Kathleen Waller - IR Bobby Garcia - President & CEO Juan Jose Roman - CFO Madeline Hernandez - President & CEO, Triple-S Salud & Triple-S Advantage

Peter Costa - Wells Fargo

Thank you for standing by. This is the conference operator and welcome to the Triple-S Management first quarter 2016 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Kathleen Waller of AllWays Communicate. Please go ahead.

Thank you, Joe. Good morning everyone and welcome to today's call to discuss first quarter 2016 earnings. With us today are your hosts Bobby Garcia, President and Chief Executive Officer; Juan Jose Roman, Executive Vice President and Chief Financial Officer. Also in the room are Madeline Hernandez, President of Managed Care and Liliana Rivera-Corcino, Corporate Controller. I am sure all of you have heard the safe harbor statements before, but we still need to get this housekeeping issue out of the way. Each quarter Triple-S Management executives will provide their current view of the Company's future. This means that they will be sharing forward-looking information with you. As you know, these statements can be affected by risks and uncertainties involved in the business. Despite management's best efforts, what actually happens can be materially different from what you hear on today's call. To get a better understanding of why this may occur, please look at the safe harbor section in today's news release and on the Company's periodic filings with the SEC. In addition, the information shared on this call should be considered current only as of today. Please use this information for your reference and remember that the Company assumes no responsibility to update it. This call is being webcast. Shortly after it ends, you will find an archived version on the Investor Relations page of the Company's Web site at www.triplesmanagement.com. If you don't have a copy of today's news release already, you can either find one on the Company's Web site or call me, Kathy Waller at 312-543-6708 and I will get one to you immediately and I can also add you to our distribution list going forward. With that, I'd like to turn the call over to Bobby Garcia now. Please proceed, Bobby.

