflects increased pharmacy and outpatient claim 
trends and the lower premium rates that went into effect July 1, 2016.

• The medical claims incurred of the Medicare business increased by $12.9 
million, or 2.7%, during the 2017 period and its MLR increased by 410 basis 
points, to 92.4%. Adjusting for the effect of prior period reserve developments 
in 2017 and 2016 and moving the risk score revenue adjustments to their 
corresponding period, the Medicare MLR would have been approximately 94.1% this 
quarter, about 210 basis points higher than last year, primarily reflecting 
higher trends in Part B drugs, pharmacy benefits and the improvement of 
benefits in 2017 products taking advantage of the HIP fee moratorium.

Medical Operating Expenses

Medical operating expenses for the six months ended June 30, 2017 decreased by 
$14.7 million, or 7.9%, to $170.8 million when compared to the six months ended 
June 30, 2016. The operating expense ratio decreased by 60 basis points to 
13.0% in 2017. The lower operating expenses and expense ratio are mostly the 
result of the decrease in the HIP Fee of $21.6 million due to the 2017 
moratorium offset by increase in general operating expenses of totaling 
approximately $6.7 million.

Life Insurance Operating Results

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Operating Revenues

Premiums earned, net increased by $1.2 million, or 3.1% to $40.0 million as the 
result of premium growth in the segment’s Individual Life and Cancer lines of 
business, as well as growth in the Costa Rica operations.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred remained at $21.9 million, the same as the 
2016 period, despite the higher volume of business during the year. The loss 
ratio for the period decreased to 54.8% in 2017, or 160 basis points, 
reflecting the higher volume of premiums during this quarter.

Underwriting and Other Expenses

Increase in underwriting and other expenses of $1.2 million, or 6.6%, to $19.4 
million mostly reflects higher commissions following the segment’s premium 
growth. In addition, the segment has incurred in higher development and 
marketing expenses related to the expansion of the Costa Rica operations. As a 
result, the segment’s operating expense ratio increased to 48.5%, or 160 basis 
points.


Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Operating Revenues

Premiums earned, net increased by $2.6 million, or 3.3% to $80.5 million as the 
result of premium growth in the segment’s Individual Life and Cancer lines of 
business, as well as growth in the Costa Rica operations.

Policy Benefits and Claims Incurred

Policy benefits and claims incurred increased by $2.2 million, or 5.1% to $45.6 
million, mostly as the result of the higher volume of business during the year, 
particularly in the Cancer and Individual Life lines of business. The loss 
ratio for the period increased to 56.6% in 2017, or 90 basis points, reflecting 
the higher volume in the Cancer line of business, which has a higher loss 
ratio, as well as to a higher claims experience in this particular line of 
business.

Underwriting and Other Expenses

Increase in underwriting and other expenses of $2.2 million, or 6.1%, to $38.4 
million mostly reflects higher commissions following the segment’s premium 
growth mentioned above. In addition, the segment has incurred in higher 
development and marketing expenses related to the expansion of the Costa Rica 
operations. As a result, the segment’s operating expense ratio increased to 
47.7%, or 120 basis points.

Property and Casualty Insurance Operating Results

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Operating Revenues

Total premiums written increased by $5.5 million, or 13.4%, to $46.4 million 
driven by higher sales of Commercial products, particularly Commercial property 
products, mainly as a result of the acquisition of a large account during the 
2017 period.

The premiums ceded to reinsurers increased by $3.5 million, or 26.7%, mostly 
reflecting higher premiums written in Commercial insurance products during the 
three months ended June 30, 2017.

The change in unearned premiums presents an increase of $1.9 million mostly 
reflecting the segments higher premiums written in 2017.


Claims Incurred

Claims incurred increased by $0.1 million, or 0.9%, to $10.9 million during the 
three months ended June 30, 2017. The loss ratio increased by 20 basis points, 
to 50.0% during this period.

Underwriting and Other Expenses

Underwriting and other operating expenses decreased by $0.5 million, or 5.1%, 
to $9.3 million mostly due to a lower net commission expense during the three 
months ended June 30, 2017. The operating expense ratio was 42.7%, 250 basis 
points lower than last year.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Operating Revenues

Total premiums written increased by $5.3 million, or 7.7%, to $73.8 million, 
driven by higher sales of Commercial property and Commercial liability 
products, mainly as a result of the acquisition of a large account, as well as 
to higher sales of Personal package products.

