The Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting our financial condition and results of operations for the three months and six months ended June 30, 2008. 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, 2007. 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 the largest managed care company in Puerto Rico in terms of membership and have over 45 years of experience in the managed care industry. We offer a broad portfolio of managed care and related products in the Commercial, Commonwealth of Puerto Rico Health Reform (the Reform) and Medicare (including Medicare Advantage and the Part D stand-alone prescription drug plan (PDP)) markets. In the Commercial market we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. The Reform is a government of Puerto Rico-funded managed care program for the medically indigent, similar to the Medicaid program in the U.S. We have the exclusive right to use the Blue Shield name and mark throughout Puerto Rico, serve approximately one million members across all regions of Puerto Rico and hold a leading market position covering approximately 25% of the population. For the six months ended June 30, 2008, our managed care segment represented approximately 89.1% of our total consolidated premiums earned, net and approximately 59.4% of our operating income. We also have significant positions in the life insurance and property and casualty insurance markets. Our life insurance segment had a market share of approximately 13% (in terms of premiums written) as of December 31, 2007. Our property and casualty segment had a market share of approximately 9% (in terms of direct premiums) as of December 31, 2007.
We participate in the managed care market through our subsidiary, Triple-S, Inc. (TSI). Our managed care subsidiary is a Blue Cross and Blue Shield Association (BCBSA) licensee, which provides us with exclusive use of the Blue Shield brand in Puerto Rico.
We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (TSV) and in the property and casualty insurance market through our subsidiary, Seguros Triple-S, Inc. (STS), which represented approximately 5.5% and 5.6%, respectively, of our consolidated premiums earned, net for the six months ended June 30, 2008 and 17.8% and 13.5%, respectively, of our operating income for that period.
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.

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 Reform. 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. 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 in significant part 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 expenses, 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
Healthcare Reform Contracts
All of the Reform contracts, except the contract for the Metro-North region, expired on June 30, 2008. The government of Puerto Rico (the government) notified all Healthcare Reform carriers that the expired contracts would not be subject to a competitive bid; instead they would renegotiate the contracts of all existing carriers for an additional twelve-month period ending June 30, 2009. As of the date of this Quarterly Report on Form 10-Q, TSI has not finalized the negotiation process with the government. In July 2008, the contracts were amended extending them until August 30, 2008, at which time it is expected the negotiation process will be completed. Once such negotiation is completed, premium rates will be retroactively adjusted to July 1, 2008. On July 30, 2008, the government notified TSI that it had been selected as the managed care services carrier for the Metro-North region effective November 1, 2008. The contract for the Metro-North region is expected to be on an Administrative Services Only (ASO) basis. On an ASO agreement TSI would not generate premiums but instead administrative service fees. The Metro-North region is expected to have approximately 175,000 members. 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 June 30,
                                                           2008          2007

      Managed care enrollment:
      Commercial 1                                        577,371       576,314
      Reform                                              344,104       356,737
      Medicare Advantage                                   72,134        47,470

      Total                                               993,609       980,521

      Managed care enrollment by funding arrangement:
      Fully-insured                                       825,187       818,930
      Self-insured                                        168,422       161,591

      Total                                               993,609       980,521

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

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               Six months ended
                                                       June 30,                        June 30,
(Dollar amounts in millions)                      2008            2007            2008           2007

Revenues:
Premiums earned, net                           $  419.2           377.3         $ 823.6          725.8
Administrative service fees                         3.9             3.6             7.6            7.1
Net investment income                              14.3            11.0            27.7           22.2

Total operating revenues                          437.4           391.9           858.9          755.1
Net realized investment (loss) gains               (1.8 )           3.8            (1.1 )          5.0
Net unrealized investment (loss) gain on
trading securities                                 (1.0 )           0.6            (7.2 )         (1.4 )
Other income (expense), net                         1.4             2.2            (0.2 )          2.4

Total revenues                                    436.0           398.5           850.4          761.1

Benefits and expenses:
Claims incurred                                   354.8           308.0           705.0          605.4
Operating expenses                                 61.4            59.3           121.4          115.5

Total operating expenses                          416.2           367.3           826.4          720.9
Interest expense                                    3.9             4.1             7.6            8.0

Total benefits and expenses                       420.1           371.4           834.0          728.9

