Garrett Edson - SVP, ICR Bobby Garcia - President & CEO Juan José Román - EVP & CFO

Peter Costa - Wells Fargo

Welcome to the Triple-S Management Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] I would now like to turn the conferences over to Mr. Garrett Edson, Senior Vice President, ICR. Please go ahead.

Thank you, Kyle and good morning. Welcome to the Triple-S Management fourth quarter 2017 earnings conference call. With us today are your host, Bobby Garcia, President and Chief Executive Officer of Triple-S; and Juan José Román, the Executive Vice President and Chief Financial Officer. In addition, Madeline Hernandez, President of Managed Care; and Liliana Rivera-Corcino, Corporate Controller will be available during Q&A. By now everyone should have access to our earnings announcement which was released prior to this call, and which may also be found on the Company's website at triplesmanagement.com. Before we begin the formal remarks, we need to remind everyone in each quarter, Triple-S Management Executives will provide their current view of the Company's future and less, they will be sharing forward-looking information. These statements can be affected by risks and uncertainties involved in the business. Despite management's best efforts, actually results may be differ materially from such forward-looking statements and what you hear on today's call. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. For further information on factors that could impact the Company and the statements and projections contained here-in, please refer to the Safe Harbor section in today's news release and the Company's filings with the Securities and Exchange Commission. Each forward-looking statements and projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation update on our forward-looking statements unless required by law. In addition, this call is being webcast and an archived version will be available shortly after the call and on the Investor Relations portion of the Company's website at www.triplesmanagement.com. If you cannot download a copy of the release, you can contact us at 787-792-6488, and we will get one to you immediately and can add you to the distribution list moving forward. With that, I'd now like to turn the call over to Bobby Garcia. Please go ahead.

