Kathleen Waller - Investor Relations Bobby Garcia - President and Chief Executive Officer Juan Jose Roman-Jimenez - Executive Vice President and Chief Financial Officer

Peter Costa - Wells Fargo Securities

Thank you for standing by. This is the conference operator. Welcome to the Triple-S Management Third Quarter 2016 Conference Call. As a reminder, all participants' lines 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, Investor Relations. Please go ahead.

Good morning. On behalf of Triple-S, I would like to extend our welcome to everyone. With us today are your host, 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'm 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 may 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 in the Company's periodic filings with the SEC. In addition, the information shared on this call should be considered current only as of today. After today, please use this information for your reference only and remember 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 Shortly after it ends, you will find an archived version on the Investor Relations page of the Company's website at www.triplesmanagement.com.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 website or you can call me, Kathy Waller, at 312-543-6708 and I will get you one immediately and we can also add your name to the distribution list going forward. With that, I'd like to turn the call over to Bobby Garcia. Please proceed, Bobby.

Thanks, Kathy and good morning, everyone. And welcome to the call. Today we reported consolidated revenues of $744.7 million, and a net loss of $1.9 million or $0.08 per diluted share versus net income of $4.2 million or $0.16 per diluted share a year ago. The adjusted net loss for the quarter was $6.3 million or $0.26 per diluted share versus adjusted net income of $9.2 million or $0.36 per diluted share a year ago. These results, which clearly fall short of expectations, reflect several challenges in our Managed Care business, some internal and others external. While less evident, they also reflect key foundational investments, operational improvements and a renewed strategic focus. I'll address the two main drivers of our operational results, decreasing revenues and increasing claim costs, along with several concrete initiatives we're undertaking to improve our performance over the next several years. I'll then handover the call over to Juan Jose, who will provide more detail on our financial performance. First, let's discuss revenue. Our topline has been most impacted by the lower premium rates in the government health plan and Medicare Advantage, partially offset by higher Commercial premium rates and by a reduction in member months across all business lines. Within the government health plan, where we service a 100% of the beneficiaries in our two contracted regions, the membership decline is directly tied to tighter eligibility requirements and the exodus of Puerto Ricans to the U.S. Mainland, reflecting the overall economic situation on the Island. Our Medicare Advantage membership has declined as a result of historically low retention rates associated with our 2016 product design. This is particularly true among dual eligibles who can move from one plan to another on a monthly basis. Approximately 30% of this year's initial enrollment has migrated to other plans, mostly toward a competitor product with a very aggressive benefit design. As I'll explain later, this is something we are addressing through our 2017 bid and Star Rating initiatives. Our Commercial membership has stabilized at a slightly lower number than last quarter, with an average retention rate across all groups of 94%, in line with our historical rates, despite our continued pricing discipline in a very price sensitive market. Now let's turn to claim costs. The third quarter was particularly impacted by higher-than-anticipated trends in three high-cost medical conditions among our MA members; ESRD, cancer, and autoimmune diseases. Treatment and drug costs for these conditions have increased by double-digits year-over-year. We've also experienced additional unfavorable reserve developments related to the claims processing issues we discussed on last quarter's earnings call. As you may remember, these issues arose mostly as a result of increased claim payment denials that generated a backlog in adjustments. We described several steps we were taking to reduce the adjustment inventory, enhance our reporting capabilities, and thereby increase the consistency of our reserve estimates. We now have a much better understanding of the problem's root causes and have enhanced our reporting capabilities. So we expect the reserve estimates to be more accurate going forward. However, additional payments made during this quarter on old claims led us to increase our reserves for prior periods. Juan Jose will expand on these issues, their effect on prior period reserve development, and how we have addressed them. So, finally, let's look toward 2017 and beyond. We remain focused on building long-term value for our shareholders through our transformation program and are taking concrete action to strengthen our core business. First, we've enhanced our benefit design for the 2017 MA bid and invested in mobile platform to facilitate sales and improve our retention rate. So far, the results of our MA open enrollment campaign are exceeding our sales targets. Second, we are especially pleased with the recent announced Four-Star Rating of our Medicare Advantage HMO contract for payment year 2018. This rating is a direct result to the investments we've made in our employees, provider network, and technology, and illustrate the talent and commitment of the Triple-S team to improve beneficiaries' quality of care. With higher baseline rates and rebate retention, we will be better positioned to offer competitive products to the market come 2018. Third, we've created a new warehouse for clinical and claims data, enhancing our analytics capabilities. We continue investing in other technologies to streamline operations and simplify our processes in key support areas such as financial reporting, planning and analysis, enrollment and counter data submission, grievances and appeals, and CMS communications. Fourth, we're implementing several clinical initiatives in the oncology management area. These initiatives should significantly improve physicians' compliance with evidence-based medical therapy, development of an end of life oncology program and use of the most cost-efficient oncology treatments, providing better care while helping to control expenditures on specialty pharma medications. We are also renegotiating our contract with our main vendor of hemodialysis treatment and designing new contract initiatives with pay-for-performance compensation structures for institutional providers. We expect to implement these new contracts by the end of the first quarter of 2017. Fifth, effective October 1, we transferred our U.S. Virgin Islands business to a third party, eliminating annual losses in excess of $3 million. Finally, we've decided to freeze our defined benefit pension plan, effective the first quarter of 2017, which will align the Company with current market practices and generate annual average savings of approximately $6 million. Employees who currently participate in this plan will be offered participation in our 401(k). In short, we made significant strides over the past months to improve our business operations in 2017 and beyond. Now, a few words on Zika. According to the Puerto Rico government's most recent numbers, there are now 31,464 reported cases of the virus on the Island, of which 2,469 are pregnant women. We constantly monitor our claims data for the leading indicators of potential problems such as the number of prenatal scans, prenatal visits, pregnancies/abortions services, neonatal intensive care unit admissions, as well as a number of microcephaly cases in the newborn population and newly-diagnosed Guillain-Barre syndrome cases. All these measures as well as our Zika-related medical costs have not been significant; have been stable for the last 22 months with no upticks in recent months. Triple-S continues to work closely with the Puerto Rico