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

Polly Sung - Wells Fargo

Thank you for standing by. This is the conference operator. Welcome to the Triple-S Management Second 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 will now like to turn the conferences over to Kathleen Waller. Please go ahead.

Good morning, I'd also like to add my welcome to today's second 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 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 And shortly after it ends, you will find an archived version on the Investor Relations page of the company's Web site at www.triplesmanagement.com.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 second quarter of 2017. I'll start by saying we are pleased with our quarterly performance. It reflects the steady progress of our strategic initiatives, clinical programs, and operational improvements in what remains a challenging environment. Consolidated revenues were $745.9 million. We generated $12.7 million in net income or $0.52 per diluted share versus net income of $3.9 million or $0.16 per diluted share last year. The adjusted net income for the quarter was $9.4 million or $0.39 per diluted share versus adjusted net income of $2.8 million or $0.11 per diluted share a year ago. Our commercial business continues to perform well and is tracking our expectations. The ongoing decline in membership, which reflects demographic trends and attrition in existing groups due to the weak economy is being offset by average premium increases of about 5% and steady MLR improvement. The decision to maintain strict underwriting discipline continues producing tangible results. Although we still face lower premiums and higher drug costs in Medicare and Medicaid, these businesses are beginning to trend well. We implemented several provider medical management initiatives this quarter, including more competitive contracts for hemodialysis services and durable medical equipment. We expect these initiatives to produce savings during the second half of the year, while improving quality, metrics, and access. While the MA business will remain under pressure throughout 2017, the MLR should improve in the second half of the year. Enrollment is up, and our retention rate has improved significantly over last year, reflecting our decision to invest much of the feedback into member benefits to create a more competitive product in anticipation of having a four star HMO plan next year. We expect to be well-positioned in 2018 due to higher reimbursement rates and more favorable provider contracts. Our Medicaid operation lost money in the first half of the year, reflecting a decline in membership and higher pharmacy cost trends. Effective July 1st, we extended our contract with ASES for the Metro North and West regions. The 90-day extension allows for continuity of health services through September 30. By that time, we will have concluded negotiations to renew for the remainder of the government's current fiscal year, which ends June 30, 2018. ASES has agreed to new rates that incorporate costs and utilization trends for fiscal 2016-2017. Upon CMS approval, which we expect to occur during the 90-day extension, ASES will pay the cumulative difference between the new and old rates. The 9% rate increase we negotiated together with cost savings initiatives to be implemented by both parties should lead to an improvement in second half results. The so-called Medicaid cliff when a one-time block grant to Puerto Rico under the Affordable Care Act runs out is expected to be reached by April 2018, following the $300 million assignment of bonds Congress approved in May, as part of its appropriation's package. We continue to work closely with the entire Puerto Rico healthcare community to secure the necessary federal funding for the remainder of fiscal 2018. Congressional leadership has expressed its commitment to fund the balance as part of the CHIP reauthorization in late summer, and the Puerto Rico government has indicated that will use local funds to cover any shortfall in the program. A quick note on Zika, in June the Puerto Rico government declared the end of the Zika epidemic. As in the past, Triple-S has not experienced any significant claims related to the buyers during the second quarter. Turning to PROMESA; the fiscal oversight board approved the government's 2018 budget in June, and the debt restructuring process is moving forward under the supervision of an experienced Federal judge. Austerity measures such as reduction in government employee's work days and a reduction in pension plan benefits which had been announced for September will likely hurt the economy in the short run, but these measures should eventually lead to greater consumer and business confidence and renewed economic expansion. We continue to offer our full support to the government in obtaining this objective. Despite the headwinds, our multiyear transformation is proceeding as planned, and our results suggest we are turning the corner operationally. We've further strengthened our Board of Directors, and continue to funnel majority of our capital expenditures and do more effective clinical strategies and technology investments. In addition, premiums in the Medicare and Medicaid businesses are poised to rise as we move into 2018. In light of our financial strength and the significant discount at which our stock trades relative to book value, the company's Board has authorized a $30 million share repurchase program. We believe buying back stock at current levels represents a prudent use of capital and we will begin the program [mildly] [ph]. With that, I will now turn the call over to Juan Jose 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 $8 million lower than a year ago, primarily reflecting a result on medical risk per revenue adjustments, partially offset by last year's Medicaid profit sharing accrual. Also contributing to the decrease in premiums was a decline in fully-insured member month enrollment, particularly in the commercial and Medicaid businesses. Now, let's look at each line of business. Premiums earned in our commercial business were 12 million below those of last year, mostly due to lower membership and a $3.6 million decrease in premiums related to the suspension of the HIP fee pass-through