Thanks, Garrett, and good morning everyone. Thanks for joining us today as we review our results for fourth quarter of 2017. In many ways, both positive and negative, 2017 was an unforgettable year at Triple-S. From an operational perspective, I'm pleased to say that our strategic agenda optimizing our infrastructure and strengthening our clinical operations is firmly on-track. We will leave the steps we're taking, we'll have many long-term benefits for our Company and we're excited for the future of our business. In a few words, these last few months have been trying times and I'm very proud of the work the team has done. I want to thank all of them for their hard work through our ongoing transformation. Of course, while we can control our business, we can't control the weather and the impact of Hurricane Maria on the island of Puerto Rico was up and short but historic. At that end, before commenting on our fourth quarter results and our strategy for 2018 and beyond, I want to provide some quick updates on the island's progress. Since our last earnings call, the island has continued to make solid progress on all fronts. PREPA is currently generating electricity at about 84% of it's capacity, a significant increase from the 30% generation on our last call. Vitally, 99% of people now have access to running water. These two items are crucial to complete the respiration of services, begin the process of rebuilding and hopefully, reverse the migration trend that occurred post Maria. Beyond electricity and water, telecommunication services available on 99% of the island, including 93% of cell phone sites; all ports and airports are open, over 90% of supermarkets are up and running and 88% of gas stations are currently online. As far as Triple-S is concerned, our network is almost fully operational. As of February, all hospitals and dialysis facilities are open as our 83% of the labs and 81% of the imaging centers in our network. About 96% of our primary care groups and 90% of our specialists are operational as well. Pharmacy claims are being processed at pre-hurricane levels and 96% of pharmacies are online and processing. So while recovery efforts are still underway, especially in Puerto Rico's rural areas, basic services and the healthcare system have witnessed significant improvement in last few months. We remain hopeful that by this summer, the island will essentially be running at full capacity once again. Against this backdrop of hurricane recovery, our fourth quarter performance continued benefiting from both, lower utilization of medical services and ongoing operational improvements in our managed care segment. This led us to record earnings per diluted share of $1.03 in the fourth quarter of 2017 versus $0.50 at a prior year period. Adjusted earnings were $0.94 per diluted share compared with $0.14 per diluted share a year ago. The net impact of the hurricanes represented approximately $0.46 of the quarter's improvement in earnings per share. For the three months ended December 31, total operating revenue was $706.8 million, down 1.7% from a year ago reflecting slightly lower member month enrollment in managed care and lower P&C premiums. As noted in our prior call, we continue to believe our P&C business is adequately reserved to absorb the losses from hurricanes. Juan Jose will provide an update on this point in his financial overview. During the quarter, we continue to transition of core IT and business processes to Optum. And while our overall timeframe was setback somewhat by Hurricane Maria, we believe this partnership is an important strategic move for our Company. It allows us to modernize and simplify business functions while generating administrative efficiencies and enhancing services to our clients and providers. This expanded relationship will allow Triple-S to focus on product development; value based contracting and medical management. We will continue to provide you with updates on our systems progress on future calls. In terms of our Medicare advantage program, we're pleased to note that the network contracting and clinical initiatives we launched in 2017 covering home healthcare, vision care, ESRD and durable medical equipment are expected to yield approximately $20 million in savings annually. During 2018, we continue executing on our strategic plans through additional clinical and contracting initiatives and our MA commercial and Medicaid businesses. In early February, the government of Puerto Rico issued an RFP for the administration of it's Medicaid program that will introduce changes in the model by the fourth quarter of 2018. As a reminder, MCOs are currently awarded one or more of eight regions for a bid process and manage all beneficiaries in the awarded regions on an exclusive basis with full risk for medical, dental and pharmacy benefits. Under the new design, participating MCOs will also bear for risk but must serve and compete for membership island-wide. Two separate risk pools will be established; one covering general population for which a base premium applies and the other a high cost, high need pool with adjusted premiums established according to target populations and medical conditions. MCOs must participate in both pools but may do so by subcontracting other MCOs, hospital systems or primary medical groups. The model also promotes alternative payment models and the establishment of preferred provider networks with no referrals or co-pays. As for the RFP; proposals are due April 6, MCOs will be selected by May 25, contracts must be signed by July 8, and the new model will go live on October 1, 2018 for a three-year term. In October, assess [ph] will assign beneficiaries to selected MCOs based on a yet and announced algorithm and the beneficiaries will have 90 days from October to December to choose the MCO of their preference. Triple-S is thoroughly evaluating the RFP and all aspects of the new model including financial, clinical, operations and systems requirements and risks. In Washington, we've recently seen important