Kathleen Waller - AllWays Communicate Bobby Garcia - President and CEO Juan Jose Roman - EVP, CFO Madeline Hernandez - President of Managed Care Liliana Rivera-Corcino - Corporate Controller

Peter Costa - Wells Fargo Securities

Thank you for standing by. This is the conference operator. Welcome to the Triple-S Management Fourth 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 conferences over to Kathleen Waller with AllWays Communicate. Please go ahead.

Thank you. Good morning everyone. 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 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 Shortly after it ends, you will find an archived version on the Investor Relations page of the Company's Web site at www.triplesmanagement.com.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 again on the Company's Web site or you can call me, Kathy Waller, at 312-543-6708 and I will get you one to you 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. Good morning, everyone. And thanks for joining us today’s review of our fourth quarter results. This morning we announced fourth quarter consolidated revenues of $730.7 million and net income of $12 million or $0.50 per diluted share versus net income of $14.2 million or $0.57 per diluted share a year ago. On an adjusted basis, net income was $3.4 million or $0.14 per diluted share versus adjusted net income of $11.2 million or $0.45 per diluted share a year ago. The fourth quarter marked the end of a challenging but eventful transition year with disappointing financial results but meaningful accomplishments in investments but later foundation for stronger long-term performance. Beginning in the second quarter, results were negatively impacted by an unanticipated trend in certain medical costs and unfavorable prior period reserve developments. We immediately began taking measures to address these issues and have made good progress on both fronts. Adjusting for the reserve developments, our net income for the fourth quarter would have increased from $8 million in the last quarter of 2015 to $10.6 million this quarter, reflecting a year-over-year improvement in the underlying business. Focusing on a strategy designed early in the year; we simplified our organization structure; integrated our three Managed Care businesses; strengthened our executive management team; revamped processes and invested in operational capabilities. These efforts paid off in October 2016, when our Medicare Advantage HMO contract achieved a 4-star rating for payment year 2018 and became the first plan in Puerto Rico to achieve 5-stars in pharmacy. And again in February 2017 one of our Commercial and Medicaid programs received full URAC accreditation, the first in Puerto Rico. We also developed strategies to improve member retention and sales. We exited a money-losing U.S. Virgin Islands business, and froze our defined benefit pension plan. We are seeing sequential improvements in our operating cost ratio and with the team focused on execution, we’re confident we’re on the right track. Let's now focus on our Managed Care segment. Our top line continued to be impacted by membership decline in the government health plan, Commercial and Medicare advantage, as discussed in our previous call. And the Government Health Plan, the membership decline is directly tied to tighter eligibility requirements and the access to the Puerto Ricans to the Mainland, reflecting the overall economic situation on the Island. This week the Puerto Rico government announced its intention to extend the current contracts with the incumbent carriers in each region. Negotiations have begun for the rates and coverage will take effect July 1, 2017. Medicare Care advantage saw significant growth during the 2017 annual enrollment period, increasing its membership from the 110,000 in December 2016 to 121,000 in January 2017, that increase of nearly 10%. Our 2017 product design is significantly more competitive than last year, which should help us boost retention rates. By achieving 4-star rating last October of HMO product, we are positioning the Company to sustain that retention trend in 2018 and beyond. Currently, stars metrics raw scores are mostly better than the same period last year, giving us an early indication that we are on track to maintain our 4-star rating in 2019. As you know, 4-star plans receive a 5% bonus applied to the county benchmarks, using premium calculations, as well as a higher share on rebase. This initial revenue translates into more competitive product offering and better margins. And at recently published Draft Call Letter, CMS communicated its intention to retain the adjustments pertaining to star rating criteria introduced last year, should rest of particular challenges in the Puerto Rico market. This increases the likelihood for SSS revenue improvements to continue into 2019 in many products. Based on our actuaries’ analysis of the Draft Call Letter, we should also see an increase of at least 1.6% in the Island’s MA benchmarks for 2018. And as CMS maintains an adjustment, it introduced last year to address the Island’s in usually low rate of zero claims in the fee-for-service population, the benchmark could increase by as much as 6% in 2018. Our fully rated commercial membership for January 2017 had a net increase of 2,662 members, increasing from 335,600 in December 2016 to 338,200 as of January 2017, driven primarily by membership increases in the individual Affordable Care Act membership. While we continue to see attrition in existing groups as result of the population exists to the United States, the January 2017 retention rate was a healthy 95.2%. These results were largely achieved in a very price sensitive market, while maintaining our underwriting discipline. With respect to the claim processing issues we've discussed in previous calls, we have established a comprehensive project plan with a formal PMO to address the root causes. We've addressed short-term solutions, have much better visibility of adjustment inventories, and are now focused on longer term projects to improve the process overall. As part of our efforts, we have focused on force and acceleration of in-submissions and reconciliations to close out prior periods. So, we are still working through the adjudication of some old claims. Now, the volume of these claims continues to decline and we’re confident they will normalize by the second quarter of this year. A few quick words on Zika. According to Puerto Rico government's most recent