Kathleen Waller - AllWays Communicate Bobby Garcia - President and CEO Juan Jose Roman - EVP, CFO

Peter Costa - Wells Fargo Securities

Thank you for standing by. This is the conference operator. Welcome to the Triple-S Management First Quarter 2017 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. Please go ahead.

Good morning and welcome to today’s first quarter conference call. 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 go through it. 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 the 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 statement in the section of today's news release or in the company's periodic filings with the SEC. In addition, all information shared on this call should be considered current as of today only. 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. And shortly after it ends, you will find an archived version on the Investor Relations page of the company's website at www.triplesmanagement.com.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 do not have a copy of today's news release, you can give me a call Kathy Waller, at 312-543-6708 and I will get you one to you immediately. With that, I'd like to turn the call over to Bobby Garcia. Please proceed Bobby.

Thanks Kathy and good morning everyone. Thanks for joining us today as we review our results for the first quarter of 2017. Consolidated revenues were $722.5 million. We recorded a net loss of $4.3 million or $0.18 per diluted share versus net income of $3.4 million or $0.14 per diluted share a year ago. The adjusted net loss for the quarter was $4.8 million or $0.20 per diluted share versus adjusted net income of $3.4 million or $0.14 per diluted share a year ago. These results -- while disappointing, they’re in line with our internal expectations. They were driven by continued weakness in our Medicare Advantage and Medicaid businesses. In recent quarters, higher than expected trends in Part B drugs and home health, deterioration in the experience of the ESRD Medicare population and higher pharmacy claims trends in the Medicaid and Medicare programs have weighed heavily on these segments. In the case of ESRD and Part B drug costs, we are in the process of narrowing the network and negotiating more competitive rates for hemodialysis services. Also, we've implemented an in-home care capitation plan as of April 1 and are working on a new initiative to better manage the cost of caring for ESRD patients. While the MA business will be under pressure throughout 2017, our outlook for its annual MLR remains unchanged in the 90% to 92% range. Sales, which had a solid start during the annual enrollment period, have maintained a steady pace throughout the quarter and our retention rate has improved over last year, reflecting a more competitive product offering. We are now working on our 2018 bid submission which will benefit from a four-star rating for our HMO products. Our Medicaid operation will lose money in the first half of the year reflecting the decline in membership and higher pharmacy cost trends. As mentioned during our last call in late February, the Puerto Rico government announced its intention to extend the current contracts with the incumbent carriers in each region for its 2018 fiscal year which begins on July 1, 2017. We have been in negotiations since then and are submitting our final rate proposal this week. Assuming our proposal is accepted by the government we expect to improve the performance of this business for the remaining six months of 2017. Much has been said in recent weeks and months about the year-end Medicaid cliff when a one-time block grant to Puerto Rico under the Affordable Care Act is expected to run out. We have been working hand in hand with the entire Puerto Rico health care community to secure additional federal funding for the remainder of the government's 2018 fiscal year. As part of the recently enacted appropriations package, Puerto Rico received close to $300 million in additional federal funds. This is approximately half of the amount needed to bridge the funding gap for fiscal 2018. Congressional leadership has expressed its commitment to fund the balance as part of the CHIP reauthorization in late summer. Although the state budget has not yet been made public nor approved by the fiscal oversight board, the Puerto Rico government has indicated that it will use local funds to cover any shortfall in the program. Our commercial business remains very stable. Average premium rates rose 5% and we saw a slight sequential uptick in membership following years of attrition in existing groups due to the ongoing economic crisis and the weeding out of unprofitable accounts. In mid-March, the fiscal oversight board established by PROMESA approved the government's ten year fiscal plan which includes significant budget reductions in benefits coverage and network design changes to the government health plan. The projected cost takeout is $100 million in fiscal 2018 and $299 million in fiscal 2019, $6.1 billion over the entire ten year plan period. On May 1, the stay on bondholder litigation under PROMESA expired and the following day the government of Puerto Rico filed for bankruptcy under Title three. Clearly we face heightened levels of political and fiscal uncertainty which will likely be exacerbated by PROMESA related austerity initiatives. Like most members of the Puerto Rico business community, we recognize that the measures being taken, while painful, are critical to restoring the island's longer term fiscal health and economic growth. We pledge our full support to both the government and the fiscal oversight board in achieving this objective. As we have been communicating continuously, our strategic transformation is a multi-year process. In 2016 and thus far in 2017 we have made strong progress on a number of fronts, although these strides are clearly not yet reflected in our financial performance. As we look ahead to 2018, we are pleased with the CMS rate announcement published in the final call letter which will allow us to leverage our four-star rating in our Medicare Advantage HMO contract. As you know, four-star plans receive a 5% bonus applied to the county benchmarks used in premium calculations as well as a higher share of our rebates. This incremental revenue should translate into more competitive product offering and better margins. I'll now turn the call over to Juan Jose Roman for a more detailed look at our financial performance.