progress in Puerto Rico's efforts to obtain specific allocations for hurricane relief and Medicaid funding. In early February, President Trump signed a disaster recovery package that will provide $16 billion in Federal Aid to Puerto Rico. Of that total, $5 billion was earmarked for Medicaid which funds the program for two years and thus postpones the potential Medicaid cliff [ph] while the remaining $11 billion will mostly go towards infrastructure, local businesses, home repair and new home building. We remain hopeful that with a two-year reprieve, a permanent solution to the Medicaid cliff will be supported and eventually implemented in Congress. While the aid is certainly welcome and should provide a short and mid-term economic boost, we continue to watch closely for indications of a sustained economic recovery. These include a change in migration patterns, job creation and importantly, concerted action by the Puerto Rico government and the fiscal oversight board to address the island's fiscal challenges while creating and promoting a viable economic development plan. So what businesses mean for 2018 and how we view Triple-S's prospects over the longer term? Over the past couple of years, we've taken a very hard look at our overall strategy and where we'd like to be 3 to 5 years from now. That introspection has been valuable for us in deciding to adapt numerous network and clinical initiatives, expanding the optimal relationship, focus on cost reductions and improve our overall technology; if that's half a story. We understand we can only optimize expenses to a certain extent and that ultimately we need to generate sustainable growth. To that end we believe the way forward for Triple-S over the longer term is to concentrate on profitably growing our business on the island, rather than looking abroad for growth. While that might seem counterintuitive given the hurricanes and recent migration, we believe focusing on the following key points and executing on our strategy will generate additional value for shareholders. First, continue to focus on winning and retaining Medicare advantaged business, growing our market share to a more consistent and competitive product offering. Second, modernize our infrastructure, provide clients with improved service and processing at a lower cost, allowing us to further enhance our product offering and grow our margins. We finally expand our ambulatory clinic network and leverage it as an additional platform to improve medical access, cost, quality and outcomes in our core managed care businesses. During the month of November, we opened our second clinic and we recently signed a lease to open a third. We will provide additional updates regarding this venture on subsequent calls. In the coming quarters, we'll continue to track our strategy closely and believe our progress will become evident in our results moving forward. Let me know talk briefly about our 2018 outlook. As Puerto Rico continues to rebuild, the impact of utilization patterns, outward migration and the impact of reconstruction efforts remained somewhat unclear. This market uncertainty was compounded in February when the Puerto Rico government issued the request for proposal for it's Medicaid program which includes a significant changes I described earlier. Given this market uncertainties, we believe it's premature to provide comprehensive full year guidance at this time. Instead, we are providing full year 2018 directional guidance regarding our commercial Medicare advantage and ancillary businesses, as well as operating expenses. In our commercial business, we expect full year at risk member month enrollment to be between 3.7 million and 3.8 million, and MLR for the full year to be between 80.5% and 82.5%. In our Medicare advantage business, we anticipate full year member month enrollment to be between 1.35 million and 1.45 million, and expect MLR for 2018 to be between 85% and 87%. The Company's ancillary segments are expected to remain stable in terms of premiums earned. Life insurance premiums earned for 2018 are expected to be between $160 million and $164 million, while property and casualty premiums earned for 2018 are expected to be between $76 million and $80 million. Finally, we expect operating expenses for full year 2018 to be between $530 million and $545 million, primarily reflecting the reinstatements of [indiscernible]. Juan Jose, will now provide you with more specific financials and five business segment. Juan José Román: 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, as well as the impact hurricanes Irma and Maria continue to have on our financial performance during the fourth quarter. Net income this quarter was $24.2 million or $1.03 per diluted share versus a net income of $12 million or $0.50 per diluted share for the same quarter last year. Adjusted net income for the quarter was $22.1 million or $0.94 per diluted share, compared to $3.4 million or $0.14 per diluted share in the prior year period. Increase in adjusted net income reflects the ongoing improvement in the managed care operations and the estimated decrease in utilization of medical services caused by these hurricanes. The estimated net impact of the hurricanes in the adjusted net income represented approximately $10.9 million or $0.46 per share. As Bobby mentioned, Puerto Rico has made significant strides in it's hurricane recovery efforts. As essential services continue to be restored throughout the country and our member and providers are returning to their pre-hurricane routine. We began to see utilization levels returning to normal. Let me now discuss the managed care quarterly results in detail. In our commercial business, premiums earned were $9 million below those of last year, mostly due to lower membership and $3.6 million decrease in premiums related to a suspension of the health insurance provider or [indiscernible] because of the 2017 maritime [ph] and partially offset by an average premium rate increase of approximately 5%. Medicare advantage premiums rose $12 