number, there are now about 39,000 reported cases of the virus on the Island, of which 3,120 are pregnant women. There have been five Zika related deaths. We constantly monitor our claims data for the leading indicators of potential problems. These measures as well as our Zika related medical costs have not been significant, have been stable since we began tracking these numbers and have no recent upticks. We continue working closely with the Puerto Rico Government, the CDC, and the industry to heighten awareness and increase Zika prevention efforts. Let's now turn to the economic environment. There have been important macro developments in recent months. The Fiscal Oversight Board established by PROMESA began operations, and the congressional task force on economic growth in Puerto Rico, also established by PROMESA, produce to report that included various recommendations to provide more accreditable access to federal funding for Medicaid and Medicare Advantage on the Island. As you may recall PROMESA was enacted last summer to establish fiscal controls and orderly mechanism for debt restructuring, and a roadmap for economic recovery in Puerto Rico. Just this week, the governor of Puerto Rico submitted a 10 year fiscal plan to [technical difficulty] board established by PROMESA for its review and approval. This part of the proposed plan that Puerto Rico government intends to make significant changes to the Government Health Plan, including a cost take-out of around $300 million of the first two years and $2.5 billion over the 10 year plan period. In January, the Oversight Board had stated its expectation that the Puerto Rico government would reduce its health care spending by $1 billion within two years. The government’s proposal contemplates changes in benefits to coverage and network design. It also contemplates changes in the allowable pre-tax margin and profit sharing model for the insurance carriers. We do not yet have specifics on the program changes or their timing, nor whether the Oversight Board will accept the proposed plan. But we will work closely with the government to address its fiscal challenges by carefully evaluating how to implement the program changes and acting on savings opportunities, while ensuring adequate premiums. We're also closely watching the potential impact to the fiscal measures on the Puerto Rico economy overall and on our commercial business. On the national front, we are of course, like everyone else, carefully monitoring the debate on the future of Obamacare pursuing strategies to ensure that Puerto Rico is treated fairly within which several legal framework is ultimately adopted. We're also working closely with the entire Puerto Rico healthcare community to identify additional funding to address the so called Medicaid cliff expected by the end of 2017. In summary, we'd echo the comments of many in the Puerto Rico business community. The economic environment is stabilizing, but there remain heightened levels of political and fiscal uncertainty, PROMESA related Australia measures will most likely create additional headwinds. While it may be painful a clear path to sustainable economic growth is paramount and can no longer be delayed. We will do all we can to aid the Puerto Rico government and the Federal Oversight Board in achieving this objective. Now, let's turn to the 2017 outlook. We fully intended to give guidance for 2017 on this call. However, it is proving to be a difficult time to do this, at least in the traditional sense. The intending repeal of the Affordable Care Act, the PROMESA fiscal plan, and the Government Health Plan changes announced this week, all present forecasting challenges. As a result of these market uncertainties, we will not provide specific earning guidance. Specifically, at this time, we are unable to predict the number of members’ premium rates or the medical cost of ensuring the Government Health Plan population. Since negotiations for fiscal year 2018 had just begun, both the details and timing of the changes in the program are still unknown and a measure source of federal funding for the program will run out by 2017 yea-end. Despite these uncertainties, however, we would like to revise some directional information about our commercial and Medicare businesses. In the commercial business, we continue to be successful in our new sales and retention strategies with January fully ensured membership totaling nearly 338,000. We expect full-year at-risk member month enrollment to be approximately 4 million plus or minus 5%, considering that we are still experiencing some attrition, but also expect to continue adding new groups. Our MLR should be in the 84.5% to 86.5% range. In the Medicare Advantage business, we had a successful open enrollment season in terms of retention and new sales. Membership as of January 31st was 121,000, and we expect that to remain stable during the year with full-year member month enrollment of about 1.5 million plus or minus 5%. We expect that MLR should be between 90% and 92%. Our ancillary segment is expected to continue showing stable results. In 2017, life insurance and property and casualty premiums are expected to reach $162 million and $90 million plus or minus 5%, respectively. Investment income should be similar to 2016 and administrative expenses should be in the range of $460 million to $485 million. We’ll continue to providing forward-looking directional information such as estimates, targets and trends where it make sense to help guide market expectations. In the current environment, however, it is difficult to make reliable forecast if they are not able to predict with accuracy certain segments of our business. I often remind my team this is a marathon not a sprint. We are in Puerto Rico for the long-run. This means we expect our MA business to become profitable within one year, the new government health plan to roll-out in one to two years, and our investments in strategic planning, people, technology, and clinical models to hit high gear in one to three years. Progress in these areas will certainly help us, improve and reliably forecast our overall performance. As we gain more clarity on Puerto Rico's economic outlook and the healthcare landscape, we will consider when and if to provide consolidated earnings estimates on a regular basis. In the meantime, we are considering all options to grow shareholder value, including strategic investments, as well as return on capital. With this, I'll pass the comments to Juan Jose.