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 the quarter were $38 million lower than a year ago, primarily reflecting a 4.9% reduction in the fully insured member month enrollment, particularly in the commercial and the Medicaid businesses. Also contributing to the decrease in members are approximately 12,000 member month or 4 million of premiums generated by the U.S. Virgin Islands business in the 2016 period, in September of last year, with these continuations of policies in the USVI. The lower commercial Medicare membership is consistent with our expectations and stemmed from the ongoing weakness in the Puerto Rican economy and the resulting population migration. This quarter our commercial enrollment which has been declining for the last several quarters posted a slight sequential increase of approximately 1000 members. Average premium rates in our commercial business increased 5% in line with prior periods, offset by the decrease of about $3.5 million in premiums related to the suspension of the HIP fee pass-through as a result of the 2017 moratorium. Medicaid average premiums decreased 4% versus last year reflecting the new rates that went into effect July 1, 2016, last year’s partial reversal of the accrued 2.5% excess profit and the $2.6 million related to the suspension of the HIP fee pass-through. In the Medicaid segment - -in the Medicare segment, the lower year-over-year average premium rates reflect a change in our membership mix. This year our member month enrollment had a higher concentration of non-dual individuals and groups which have a lower per member per month rates than duals. In addition, the Medicare benchmark of Puerto Rico experience another year-over-year decrease. As a reminder, 2017 is the last year where we will see a benchmark reduction. After six years of the planning reimbursement rates, 2018 will see an increase in the Medicare benchmark. Managed care claims were down $9 million year over year, mostly driven by their lower enrollment this quarter partially offset by higher medical costs. The MLR was 91.7%, up 380 basis points from last year. Unlike the last few quarters, this quarter was not impacted by significant prior period reserve development. Specifically this quarter benefits from the $1 million favorable prior period reserve development. Let me give you more details on the MLR for each of the managed care businesses. The Medicaid MLR was 97.8%, 770 basis points higher than last year, stemming from increase pharmacy and patient claims trends as well as a reduction in premiums I mentioned before. As Bobby mentioned the situation will persist until July 1, 2017 when new rates will take effect assuming our new contract bid for our existing two Medicaid regions is accepted by the Puerto Rico government. The Medicare MLR increased 390 basis points to 94%. Excluding the impact in both periods of prior period reserve developments and move the Medicare risk per revenue adjustment to their corresponding periods, the recasted MLR – the Medicare MLR would have been 95.6%, up 280 basis points from last year. This metric was mainly impacted by higher than expected trends in Part B drugs, pharmacy benefits, ESRD, and the improvement of benefits in our 2017 Medicare product offering. Taking advantage of the HIP fee moratorium we enhanced our offering to drive grow and improve our retention in anticipation of the 2018 four-star plan. These additional benefits represent approximately 180 basis points of the 280 basis point increase in the adjusted MLR. The commercial MLR was 83.5%, up 70 basis points year over year. Excluding the impact of prior period reserve developments, the recasted MLR would have been 83.3%, 240 basis points lower year over year. The declining adjusted MLR reflects claims trends that are below the rate of increase in premiums due to our continued underwriting discipline. Claim trends in this business are stable reflecting a single digit percentage increase. Let's move on to the segment’s quarterly operating expenses. Operating expenses were down $11.5 million from a year ago. This reflects the decrease in the health insurance provider fees of $10.8 million due to the 2017 moratorium as well as lower personnel costs. Turning to our complementary segments, life insurance premiums increased 4% year over year, including growth in our Costa Rica operations. The life business achieved chief operating income of $4 million, down $2 million from last year reflecting higher claim experience particularly in the individual and cancer products. The operating income of our property and casualty insurance segment remained stable at $2.1 million. The consolidated income tax benefit increased $8.4 million year over year reflecting the loss before taxes in the managed care segment. Our balance sheet remains strong with $1.6 billion investment portfolio as of March 31, 2017 and limited exposure to the Puerto Rico devaluations. As of today Puerto Rico government obligation has a fair value of 17 million and represents only 1% of the portfolio. Approximately 8 million of these positions are escrow bonds collateralized with U.S. obligation and are not exposed to Puerto Rico credit risk. The remaining position has been previously incurred and the carry-on book value represents around 56% of par value. I would also like to highlight the fact that we continue to receive payment from government accounts on a regular basis and Medicaid receivable balances related to the current contract are up to date. We will now proceed toward Q&A section. Operator, please open up the call for questions.

[Operator Instructions] Our first question comes from Peter Costa with Wells Fargo Securities.

Thanks. First, looking at the claims processing issue that you had last quarter that caused the higher PPD, we didn’t see that this quarter. In fact, you saw PPD improved to a favourable level. Can you tell us what – is that completed now? Have you finished the claims processing, re-authorization, and project or where we stand with that?