Thanks Kathy and good morning everyone. Welcome to our call. I'd like to start with an overview of the quarter and a snapshot of the first quarter results for our three primary operating segments. I'll then give you an update on the progress of our strategic transformation and comment briefly on the Puerto Rico economy. Overall, our financial results are tracking internal projections. Consolidated revenues were $754.6 million. Pro forma net income was $3.4 million or $0.14 per fully diluted share. Juan Jose Roman, our CFO will go into more detail on the specifics of our quarterly financial performance. Turning to our Medicare business, we continue to reap the benefits of our operational realignment and expect to see further cost synergies as the year progresses. Since Madeline Hernandez assumed responsibility for all of our Managed Care earlier this year, she has spent a lot of time visiting top accounts and producers, meeting with IPAs, and really delving into the business. As a result, we will be introducing a new capitation model in July and will continue to streamline and strengthen our provider relationships focusing on quality healthcare delivery, enhanced efficiencies, and other performance indicators. We've made other meaningful strides as well. We will continue to expand new programs aimed at enhancing the providers' ability to properly capture member conditions and the appropriate treatment, which in turn drive better yields, timing their cash flows, and improve quality of care. The increased PCP and IPA engagement has led to the completion of annual healthcare assessments for 49% of the membership compared to 22% for the same period last year. In addition, Star remodeling is showing continued raw score improvement and we have deployed an automated sales platform and inpatient utilization has been trending lower. Also, based on the 2017 call letter and rate announcement, which CMS released on April 4, premium reductions next year will be less than anticipated, in the neighborhood of a 1% decline to flat compared with earlier estimates of 5% to 6% decline. The primary reason that the rate will not be closer to the industry expectation of a 1% increase is that Triple-S has less dual eligibles and fewer stars. As mentioned on the third quarter call of last year, Triple-S plans will have a 3.5 star rating in our PPO product by January 2017. On the commercial front, our underwriting discipline has continued to service well resulting in a further MLR decline. Retention rates of employer groups remain strong, but we continue to experience member loss in existing groups due to attrition. We're working with our PBMs to renegotiate existing contracts for our commercial business, consolidate the number of PBMs, strengthen our relationships with them and capture incremental savings before contracts expire. We could see some concessions in the second half of the year. Going forward we plan to renegotiate certain supplier contracts and simplify our product design, much like we did in the MA segment, in order to put this business back on a growth path. In the Medicaid segment, we're beginning rate negotiations for our new contract which will become effective July 1. As we stated last quarter, we do not expect any changes in the regions we serve. The business continues to perform in line with our expectations. Lastly, there's been a lot of discussion in the news about the Zika virus. Thus far in Puerto Rico, about 500 cases have been diagnosed. While this virus has not been a major issue for us at Triple-S, the Department of Health has noted that it has the potential to become an epidemic if not contained. Government efforts to control the virus include educating the general public about the use of mosquito repellents, offering a hotline to report accumulated water and public waste as well as aggressively fumigating targeted areas. Now let's turn to our ancillary businesses. Our life insurance business is also tracking our expectations and continues to represent a meaningful growth avenue for Triple-Strength, with historic annual expansion of 5% to 7% and a relatively low penetration rate. We are looking to fortify the brand and enhance our customer service focus. In light of the continued soft underlying market, the mandate for our property and casualty business has been to get back to basics focusing on stricter underwriting discipline, and more profitable business. I'll now give you an update on our strategic direction. As I mentioned on our last call, we made significant progress on our organizational redesign. We've strengthened and simplified our leadership structure, redefined rolls, increased expense control, removed management layers, and consolidated duplicative structures generating annual run rate savings of over $10 million. Several months ago, we began developing a clinical strategy that capitalizes on the changing dynamics of healthcare delivery and the convergence of the provider and payer markets. While still in the early stages, this strategy is designed to provide our members seamless access to high value, integrated care through innovative partnerships with our providers. Implementation of initiatives to support this strategy will begin later this year. Our shift in clinical direction is necessitated by the vast and rapid changes taking place within the healthcare system. Reinventing our clinical approach will provide us with the appropriate positioning to help reshape healthcare delivery in Puerto Rico. I firmly believe we have a market presence, financial wherewithal, brand recognition, provider network and human capital required to accomplish this objective. From a corporate strategy perspective, for the next two years to three years, a large majority of our resources will be funneled to the growth of our core business. The health insurance market in Puerto Rico is $9.2 billion and we expect it to grow another 1 billion over the next five years. Triple-S currently captures approximately 30% of the market. To be more specific, our market share is approximately 31% in Medicaid, 23% in Medicare, and 43% in commercial. We clearly have room to grow our core. We also plan on dedicating a portion of our capital to adjacent investments assuming they have an acceptable risk profile and will generate economies of scale and scope as well as provide support for our core. We'll continue to focus on refining our operating model to develop better processes and advanced technologies to enhance our competitive position, improve the quality of care for our members, reduce costs, increase our Star ratings MA, and improve retention across all three of our healthcare businesses. As part of our strategic decision to focus on the core and re-evaluate unprofitable businesses, we've decided to discontinue offering group health insurance products in the U.S. Virgin Islands effective August 1, 2016. We are currently working with the government of the U.S.VI to ensure a smooth transition out of this market segment. We will continue serving policyholders of the Blue Cross Blue Shield Association's federal employees program who reside in the Virgin Islands and certain insurance contracts we underwrite and issue to Puerto Rico-based employers that have branch office employees there. To summarize, we're pleased with the pace of our ongoing strategic transformation and the steady operational improvement we are seeing in what remains a challenging economic environment. The economic outlook for Puerto Rico remains weak. According to recently issued World Economic Outlook from the International Monetary Fund, the economy is projected to continue contracting through 2021. Legislation to help Puerto Rico restructure its approximately $70 billion in debt was introduced in the U.S. House of Representatives in mid-April, but was removed from the docket shortly thereafter. Ongoing discussions are aimed at trying to come up with some form of assistance to deal with the liquidity and economic issues that the government of Puerto Rico was facing. We've been closely tracking these developments and have taken actions to mitigate the potential impact of this situation on our business. We are also participating actively in ongoing industry efforts to maintain and increase federal funding for healthcare in Puerto Rico. In summary, we have a forward-looking management team with a focused methodology for capital allocation and any future investments we make will be aligned with what is best for the long-term health of the Company. Disciplined decisions about the allocation of capital made by a team that is more than capable of executing the resulting strategy is we believe, critical to unlocking significant value for our shareholders. I'll now turn the call over to Juan Jose to give you a brief update on our key business segments.