million year-over-year; primarily due to an increase in member month enrollment of approximately 28,000 live offsetting [ph] by a 4 million reservation in additional risk or revenue adjustments and lower reimbursement rate in 2017. Medicaid premiums decreased $9 million year-over-year driven by the release of 2.5% excess profit accrual which increased 2016 premiums by $6 million. A declining member month enrollment of approximately 45,000 live and $2.7 million related to a suspension of [indiscernible]. The favorable impact of higher Medicaid average premiums rates which when into effect July 1, 2017 and increased premium by approximately 9% from last year, partially offset these decreases. Managed care claims were down $50 million year-over-year, mostly driven by the estimated decrease in membership in the commercial and Medicaid businesses, generally lower utilization trends and an estimated $27 million of hurricane related decline in utilization. The slip [ph] in claims incurred also reflects prior period reserve developments recognized during this quarter. Our managed care MLR was 80.9%, 710 basis points better than the same period last year. Let me give you more details about the MLR for each of the managed care businesses. The commercial MLR was 72.5%, 870 basis points lower year-over-year, excluding the impact in both periods of prior year reserve development, the recasted MLR would have been 74.5%, an improvement of approximately 600 basis points from a year ago. This improvement results primarily from an estimated hurricane related decline in utilization which lower the adjusted MLR by approximately 700 basis points. As mentioned in previous conference calls, claim strength in this business remains stable and are in line with premium increases. The Medicare MLR improved year-over-year by 880 basis points to 82.3%, excluding the impact in both periods of prior period reserve developments and moving the regional Medicare risk of revenue adjustments to the corresponding periods, the recasted MLR would have been 82.9%, a 230 basis point improvement from last year. This improvement results primarily from the estimated hurricane related decline in utilization which lowered the adjusted MLR by approximately 490 basis points, partially offset by roughly 200 basis point increase resulting from the improved benefits in our 2017 Medicare product offerings and 50 basis point increase due primarily to higher pharmacy benefits trends. The Medicaid MLR was 87.6%, 380 basis points lower than last year. Excluding the impact of prior period reserve development and the release of the profit sharing accrual, the MLR would have been 90.4%, 100 basis points above last year but in line with the target MLR established in our Medicaid contract. This increase was primarily driven by pharmacy and operation claims trends. Let me move on to the managed care segment's quarterly operating expenses; operating expenses were down almost $1 million from a year ago, the decrease reflects an $11.1 million decline in the HIP fee due to a 2017 monitorial [ph] and lower provision for bad debt reflecting improved collection this quarter, mostly in our commercial groups including government accounts as they return to normal operations in the aftermath of Hurricane Maria. These were partially offset by higher personal costs, business promotions, and other general expenses totaling approximately $12.4 million. Let me share some brief comments on our life and property and casualty segments. Life insurance premiums were up 1% from last year, primarily reflecting premium growth in the segments individual life line-up business. The segment operating income was $6 million, a $600,000 redemption [ph] year-over-year. In the property and casualty segment, net premiums earned has been impacted by approximately $6.2 million related to catastrophe reinsurance reinstatement cost. We estimated everything losses related to here again, remained fairly consistent with our initial estimates increasing by approximately $1 million. This resulted in an operating loss of the segment of $100,000. As of December 31, 2017, our balance sheet reflects approximately $605 million within claims liabilities as a result of unpaid estimated gross losses related to here against Irma and Maria, as well as $630 million within premium and other receivables because of catastrophe related losses recoverable from their insurance program. As of yesterday, we have received 15,200 claims related to Hurricane Maria with gross losses of $687 million. We continue to believe the catastrophic coverage for losses and allocated loss expenses is sufficient to cover anticipated gross losses. Consolidation income tax expense was $17.9 million, an increase of $21.8 million from the prior year, primarily reflecting a significant increase in the managed care segments taxable income which has a higher effective tax rate than other businesses. Our balance sheet remains strong with a $1.6 billion investment portfolio as of December 31, 2017 and limited exposure to Puerto Rico obligations. At quarter's end, Puerto Rico government obligations have a fair value of $8 million and represents less than 1% of the portfolio. All of these positions are escrow bond collateralized with the U.S. obligations and are not exposed to Puerto Rico credit risk. Finally, as mentioned in our press release, the Company's Board recently authorized a $25 million expansion offer of the existing $30 million Class B repurchase program. Under the repurchase program during the fourth quarter of 2017, 322,000 shares were repurchased at an aggregate cost of $7.7 million. We have continually purchasing shares subsequent to year end and as of February 27, 2018 have repurchased an additional 225,000 shares for an aggregate cost of $5.3 million. As of February 27, 2018 we have approximately $29.4 million of our liability remaining under the repurchase program including the expansion announced today. We will now proceed to our Q&A section. Operator, please open up the call for questions.