government, the CDC, and the industry to heighten awareness and increase Zika prevention efforts. In closing, I'm pleased to say our transformation program continues to progress. Again, our primary goal is to build a performance-driven Company that can drive down costs and grow profitably over the long run regardless of the operating environment. Despite the challenges, we're encouraged by the pace of change and are confident that our transformation strategies will enable us to begin providing guidance in 2017. I'll now turn the call over to Juan Jose, who will give you more detail on our efforts to fix our claims issues, increase our forecasting abilities, and decrease our reserve volatility. He will also give you a brief update on key financial metrics. Juan Jose? Juan Jose Roman-Jimenez: Thank you, Bobby. I would like also to add my welcome to everyone on this call. As Bobby mentioned, this was a disappointing quarter marked by unfavorable prior period reserve developments, resulting mostly from claims processing issues, which I will discuss in detail later on. As a result, we reported a net loss for the quarter of $1.9 million or $0.08 per share versus net income of $4.2 million or $0.16 per share a year ago. On an adjusted basis, the net loss was $6.3 million or $0.26 per share versus adjusted net income of $9.2 million or $0.36 per share a year ago. Taking into consideration these prior period reserve developments, adjusted net income would have increased from $6.3 million in the third quarter of 2015 to $10.4 million this quarter. Now, let me focus on a discussion of the Managed Care segment's quarterly results. Managed Care premiums for the quarter were $29 million lower than a year ago, primarily reflecting a 6.5% reduction in member months enrollment. The premium for the quarter were also impacted by lower Medicaid average premium rates negotiated with the government of Puerto Rico that went into effect July 1, 2016 as well as by a reduction in 2016 Medicare reimbursement rates. These decreases were partially offset by an approximately 5% year-over-year increase in Commercial average premium rates and by a $15.6 million increase in Medicaid premiums, resulting from the partial reversal of the accrual excess profit to compensate for higher utilization trends and the previously-mentioned decrease in premium rates. Managed Care claims were down $8 million year-over-year, while the MLR was 90.5%, up 270 basis points from last year. The higher MLR primarily stems from unfavorable prior period reserve developments. Specifically, this quarter was impacted by $27 million or $0.68 per share of unfavorable prior period reserve developments compared with $5 million or $0.11 per share of favorable reserve developments recognized during the same quarter a year ago. Excluding the impact of prior period reserve developments and moving the Medicare risk score revenue adjustments to the corresponding periods, the recasted Managed Care MLR would have been 86.7%, down 70 basis points from last year. This unfavorable prior period reserve developments were caused largely by an increase in the Medicare payments and reserve for certain claims with older date of service. This increase in payments and reserve for older date of service was caused by higher claims [IOs], which resulted in an increased inventory of claim adjustments or claims requiring reprocessing. The increased number of claims spending adjustment and claim reserves is related primarily to in-patient and out-patient services. One of the main reasons for the increase in old claim payments is related to the MA business transfer effective January 2015 within the legal entities that comprise our Managed Care segment. When this business was transferred, a significant backlog of claims resulted from the fact that the claim codes and negotiated agreements were different in each legal entity, causing an increase in claims denying and delay in the reconciliation and payment of claims. Another reason was the increase in the number of claims that were initially denying due to a number of factors; first, delays in the hospital review process; second, with adoption of the new ICD-10 codes, effective October 2015, we received claims with either all or erroneous codes; third, other operational issues not recognized on a timely basis. All of these issues cost the system to denying more claims than usual, many of them legitimate claims paid much later through the claim adjustment process, which is mostly manual and therefore slowing. To reduce claim adjustment inventories, we have taken the following steps. Since late 2015, we began conversation with hospitals with the intent of settling claims with old service dates. We were able to reach settlements with some and there is still ongoing discussion with other institutions, which we expect to complete by the end of 2016. As of September 2016, we have established reserves for those settlements still under evaluation. In March 2016, we implemented an electronic claim adjustment functionality for the Commercial and Medicaid line of businesses. Monthly adoption of electronic adjustment submission has grown consistently since implementation. And as of September 2016, we were receiving 14% of all adjustments electronically. In September 2016, we implemented an adjustment inventory reduction plan and added new temporary staff. We have already reduced some of the inventory and expect significant additional reductions by the end of the year. In addition, we developed new operational reports to provide our actuaries with more granular information on all claims in process, including suspended, adjustments, and ready-to-pay claims. This new report should enable us to address more proactively, changes our volatility in claim processing patterns, allowing us to factor these changes into our results. They also provide more visibility of outstanding claims inventories, which will allow us to better analyze and manage these claims and better estimate reserves as part of our ongoing claim management and estimation processes. In short, we're putting in place concrete action plans to improve business processes with the goal of reducing claim denials and shortening processing times. We expect to continue enhancing our claim processing capability over the next six months to nine months as we keep working closely with providers to improve coding, build communication within the organization, and expand reporting capability. We are confident that the step outlined above has improved our visibility into our claim inventories and our entire claim management process, which will in turn provide us with capabilities to develop reserve with greater accuracy in the future. Now moving on to the segment's quarterly operating expenses. Operating expenses were down $1 million from a year ago, reflecting a $4.4 million contingency accrual recorded in the 2015 period and lower personnel costs and professional service fees in the 2016 period. These decreases were partially offset by an increase in the health insurance provider fees of $3.7 million, reflecting the Medicaid enrollment after the model change in 2015 as well as a new business-to-business tax implemented in Puerto Rico at the end of the third quarter of 2015. Turning to our complementary segments, Life Insurance premium increased 9% year-over-year, including growth in our Costa Rica operations. This segment continues generating steady quarterly operating income. Our Property and Casualty Insurance segment achieved operating income of $4 million, up from $2.6 million in the prior year, reflecting better claims experience in the medical malpractice line of business. The consolidated income tax benefit was up $6 million year-over-year, reflecting the loss before taxes in the Managed Care segment. With continued minimal exposure to Puerto Rican debt obligations, our balance sheet remains strong with a $1.5 billion investment portfolio. During the quarter, we completed the repurchase program authorized in November 2015. Outstanding shares as of September 30, 2016 were $24 million. We will now proceed to our Q&A section. Operator, we will now open up the call for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Peter Costa of Wells Fargo. Please go ahead.