Thank you, Bobby. I would like also to add my welcome to everyone on this call. Let's look at our first quarter 2016 operating performance. The first quarter results are tracking our expectations across all our segments. Our pro forma net income for the quarter ended March 31, 2016 was 3.4 million or $0.14 per share versus 9 million or $0.34 per share a year ago. On the surface, first quarter numbers do not tell the whole story. Taking into consideration certain premium and claim adjustments and prior period reserve developments, pro forma net income for the first quarter of 2016 and 2015 would have been 4.6 million and 3.4 million respectively. Before moving into the components of our results, I would like to remind you that year-over-year financial comparisons continued to be impacted by the change in the Medicaid contract from an ASO agreement to a fully insured model effective April 1, 2015. The Medicaid member month statistics reflect our decision to participate in only two regions when the government of Puerto Rico changed its delivery model from an ASO under which we serve all eight regions to one that is at risk. The quarterly consolidated operating revenues were 756 million, an increase of 182 million or 32% from the same quarter last year primarily reflecting the change in the Medicaid model. At 627 million, reported consolidated claims incurred for the quarter were 194 million higher than those of a year ago. This increase resulted mainly from higher managed care claims, which in turn resulted mostly from the change in the Medicaid model representing 182 million in claims. Consolidated quarterly operating expenses were down 4.4 million from a year ago and the consolidated operating expense ratio for the quarter fell by 620 basis points to 16.5% reflecting higher premium revenue, lower expenses, and lower membership in our managed care segment. Lower operating expenses also reflect the decrease in the number of Medicaid regions we serve from eight to two. The decline in spending also relates to a decrease in the provision for doubtful accounts mostly reflecting the strengthening of the allowance in Q1 2015. This decline in operating expenses was partially offset by the new business-to-business tax implemented in Q3 2015 and higher health insurance provider fee reflecting the higher fully insured member month enrollment that results from the Medicaid model change. Consolidated income tax expense was down $3 million year-over-year resulting from the decreased capital gains which are taxed at a lower rate and a decline in the Managed Care segment's pre-tax income. Now let me focus on a discussion on our quarterly results of the Managed Care segment. In the Medicaid business, premiums increased $202 million compared to last year. Claims incurred for the period amounted to 182 million resulting in a 90.1% MLR, which is in line with our expectations. In the commercial business, premiums earned increased 3 million or 1% primarily reflecting a nearly 6% year-over-year increase in average premium rates partially offset by a decrease in fully-insured member month enrollment. The lower enrollment has been largely driven by attrition within existing accounts reflecting the overall economic condition in Puerto Rico and a lower number of contracts resulting from our continued underwriting discipline. This discipline has favorably impacted the commercial MLR for this quarter, which decreased 40 basis points to 82.8%. Adjusting for the effects of prior period reserve development, this metric was 80.9%, down 640 basis points from last year. The underlying claims trends for this quarter has been stable with a slightly negative in-patient trend offset by a mid single-digit increase in the pharmacy claims trends. Medicare Advantage premiums were up 1 million or 0.4% due to the increased member month enrollment in MA products offset by the expected 2016 reduction in Medicare reimbursements and a change in the business mix from duals to non-duals, which has lower PMPM premiums. The Medicare MLR was 90.1%, 430 basis points higher than the same period a year ago. There are two main reasons for the difference. First, 2016 rates decreased approximately 5%. Second, we have completed a higher number of HRAs compared with the first quarter last year, 49% versus 22% of our membership, which resulted in an additional 6 million in claims and related service costs in the quarter. Importantly, these early efforts to capture our members medical conditions should provide more consistent results throughout the year and better cash flows in 2017. Adjusting for the effect of prior period reserve developments and the increased HRA expenses, our Medicare MLR would has been approximately 88% this quarter, about 150 basis point higher than last year. Moving now to our balance sheet, our investment portfolio totaled $1.5 billion as of March 31, 2016. Puerto Rico government obligations, which have the book value of $26 million, represent only 2% of the portfolio. Since $16 million of these obligations are escrow bonds collateralized with US obligations and the remainder was impaired last year, our exposure to Puerto Rico debt is minimal. I would also like to highlight the fact that we continue to receive payments from the government accounts on a weekly basis and Medicaid receivable balances related to the new contracts are up to-date. Days claims payable as of March 31, 2016 was 58, remaining unchanged from 2015. For the quarter ended March 31, 2016, net cash generated by operating activities was $31 million, down $7.5 million when compared to last year. We continue to repurchase our common stock in the open market. During this quarter, we bought back approximately 367,000 shares under the care and repurchase program authorized in November 2015. As of March 31, 2016, we have approximately $40 million remaining under this program. Outstanding shares as of March 31, 2016 were 25 million. In summary, our business is performing as anticipated and we're seeing the results of our sustained efforts to improve operational performance. We will now proceed to our Q&A session. Operator, we will now open up the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Peter Costa, Wells Fargo Securities.