Thank you, Bobby. I would also like to add my welcome to everyone on this call. I will focus my discussion on the Managed Care segment’s quarterly results. Managed Care premiums for that quarter were $52 million lower than a year ago, primarily reflecting 7.5% reduction in member month enrollment. The premium for the quarters 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 4% year-over-year increase in commercial average premium rates and by $9.4 million increase in Medicaid premiums, resulting from the reversal of the accrued excess profits to compensate for high utilization trends and the previously mentioned decrease in premium rates. Managed Care claims were down $20 million year-over-year while the MLR was 88%, up 370 basis points from last year. The later esteeming primarily stem from unfavorable prior period reserve developments. Specifically, this quarter was impacted by $12 million or $0.29 per share of unfavorable prior period reserve developments in the commercial and the Medicare businesses compared with $5 million or $0.13 per share of favorable reserve developments recognized in the same quarter a year ago. This quarter we saw sequential improvement in the federal prior period research developments, which decreased from $27 million for the three months ended September 30, 2016 to $12 million this quarter. As mentioned in previous quarters, this unfavorable prior period reserve developments were largely related to patient and out-patients services with older days of service where payment and expect payments were greater than originally estimated. With only month of development to evaluate the year-end reserve, based on the payment data for January 2017, the year-end reserve appears to be adequate. As Bobby mentioned, we continue working on plans to improve business processes with the goal of reducing claim adjustment inventories, shortening processing times, and improving our reporting capabilities. Excluding the impact of prior period reserve developments and moving the Medicare risk score revenue adjustment to the corresponding periods, the re-casted Managed Care MLR would have been 85.4%, up 130 basis points from last year. This increase primarily reflects higher than expected trends in part the drugs, additional deterioration in experiencing of the ESRD population in the Medicare business, and higher pharmacy claim trends in the Medicaid programs. We have identified detailed plans to address these issues. In the case of the ESRD and for the drug cost, we’re in the process of negotiating new fees, which certain providers are narrowing the network. Other significant initiatives to improve cost trends include the implementation an in-patient value care program to reduce remissions and the review of medical and payment policies. The in-patient value care program incorporates pay for performance and quality incentive in a new compensation model. The first phase of the program is being implemented in five hospitals, and is expected to be completed in Q2 of this year with the expectation of rolling out the program to other hospitals over the next year. As part of the implementation an average 5% reduction in premiums was sustained from the beginning of 2017. We also started a comprehensive review of our medical and payment policies through a newly formed payment integrity program. We began this project in January 2017 and expect to complete it by the year-end. The program integrates all aspect related to disbursements to providers, including detection of fraud, waste and abuse, coordination of benefits, payment policies and contracting terms. Related to these initiatives, we have begun to re-contract the network in all Managed Care line of business in order to align terms to market and industry trends. This effort will take 18 months to be fully deployed, and benefit will be seen gradually as we re-contract the network. Now, moving on to a segment quarterly operating expenses. Operating expenses were down $8 million from a year ago. This decrease is due to a lower provision for the full accounts, as well as reduced payroll and related expenses, offset by higher health insurance provider fee. The lower provision for doubtful accounts reflect a strengthening during the 2015 period of the resell for Puerto Rico government related accounts. The lower payroll and related expenses reflect a one-time curtailment credit related to the 2016 freezing of the defined benefit pension plan, lower short and long-term incentive compensation, and higher expenses recognized last year related to management changes and retirement. These were partially offset by an increase in the fee of 2 million, reflecting the Medicaid enrollment after the model changed in 2015. Turning to our complementary segments, Life Insurance premiums increased 4% year-over-year, including growth in our Costa Rica operations. The business achieved operating income of $7 million, up $1 million from last year, reflecting improved policy retention and sales in individual and counter products. The operating income in our Property and Casualty Insurance segment also grew by $1 million to $3 million for this quarter, reflecting better claim experience in the medical [technical difficulty] business. The consolidated income tax benefit increased $10 million year-over-year, reflecting the loss before taxes in the Managed Care segment. We will now proceed to our Q&A section. Operator, please open up the call for questions.