Good morning, Peter. This is Bobby. As we mentioned last call we put in place a confidential project to address all the issues identified in the claims processing from soup to nuts. And we have addressed many of the issues; there are still some remaining but we do feel that we now have it under control.

So you don't expect another round of unfavorable development coming from getting through more of the claims development or is your processing -- the remaining few things left to to do might incur some more unfavorable development?

Hi Peter, this is Juan Jose. Just let me add, we also added new analytics and reports just to monitor also the claims and experience. So far I think we have a good handle that we should not expect to see such significant changes as we saw or -- development as we saw in the past. So we definitely feel more comfortable. But to Bobby’s point, there are still some items that need to be finalized and completed before we feel that we have 100% fixed the issues. But definitely much much better and I think with the reporting that we implemented, additional reportings now we have a better visibility and much faster.

I'd say, just remember these are always estimates. And I think next quarter, one additional quarter will provide more comfort and consistency.

And in terms of the Medicaid PMPM in the quarter it was down about 9% year over year. Can you get into exactly why it was down that much? Seems more than we would have expected and I know you mentioned the duals mix but I think that had to do with the Medicare PMPM, I wasn't sure about that.

No, on the Medicare -- Medicare PMPM.

The Medicare -- so the first impact is they’re changing the duals. So what our growth this quarter as compared to last year comes mostly from non-duals but also we gained a couple of groups – the Medicare Advantage groups which altogether their premium is significantly lower than our duals eligible. The other part is that there was an adjustment in the – there was an adjustment in the benchmark, there was a reduction in the benchmark of around 2%, 3% versus last year. And let me just add in average the difference between a dual and non-dual is around $250 PMPM.

I was actually referring to the Medicaid MLR – I am sorry, the Medicaid PMPM rate.

Okay. A couple of things. So first, there was a decrease in rates effective July 1, 2016 of 4% -- average 4%. Second, last year we had the excess profit -- the excess of profit we -- last year we had an excess, so we recognized that as part of our premium, and we don't have that this year. I need to check how much was in the quarter, I think was around $3 million to $4 million, more or less. We don't have this year. And lastly last year we recognized as premium the pass-through of the HIP fee that was around $2.6 million, that was reimbursed by the government of Puerto Rico that because of the moratorium, the tax holiday we don't have this year.

And then I guess my last comment question is, you sound like you think the rate in medical loss ratio in the commercial business is going to be stable with some seasonality, 2 or 3 points [ph] going up through the rest of the year. But it sounds like you feel like that's a steady state, is that correct? Or is that something you still expect some deterioration on?

No, you’re correct. Right now what we see, premium rate increases are in line with claims trends and claims trends in commercial actually have been a low single digit, so it's very very -- and we expect at this moment really that to continue for the remainder of the year.

Our next question comes from Michael Bomstein, he is a private investor.

So this great quarter given the adverse environment, I was wondering whether the 2017 and 2018 have sea-change what your exposure to that is across three business lines, and whether that's been fully baked into the 2017 and 2018 pricing and reserving?

Good morning. When you say sea-change you mean what's going on with the banks or the government?

You know how the geographical floors for the physician payment benchmarks for the Medicare rates have been -- were moved to like 1.04 in 2017 and 2018 like driving the physician trends if you're on like 100% fee for service contracts?

Sorry, go ahead.

I was just wondering whether that was baked into your physician trend on reserving if your contracts are based on fee for service, and which business lines you would be exposed to on that?

Just to make sure that we’re referring the same thing. If I understand you correctly you're talking about the change in the Medicare fee for service schedule for providers. It was changed in October of last year for 2017; is that correct?

Yes, and the upcoming 2018 change for Puerto Rico as well.

And so it does -- the way we handled it for 2017 and I am going to take it by business line, is that the Medicare bids were done in June and that changed to the traditional Medicare fee for service was in October, so they were not baked into the bid. And therefore we made amendments to the provider contracts to keep the Medicare scheduled payments based on 2016. So that does not affect with very few minor exceptions does not impact our 2017 scenario for any commercial, that does not apply -- in Medicaid it does not apply, so that's it with respect to the fee schedule. For 2018, as with the new fee schedules they have been taken into consideration in the call, so we will be taking that into account as we prepare our 2018 bids for June. End of Q&A

This concludes the question and answer session. I'd like to turn the conference over to Bobby Garcia for any closing remarks. You may go ahead.

Thank you very much. In closing, we remain committed in completing our operations overall and repositioning Triple-S over the next few years in our legacy business while activating, enabling and investing in value based integrated models of care delivery as the market evolves. This will allow us to achieve growth and sustainability in the years to come. We're on track with our strategic agenda and remain absolutely committed to the creation of shareholder value which includes both strategic investments and a reasonable return on capital. Thank you very much and have a great day.

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