Income before taxes                                15.9            27.1            16.4           32.2
Income tax expense (benefit)                        3.8             6.3             3.1            6.9

Net income                                     $   12.1            20.8         $  13.3           25.3

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007 Consolidated premiums earned, net and administrative service fees increased by $42.2 million, or 11.1%, to $423.1 million during the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The increase was primarily due to an increase in the premiums earned, net in our managed care segment, principally

due to an increased volume in the Medicare business. Also, during the three months ended June 30, 2007, the managed care segment received approximately $8.1 million corresponding to the retroactive increase in premium rates of the Reform business for the period between November 1, 2006 and March 31, 2007. Consolidated net investment income increased by $3.3 million, or 30.0%, to $14.3 million during the three months ended June 30, 2008. This increase is attributed to a higher yield in 2008 as well as to a higher balance of invested assets.
Net Realized Investment Losses
Consolidated net realized investment losses of $1.8 million during the three months ended June 30, 2008 are the result of other-than-temporary impairments related to fixed income securities. The other-than-temporary impairments were offset in part by $0.6 million of net realized gains from the sale of fixed income and equity securities.
Net Unrealized Loss on Trading Securities and Other Income (Expense), Net The combined balance of our consolidated net unrealized loss on trading securities and other income (expense), net decreased by $2.4 million, to $0.4 million during the three months ended June 30, 2008. The decrease is principally due to an increase in the unrealized loss on trading securities and a decrease in the fair value of the derivative component of our investment in structured notes linked to the Euro Stoxx 50 and Nikkei 225 stock indexes; both decreases are due to market fluctuations. The unrealized loss experienced on trading securities represents a decrease of 0.8% in the market value of the portfolio, which is slightly lower than the decrease experienced by the Standard and Poor's 500 Index of 3.2%. The change in the fair value of the derivative component of these structured notes is included within other income (expense), net.
Claims Incurred
Consolidated claims incurred during the three months ended June 30, 2008 increased by $46.8 million, or 15.2%, to $354.8 million when compared to the claims incurred during the three months ended June 30, 2007. This increase is principally due to increased claims in the managed care segment as a result of higher enrollment and utilization trends. The consolidated loss ratio increased by 3.0 percentage points to 84.6%, primarily due to the fact that during the three months ended June 30, 2007 the managed care segment recorded the retroactive premium rate increase in the Reform business described above of approximately $8.1 million, which had the effect of reducing the consolidated loss ratio by 1.8 percentage points. Also, there were a higher utilization trends in the managed care segment for the period, particularly in the Medicare business.
Operating Expenses
Consolidated operating expenses during the three months ended June 30, 2008 increased by $2.1 million, or 3.5%, to $61.4 million as compared to the operating expenses during the three months ended June 30, 2007. This increase is primarily attributed to a higher volume of business, particularly in the Medicare business of our managed care segment. The consolidated operating expense ratio decreased by 1.1 percentage point, to 14.5% during the 2008 period mainly due to the aforementioned increase in volume.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007 Operating Revenues
Consolidated premiums earned, net and administrative service fees increased by $98.3 million, or 13.4%, to $831.2 million during the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The increase was primarily due to an increase in the premiums earned, net in our managed care segment, principally due to a higher volume in the Medicare business and the increases in premium rates of the Reform business during the second half of 2007. Consolidated net investment income increased by $5.5 million, or 24.8%, to $27.7 million during the six months ended June 30, 2008. This increase is attributed to a higher yield in 2008 as well as to a higher balance of invested assets.