We will now begin the question-and-answer session [Operator Instructions]. The first question is from Peter Costa with Wells Fargo Securities. Please go ahead.

Can you give us a timeline on what to expect in terms of getting some clarity on the Medicaid business, and what the government changes and budget reductions might mean to you guys?

Peter, this just came out on February 28th, two days ago. The governor made a public announcement, and the fiscal plan has been submitted to the Fiscal Oversight Board. My understanding is that the Oversight Board has about two to three weeks to comment and decide whether to approve, so that this would be in place by April. Now, it's not clear, at this point when the changes will go into effect. As you know, we are negotiating rates currently for the fiscal year 2018, which runs from July 1, 2017 through June 30, 2018. Now, in parallel, the government is submitting amendments to its state plan, and we're expecting those amendments to be submitted in the next few weeks. But of course, we don’t have any visibility at this point as to exactly what's contained. We're really just in a wait and see mode at this point, Peter. We just need to see how it plays out in the next month before we know what the design changes mean and when they will be implemented. I would say the information I have is that they are expecting changes by 2019, by fiscal 2019. So that the rates we’re currently negotiating will probably be similar to the existing design and program. Although, there may be some reductions say in -- or changes in formulary and certain coverage that would start generating savings during the 2018 fiscal year. So to the stages don’t know exactly what the stages look is like.

Is it possible that you will have something that will be a partial year decision that takes you to the end of the Medicaid Clift, but not beyond that?

In terms of contracting or design elements?

Both…

Because we -- let me state it this way. The fiscal plan that the governor submitted is supposed to be based on known sources of funding. The Fiscal Oversight Board it has stated is that it will not accept a plan that includes expenditures for which they do not have a source of funding. So, we’ll have to see how they respond to the governor’s plan. Because as currently estimated, the Medicaid cliff will occur sometime between December of this year and February of next year. And so, if they have to make a choice, they can impact coverage, eligibility, payments to providers, they have a number of levers. But at this point, they’ve just been clear how they will -- which of those last levers they will pull.

So we’ll stay tuned over the next month or two, and then maybe [multiple speakers] after that?

Absolutely. I’d say month or two to just have more clarity for. So I would say for next call certainly we’ll have much more information.

Then a little more on Zika, if you would. Over the 3,000 cases of moms that have Zika today, probably 1,000 of those are more are yours -- your members. Can you discuss what the transmission rates are expected to be of moms who have Zika to babies who have microcephaly? And whether you've seen any examples of microcephaly at this point?

When we look at our data, again a detailed data, we have not seen any changes so far. So, by quarter, what we are seeing is new cases with microcephaly to be stable. And what I mean with that is go from two cases from one case to seven cases by quarter, so no changes really on the number of cases with microcephaly. When we look at the number of cases, we imported with Zika in Q4, we saw a decrease in the number of reported cases as compared to Q3. So, the data in general, Pineto Las, et cetera, has not show any changes. Probably the only slight changes we saw again is new cases with Zika went down in Q4 reported cases. And in case of microcephaly in-bodies we have quarters with just one case. We have other quarters with 12 cases sick bodies, but the average is around five cases per quarter. So nothing that we noticed that have changed significantly at this in the last 22 to 24 months.

[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Garcia for any closing remarks.

Thank you, Operator. 2016 has been a demanding year, and we know there is still work for us to do. We’ll continue to attract the majority of corporate resources to strengthen our core Managed Care business where we expect to see margin improvements by early 2018. We remain mindful of our commitment to making prudent disciplined capital allocation decisions that result in long-term shareholder value. We also intend to remain a vocal advocate for the Island in Washington D.C. Thanks very much for your time today. Have a great day.

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