Hi, guys. Can you give us a view on some of the headwinds and tailwinds to your earnings going into next year? Juan Jose Roman-Jimenez: Hi, Peter. This is Juan Jose. So, right now, we think we have addressed our main issues with the reserves. So, starting with the next quarter and going forward, we think we will not have again those significant reserve developments as has been reported. There is still some work to go. So we're completing and looking into our operations just to accelerate our processes of paying claims. The most important part is that we just finalized putting together reports to at least have the adequate visibility if there are some additional volatility that we actually consider that as part of our reserving for the specific quarter. As what we said, we will start providing guidance for 2017. But in general, our businesses, we think, are well positioned for the new enrollment period or process and as we mentioned in the call, our sales are tracking better than what we have been expecting.

Let me just add, I'd say – yes, go ahead.

Can you quantify the amount of reserve development that you've taken so far this year in total, so you get an idea for the total year-over-year changes that we might expect for next year? Juan Jose Roman-Jimenez: For this year, it has been $19 million year-to-date, related to 2015.

Thanks.

[Operator Instructions] The next question is from the line of Peter Costa of Wells Fargo.

Hi, sorry, I think I got cut off there a little bit. Can you talk about Zika claims, according to reports the first microcephaly case tied to Zika has happened now in Puerto Rico, can you say what is the cost at birth of a microcephaly case and what would be the ongoing cost for you for microcephaly patient?

Good morning. This is Bobby. That's correct, there has now been one reported case of a child born with Zika-related microcephaly although that was not on the Triple-S network. The estimates range is a broad range of estimates depends on what stage of the pregnancy the microcephaly case develops and so it's estimated that it's on a range of 100,000 to 200,000 per month, but could reach 5 million over the life of the infant, given the life expectancy.

Okay. And then can you describe what steps you're doing at this point in time to make sure that your patients are correctly monitored, so it's discovered early on?

We've done a lot of outreach with our PCPs, with our OBGYNs, and are monitoring all the data at granular level. We've also been working with the government of Puerto Rico, with the CDC, and prevention efforts. Specifically, the target is women of childbearing age, of course, if they are pregnant, it's a matter of preventing getting bitten by a mosquito and there are education efforts, outreach efforts in our regard and for women who are not pregnant, there is also an education effort to provide them alternatives for voluntary contraception. We are also giving them the opportunity to have intrauterine devices with no deductible. So, that has been an effective program for us.

Thanks.

I'm sorry with no copay.

Thank you. End of Q&A

[Operator Instructions] There appear to be no further questions at this time. I'd like to turn the conference back over to Bobby Garcia for closing remarks.

Well, thank you again for your continued interest in Triple-S. We do feel that our strategic plan and focused efforts will pay off in a long-term. And we look forward to seeing many of you at the upcoming conferences this fall, specifically Credit Suisse next week, and Stifel in mid-November. Thanks again. Have a good day.