The premiums ceded to reinsurers increased by $3.2 million, or 13.6%, mostly 
reflecting higher premiums written in Commercial insurance products during the 
six months ended June 30, 2017.

The change in unearned premiums presents an increase of $1.6 million mostly 
reflecting the segments higher premiums written in 2017.

Claims Incurred

Claims incurred increased by $0.9 million, or 4.4%, to $21.5 million during the 
six months ended June 30, 2017. The loss ratio increased by 150 basis points, 
to 49.4% during this period, primarily as a result of an unfavorable loss 
experience in the Commercial and Personal Auto lines of business.

Underwriting and Other Expenses

Underwriting and other operating expenses decreased by $0.9 million, or 4.2%, 
to $20.3 million mostly due to lower personnel costs. The operating expense 
ratio was 46.7%, 260 basis points lower than last year.


Liquidity and Capital Resources

Cash Flows

Cash flow from operating activities increased by $144.3 million for the six 
months ended June 30, 2017 as compared to the six months ended June 30, 2016, 
principally due to an increase in premium collections of $85.0 million, lower 
claims paid by $44.0 million, a decrease in cash paid to suppliers and 
employees of $9.2 million, and lower incomes tax paid by $5.7 million. The 
higher premium collections follow the collection in advance of the July 2017 
Medicare premiums from CMS.

During the six months ended June 30, 2017, we received the remaining $24.3 
million from a loan with a commercial bank related with a credit agreement 
entered into in December 2016. These proceeds were used to prepay the 
outstanding principal amount of $24.0 million of the 6.6% senior unsecured 
notes.

There were no repurchase and retirement of common stock during the six months 
ended June 30, 2017.

The fluctuation in the Other uses/sources of cash is attributed to changes in 
the amount of outstanding checks over bank balances.

Net capital expenditures increased by $6.0 million during the six months ended 
June 30, 2017 as compared to the six months ended June 30, 2016, principally 
due to initiatives related to information technology in the Managed Care 
segment.

Financing and Financing Capacity

We have several short-term facilities available to address timing differences 
between cash receipts and disbursements. These short-term facilities are mostly 
in the form of arrangements to sell securities under repurchase agreements. As 
of June 30, 2017, we had $60.0 million of available credit under these 
facilities. There are no outstanding short-term borrowings under these 
facilities as of June 30, 2017.

On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior 
unsecured notes originally due December 2020 (the 6.6% notes). These unsecured 
notes were paid in full on January 11, 2017.

On December 28, 2016, TSM entered into a $35.5 million credit agreement with a 
commercial bank in Puerto Rico. The agreement consists of three term loans: (i) 
Term Loan A in the principal amount of $11.2 million, (ii) Term Loan B in the 
principal amount of $20.2 million and (iii) Term Loan C in the principal amount 
of $4.1 million. Term Loan A matures in October 2023 while the Term Loans B and 
C mature in January 2024. Term Loan A was used to refinance the previous $41.0 
million secured loan payable with the same commercial bank in Puerto Rico. 
Proceeds from Term Loans B and C were received on January 11, 2017 and were 
used to prepay the outstanding principal amount plus accrued interest of the 
6.6% senior unsecured notes due January 2021 ($24.0 million). Pursuant to the 
credit agreement, interest is payable on the outstanding balance of the Loan at 
the following annual rate: (i) 1% over LIBOR for Term Loan A, (ii) 2.75% over 
LIBOR for Term Loan B, and (iii) 3.25% over LIBOR for Term Loan C. The loan 
includes certain financial and non-financial covenants, which 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 and dividends. Failure to meet these covenants may trigger 
the accelerated payment of the outstanding balance. As of June 30, 2017 we are 
in compliance with these covenants.

On March 11, 2016 TSS entered into a $30.0 million revolving loan agreement 
with a commercial bank in Puerto Rico. This unused line of credit had an 
interest rate of LIBOR plus 220 basis points and includes certain financial and 
non-financial covenants that are customary for this type of facility. This 
revolving loan agreement matured on March 11, 2017, and was not renewed.

On April 18, 2017, TSA entered into a $10.0 million revolving loan agreement 
with a commercial bank in Puerto Rico. This line of credit has an interest rate 
of 30-day LIBOR plus 25 basis points, and contains certain financial and 
non-financial covenants that are customary for this type of facility. As of 
June 30, 2017, there is no outstanding balance in this line of credit.

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

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, 
2016.