because of their 2017 moratorium, partially offset by an average premium rate increase of approximately 5%. Contributing to the decreasing commercial membership was approximately 12,000 member month or 4 million of premiums generated by the U.S. Virgin Island business in 2016. In September of last year, the issuance of these policies was discontinued. Medicaid premiums were down $7 million year-over-year, primarily due to reduced reimbursement rate in 2017, and a 17 million year-over-year decrease in our midyear adjustment, offsetting partly by an increasing member month enrollment of approximately 12,000 lives. The lower midyear adjustment is a result of improvement in the timing of our health risk assessments for our Medicare populations. Since we now start this process earlier, the monthly premium rates reflect the corresponding member risk core from the beginning of the calendar year. Medicaid premiums increased $10 million year-over-year, driven by a profit sharing accrual, which reduce last year's premium by $15 million, and the collection of 12 million in premiums due to our compliance with the contracts quality incentive metrics. Partially offseting these adjustments, were a decrease in membership, a reduction of $2.6 million related to the suspension of the HIP fee pass-through and lower Medicaid average premium rates, which went into effect July 1st, 2016, and were down 4% from last year. Managed care claims were down $11 million year-over year, mostly driven by the quarter's lowered enrollment and favorable prior period reserved developments partially offset by normal medical cost strings. The MLR was 87.5%, 70 basis points below the prior year. Let me give you more details regarding the MLR for each of the managed care businesses. The commercial MLR was 80.6%, an 860 basis points improvement year-on-year. Excluding the impact of prior period reserve developments, the re-casted MLR would have been 83.1%, 450 basis points lower than a year ago. The decline in the adjusted MLR reflects favorable claim strengths relative to the increase in premiums, resulting from our continuous streak on the writing discipline. Claim trends in this business continue to be stable, reflecting a single-digit percentage increase. The Medicaid MLR was 90.3%, 100 basis points higher than last year. Excluding the impact of prior period reserve developments, as well as the impact of the profit sharing accrual and premiums related to our compliance with quality incentive metrics, the MLR would have been 96%, 580 basis points above last year. The increase in the adjusted MLR is driven by increased pharmacy and patient claims strength as well as a reduction in premiums I mentioned before. The recently negotiated premium rates taking to consideration they hired anticipated trends that we have -- has been experiencing over the last two years. We expect a 91% MLR as required by contract, once the premiums rates negotiated for this businesses go into effect, we direct it to July 1, 2017. The Medicare MLR increased 430 basis points to 90.9%. Excluding the impact in both periods of prior period reserve developments and moving the Medicare risk revenue adjustments to a corresponding periods, the Medicare MLR would have been 94.3% up 300 basis points from last year, this metric was impacted by higher than expected trending pharmacy benefits and the improved benefits in our 2017 Medicare product offerings. Taking advantage of the HIP fee moratorium, we enhanced our offering to drive growth and improve our retention in anticipation of having a start plan in 2018. These additional benefits accounts for approximately 170 of the 300 basis increase in the adjusted MLR. Let's move on to the segments quarterly operating expenses, operating expenses were down $3.3 million from a year ago, the decline reflects the decrease in the HIP Fee of $10.7 million due to a 2017 tax holiday of power by increases in other general operating expenses of approximately $6.9 million. Turning to our complementary businesses both the life and property and casualty insurance segments continue to generate consistent profitable results, the Life Insurance premiums rose 3% year-over-year primarily reflecting improved retention in certain individual life products and higher sales of cancer policies, the operating income of the life insurance segment remained stable at $5 million, the operating income in our property and casualty insurance segment was $3.8 million up $0.4 million reflects mostly reflecting reduced operating expenses. The consolidated income tax expense decreased $2.2 million year-over-year reflecting their prior year reassessment of the tax rate used to measures several temporary differences in our property and casualty segment, these reassessment raise the deferred tax rates in 20 to 39% resulting in a $2.6 million in 2016 deferred tax expense. Our balance sheet remains strong with a $1.5 billion investment portfolio as of June 30, 2017 and limited exposure to Puerto Rican debt obligation. Currently, Puerto Rico government obligations have a fair value of approximately $8 million, 100% plus than 1% of our portfolio, all of these positions has our escrow homes collateralized with the U.S. obligations and are not exposed to Puerto Rico credit risk. I will also like to highlight the fact that we continue to receive payment from the government accounts on a regular basis and Medicaid receivable balance as related to current contracts are up to date. As you may have seen in our earnings release, following our filing for the period ending December 31, 2016 on March 31, 2017 we reevaluated certain internal controls related to the review process of the managed care claim space data in our incurred but not reported actuarial models specifically the company returning that the claims paid information in the Triangles used in our model was not reviewed by an individual than they prepare to ascertain data was accurately presented by incurred date causing a material weakness in our internal control or financial reporting. We have already taken steps to address this situation, it is important to note that the identification of this issue does not change our consolidated financial statements for those periods. We will now proceed to our Q&A session. Operator, please open up the call for questions?