Net Realized Investment Losses
Consolidated net realized investment losses of $1.1 million during the six months ended June 30, 2008 are primarily the result of other-than-temporary impairments related to fixed income securities. The other-than-temporary impairments were offset in part by $1.2 million of net realized gains from the sale of fixed income and equity securities.
Net Unrealized Loss on Trading Securities and Other Income (Expense), Net The combined balance of our consolidated net unrealized loss on trading securities and other income (expense), net decreased by $8.4 million, to $7.4 million during the six months ended June 30, 2008. The decrease is principally due to a decrease in the unrealized gain on trading securities and a decrease in the fair value of the derivative component of our investment in structured notes linked to the Euro Stoxx 50 and Nikkei 225 stock indexes; both decreases are due to market fluctuations. The unrealized loss experienced on trading securities represents a decrease of 10.5% in the market value of the portfolio, which is slightly lower than the decrease experienced by the Standard and Poor's 500 Index of 12.8%. The change in the fair value of the derivative component of these structured notes is included within other income (expense), net.
Claims Incurred
Consolidated claims incurred during the six months ended June 30, 2008 increased by $99.6 million, or 16.5%, to $705.0 million when compared to the claims incurred during the six months ended June 30, 2007. This increase is principally due to increased claims in the managed care segment as a result of higher enrollment and utilization trends. The consolidated loss ratio increased by 2.2 percentage points to 85.6%, primarily due to higher utilization trends in the managed care segment for the period, particularly in the Medicare business. Operating Expenses
Consolidated operating expenses during the six months ended June 30, 2008 increased by $5.9 million, or 5.1%, to $121.4 million as compared to the operating expenses during the 2007 period. This increase is primarily attributed to a higher volume of business, particularly in the Medicare business of our managed care segment. The consolidated operating expense ratio decreased by 1.2 percentage points, to 14.6% during the 2008 period mainly due to the aforementioned increase in volume.
Income Tax Expense (Benefit)
The decrease in income tax expense (benefit) during the six months ended June 30, 2008 is primarily the result of the lower income before tax during the period. The consolidated income tax rate decreased by 2.5 percentage points, to 18.9% during the six months ended June 30, 2008, primarily due to a higher taxable income in 2007 from our managed care segment, which has a higher effective tax rate than other segments.

Managed Care Operating Results

                                       Three months ended               Six months ended
                                            June 30,                        June 30,
 (Dollar amounts in millions)         2008            2007            2008            2007

 Operating revenues:
 Medical premiums earned, net:
 Commercial                       $     179.7           180.6     $     361.7           360.8
 Reform                                  80.9            86.6           161.9           158.4
 Medicare                               113.6            64.3           210.5           117.8

 Medical premiums earned, net           374.2           331.5           734.1           637.0
 Administrative service fees              4.8             4.6             9.3             9.0
 Net investment income                    6.1             4.7            11.7             9.5

 Total operating revenues               385.1           340.8           755.1           655.5

 Medical operating costs:
 Medical claims incurred                331.2           285.8           659.0           561.3
 Medical operating expenses              39.9            37.2            76.8            72.3

 Total medical operating costs          371.1           323.0           735.8           633.6

 Medical operating income         $      14.0            17.8     $      19.3            21.9

 Additional data:

 Member months enrollment:
 Commercial:
 Fully-insured                      1,228,783       1,247,353       2,464,272       2,501,096
 Self-funded                          499,317         484,505         995,379         963,828

 Total commercial member months     1,728,100       1,731,858       3,459,651       3,464,924
 Reform                             1,031,631       1,068,684       2,065,291       2,133,530
 Medicare                             215,828         136,214         406,357         264,844

 Total member months                2,975,559       2,936,756       5,931,299       5,863,298

 Medical loss ratio                      88.5 %          86.2 %          89.8 %          88.1 %
 Operating expense ratio                 10.5 %          11.1 %          10.3 %          11.2 %

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007 Medical Operating Revenues
Medical premiums earned for the three months ended June 30, 2008 increased by $42.7 million, or 12.9%, to $374.2 million when compared to the medical premiums earned during the three months ended June 30, 2007. This increase is principally the result of the following:
• Medical premiums generated by the Medicare business increased during the three months ended June 30, 2008 by $49.3 million, or 76.7%, to $113.6 million, primarily due to an increase in member months enrollment of 79,614, or 58.4% and a change in the mix of products. The increase in member months is the net result of an increase of 81,384, or 80.0%, in the membership of our Medicare Advantage products and a decrease of 1,770, or 5.1%, in the membership of our PDP product.

• Medical premiums earned in the Reform business decreased by $5.7 million, or 6.6%, to $80.9 million during the 2008 period. This fluctuation is primarily due to the effect in the 2007 period of the retroactive premium rate increase recorded in June 2007 for the period of November 1, 2006 to March 31, 2007 amounting to $8.1 million and a decrease in member months enrollment by 37,053 or 3.5%. Partially offsetting this decrease is the increase in premium rates effective July 2007. In the 2007 period this segment received a retroactive premium rate increase of approximately 6.7% which, even when effective November 1, 2006, was not received until June 2007.