A couple of questions for you. The first, your Medicaid PMPM rate went up a little bit like 4% in the quarter. One of your competitors also noted a formulary change that took effect January 1 of this year. It caused them some problems. Was there any one-time items in your PMPM Medicaid rate and did you have any problems from that formulary change or are you sure that you haven't had any claim issues related to that?

Hi, Peter, this is Juan Jose. No, we don't have any problem with our Medicaid. The business has been stable. In terms of our premiums PMPM, mostly the changes will be based on the changes in membership, but really there has been no changes in terms of the premiums that we collect from the government. Clearly, we know it is during the quarter, a drop in membership -- basically there is less people in the program in general. That has been consistent in the last month and my understanding is consistent with the other companies working with the reform.

It's a reflection of the population decline in Puerto Rico.

Okay. Second question, you talked about a new capitated model for M&A that you are going to put in place in July. Is that on the cost side so will we see changes right away or is that a capitated model that you'd be selling as a product that wouldn't really take effect until next year in 2017?

This is Madeline Hernandez. This is a new capitation model that will take an effect for this year July 1, 2016 and it's in alignment that we are already putting more information for the providers and we are doing more alignment to the quality metrics and the Stars rating that we want to pursue going forward.

But you wouldn't be actually selling it to members until next year, is that correct or is this is a cost control only structure?

This is basically the compensation to the primary care physicians.

Okay, so it's a cost implementation?

[Indiscernible] it is cost related. So basically we will be changing in our MA business, the way we compensate the PCP's. This is not a separate policy, just change in the way we compensate our PCP's just to reflect or incentivize the compliance with the quality metrics that will help us improve our Star ratings.

Okay, that makes sense and what kind of savings do you expect to get from that program right away?

For the year, it will be around $5 PMPM. So half of the year, it will be $250 PMPM.

Okay, and then you mentioned Zika and so not really impacting your numbers this quarter. Have you been able to look at visits to OBGYNs? Has that gone up in the quarter? Are people just saying do I have the virus or anything like that, is that creating a cost for you guys at all?

No, I would say not. Our outpatient visits are stable.

Really there's nothing in the data that we have seen any type of impact. So actually as I mentioned in the call, our trends basically across the board in each of our businesses in the Managed Care, the in-patient actually has been slightly negative, right, the trends and the outpatient is very stable in the low single-digit -- positive low single-digit, so no changes from the previous quarter or the run rate when we look at 2015 the second half of the year versus this first quarter.

And the last question, what's the cash at the parent?

As of today, it's around $18 million.

[Operator Instructions] There are no more questions at this time. I'll now turn the conference back over to Bobby Garcia for closing remarks.

Thank you. Let me just reiterate that we have the financial wherewithal and management team to navigate the difficult economic environment in Puerto Rico and to position the Company for future growth. We really appreciate your participation in the call today and look forward to seeing you in future events. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.