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Polly Sung with Wells Fargo. Please go ahead.

Good morning. How are you?

Hi, Polly. Good morning.

Can we first talk about sort of the week internal controls identified? Sort of what drove you guys to do the evaluation, and then where -- what are sort of the next -- I know you guys have that, you've taken steps, but does that mean your reserves where you stand right now, or okay, or you're still evaluating them?

Hi. This is Juan Jose. So, no, our reserve are correct, those already reported or -- and those that were reported now as of June, so it did not have any impact on reported numbers or any of the result that has been reported. So, I think that -- I want to make that very clear. This is just only that we reevaluated. And it was basically following as a result of finding and inspection from the Public Company Accounting Oversight Board the PCAOB, is that [indiscernible] probably accounting firm requested that we do evaluate those controls. And mostly, they have to do with the preciseness of the incurred date in our [lax] [ph]. So it's mostly the controls that we don't have a second person, all they're done, then, they are prepared, just reviewing the formulas. So, that's basically where we have the problem. Let me say that around our processes, we have many other controls to monitor our reserves. So we do obviously have all the controls in place that mitigate, or that really oversee our whole research processes. So we're very comfortable that our numbers are correct. We have no doubt on that. However, this is using internal controls that in term of internal controls we have this missing control and that's required us to do an assessment, and that's what we did. So, the revaluation again was as a result of a review by the PCAOB awarding the [indiscernible] accountant. At the same time they asked us to review their process. And as part of that process, what we find out, or the determination was that we don't have the preciseness in the incurred date in the lax, or a second reviewer to determine that preciseness of that. However, as per -- and the process actually was working on the broadly first quarter of 2016 is that we have some changes in our editorial department, where the person doing that review actually left the company. And although we actually added as part of their review process our external actuaries, we did not ask them to do the detail review of the incurred date. So, that second review is what is missing the whole process. So the process have controls is that we're missing that part of the process of having a second person reviewing the detail formulas in the IVNR. So, I just want to make this very clear, no impact in our numbers at all, this is just a internal control situations, and it's specifically is that during 2016, we have these changes in our editorial department, and although we added a full review for an hour external actuaries, we didn't ask them to do the detail review of the formulas in the lax. So that's basically what we're changing. We're putting a second person, steps taken where that -- for the closing of June, we have a second person reviewing those reserved buckets in the IVNR.

Got it. That makes sense. It looks like in your commercial segment, favorable development was pretty good. Can you talk about sort of what drove that? Is that mostly Q1 related, or is that related to prior year? And it sounds like it's not helped by sort of the reveal of the control problem, right?

No, no I have nothing to do with that.

Okay.

So the positive development really is we're continuing to see. As we said, it's a combination of factors. First, some of the accounts with very high MLR as we said we continue our strict underwriting guidelines. So, remember that we renew groups basically every month. So, as you continue to increase premium rate to the adequate level for those group with a very high MLR, or they leave the company or they get the higher increase, or you say, net of a higher increase or a buyback of benefit, but the bottom line is because of the underwriting guidelines, now we are improving the results of certain groups with a very high MLR. That obviously help us in terms of our experience going forward. So I think the commercial really is that we continue to see the benefits in our number, in our results, but it takes times, right, and remember that we renew significant portion of our groups in January. So after Q1 is that we continue to see the benefit of the results of that significant renewal of new groups in our commercial.

That makes sense.

And this is just in the quarter, when you look year to-date, the December reserve, the development is almost to the penny.

Okay.

For March, we continue to see positive result in commercial, and it's showing obviously in the results.

Okay. And can you tell about Zika a little bit, I know you said Puerto Rico had declared end to that epidemic. But there has been sort of some concerns, you know, where news have pointed out maybe that the problem isn't being reported as much in Puerto Rico. Just put your thoughts on the situation there, and now that we are well into the summer, whether it sort of -- Zika cases could rise back up?

Yes. So, let's -- so the government all right -- the recent -- they have already declared there is not an epidemic, is that the number of cases they're seeing reported or actual cases in hospital have decreased significantly. It's not really -- they don't see a trend. What they said is very consistent with our own data. So when we look, and as we said in last call, when we started looking at our new cases, we were seeing a significant decrease on reported cases. So what I can tell is that what they said is very consistent with what we have been asking since the beginning of the year. So what I can tell you that at least from our side, that is very consistent, we actually saw a decrease in the number of cases, consistently decrease in cases every month, so that's very important, is a trend, and then exactly what they are saying. So, so far what I can tell you is that we agree with them. We are not seeing that as a big problem in Puerto Rico.

Okay, thank you very much. That's all my questions.

Thank you.

This concludes the time allocated for question-and-answer session. I will like to turn the conference back over to Bobby Garcia for any closing remarks.

Thank you. In closing, I would like to remind investors that recent macro developments in Puerto Rico suggest the island with bottom up between this year and next. And economists predict that it can take about five years until 2022 to begin growing again. The resulting economics, social, and demographic landscape will surely be different, so with the healthcare landscape, shape not just by the island is changing reality, but by the broader transformation of the industry, in turn driven by technology, medical discoveries, and the dual need to improve quality while containing cost. The question I ask continually to my management team is how we can anticipate and capitalize on the inherent disruption to our legacy business, while finding new ways to grow? We are in a unique position given our brand, financials, and history to take full advantage of that future. We remain committed to repositioning our legacy business for success over the next two years, while actively enabling and investing in value-based integrated models of care delivery. We are on track with our strategic agenda, and we remain absolutely committed to the creation of shareholder value, which includes both strategic investments and a reasonable return on capital. Thank you very much for your time this morning. Have a great day.

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