• Medical premiums earned of the Commercial business decreased by $0.9 million, or 0.5%, to $179.7 million during the three months ended June 30, 2008. This fluctuation is the net result of a decrease in fully-insured member months enrollment of 18,570, or 1.5%, and an increase in the average premium rates of corporate accounts of 4.5%.

Medical Claims Incurred
Medical claims incurred during the three months ended June 30, 2008 increased by $45.4 million, or 15.9%, to $331.2 million when compared to the three months ended June 30, 2007. The medical loss ratio (MLR) of the segment increased 2.3 percentage points during the 2008 period, to 88.5%. These fluctuations are primarily attributed to the effect of the following:
• The medical claims incurred of the Medicare business increased by $63.3 millions during the 2008 period primarily due to the increase in member months and a higher MLR by 24.5 percentage points. The higher MLR is in part due to the effect of prior period reserve developments. Excluding the effect of prior period reserve developments in the 2007 and 2008 periods, the MLR increased by 14.3 percentage points, primarily as the result of higher utilization trends for the period when compared to the three months ended June 30, 2007. The increase in utilization trends is primarily the result of higher utilization in outpatient visits and drug benefits for dual eligibles. The higher MLR is also the result of a change in enrollment mix between dual and non-dual eligible members within the business. Member months during the three months ended June 30, 2008 has a higher concentration of dual eligible members than the same period of the prior year. Dual eligible members have a higher utilization than non-dual eligible members.

• The medical claims incurred of the Reform business increased by $3.8 million during the 2008 period and its MLR increased by 10.8 percentage points during the three months ended June 30, 2008. The higher MLR is primarily the effect of the retroactive premium rate increase received by this business during June 2007 and prior period reserve developments. Considering this retroactive premium rate increase and excluding the effect prior period reserve developments in the 2007 and 2008 periods, the MLR actually decreased by 1.9 percentage points during the 2008 period.

• The medical claims incurred of the Commercial business decreased by $21.7 million during the 2008 period and its MLR decreased by 11.6 percentage points during the three months ended June 30, 2008. The lower MLR is primarily the effect of prior period reserve developments. Excluding the effect of prior period reserve developments in the 2007 and 2008 periods, the MLR decreased by 1.3 percentage points, primarily as the result of lower utilization trends in drug and medical claims. Another factor that contributed to the reduction of the MLR for the period is the re-pricing or termination of less profitable groups during 2007.

Medical Operating Expenses
Medical operating expenses for the three months ended June 30, 2008 increased by $2.7 million, or 7.3%, to $39.9 million when compared to the three months ended June 30, 2007. This increase is primarily attributed to the higher volume of business of the segment, particularly in the Medicare business. The segment's operating expense ratio decreased by 0.6 percentage points during the three months ended June 30, 2008, to 10.5%.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007 Medical Operating Revenues
Medical premiums earned for the six months ended June 30, 2008 increased by $97.1 million, or 15.2%, to $734.1 million when compared to the medical premiums earned during the six months ended June 30, 2007. This increase is principally the result of the following:
• Medical premiums generated by the Medicare business increased by $92.7 million, or 78.7%, to $210.5 million, primarily due to an increase in member months enrollment of 141,513, or 53.4% and a change in the mix of products. The increase in member months is the net result of an increase of 145,926, or 74.9%, in the membership of our Medicare Advantage products and a decrease of 4,413, or 6.3%, in the membership of our PDP product.

• Medical premiums earned of the Reform business increased by $3.5 million, or 2.2%, to $161.9 million during the 2008 period. This fluctuation is primarily due to the increases in premium rates during 2007; these rate increases were mitigated by a decrease in member months enrollment in the Reform business of 68,239, or 3.2%. The retroactive increase in premium rates received in June 2007 period corresponding to the period between November 1, 2006 and December 31, 2006 was approximately $2.1 million.

• Medical premiums generated by the Commercial business increased by $0.9 million, or 0.2%, to $361.7 million during the six months ended June 30, 2008. This fluctuation is the net result of an increase in the average premium rates of corporate accounts of 5.2% offset in part by a decrease in fully-insured member months enrollment of 36,824, or 1.5%. . . .