[Operator Instructions] The first question comes from Peter Costa of Wells Fargo. Please go ahead.

On the managed care business, I'd like to spent a little bit of time exploring a couple of things. First, I'd like to talk about the new initiative to build out the clinics. How fast can that grow and what can that be in scale? And then what does that imply for margins going forward?

We consider the clinic strategy as an important part of the business going forward, not only for the value of the business on a standalone basis but given what it can contribute in terms of product development and better management of our membership in quality and outcomes. We do plan on turning this into an island-wide clinic network but I would prefer to not give too much information on how and when, just for competitive reasons.

Okay. Let's move on to the issues around the hurricane in terms of visits impact on the quarter. You clearly, was a helper in terms of keeping the utilization flow, has that continued on into the first quarter as utilization is still slow in the first quarter from the hurricane or is that mostly quite back up at this point, seems like the service providers are mostly backup and running now? Juan José Román: Right now, basically we're at the same levels before hurricanes and mostly December. So the big impact really was at the end of September upto November, early December also but that -- now by the end of December we basically saw most of the services at the same level pre-hurricane. Starting the New Year, when we look at the claims and the trends, again they continue to be in line with pre-hurricane; so it looks like in general our providers are almost back to normal.

Let's talk about that Medicaid rebid; is there -- you guys have serviced the whole island before in Medicaid, so you probably have an advantage from a perspective; you've seen all the claims and all the different geographies in the past. Is this something that you would do in terms of sub-contracting for others or using others or do you think this is something you do all on your own?

Yes, it's very early in the process. We just received this two weeks ago and as you heard from my prepared comments, there are a lot of changes to the model. If the R-fee does allow for different alternatives that range from an MCO doing everything from soup to nuts [ph] in both pools, the high cost and high claims pool and the general population to actually subcontracting with other MCOs, hospital systems or primary medical groups for the high cost pool. So we -- there are lot of other companies that have been participating in the process, there have been mandatory conference calls and meetings with the actuaries and the team at the [indiscernible] in trans-administration. So again, and sorry to be a little quicker but I don't want to tip my hand with respect to how we're going to approach the new model.

I understand. Let's move onto…

Go ahead. If I could just add; we -- I just wanted to reiterate your point, right that you're raising your question that we have managed the entire island, remember from 2013 to 2015; when we came back into the program, we did that on an ASO basis, so we do have that data, we've been looking at that data and we have -- so we do have that data, we've been looking at that data and we have or known across the island for our Medicaid source.

Let's move on to the P&C business little bit. Last time you gave us this breakdown of the claims, last quarter I heard there was 11,000 claims and it's upto 15,200 now. Last quarter I think you said 3,000 to 4,000 were auto-claims and 700 were home owners and small business with very little business interruption insurance yet at that point. Where do we stand now in terms of the claims in terms of breakdown? Juan José Román: I don't have in front of me the breakdown but in line with last quarter, in terms of the majority of the claims in terms of dollar value they will commercial, vis-à-vis personal lines. Overall, we're receiving less than -- 20% to 25% are related to personal lines in terms of the gross losses. So I think it continue to be consistent with our previous call, just increased -- what we are seeing is slightly during the month, for example, in February, now we're receiving less and less every day. For the whole month I think we received around 700 claims in total.

And what were those claims for the most part in February; what type of claims were coming in? Juan José Román: Personal. So the personal lines are getting more now as compared to commercial, commercial tend to come faster because there are businesses running and they try to -- they usually are faster in terms of claiming or coming to claim their losses.

And then, if we look at the $687 million in total gross images that you have or gross losses, can you explain how much of that was covered by facultative reinsurers and versus that you serve your overall cap?

The majority is reinsurance. Right now that $680 million that we book -- I remember that's based on the estimates and the models but when we look at reported and the initial reserve we set up in our systems, right now we're running our own $560 million, so there stood some room to go on the $687 million that we have as a research based on our books.

And maybe then it will be -- of the $560 million how much is covered by the facultative reinsurance as opposed to the gross cap reinsurance?

That number actually sort of really net of the facultative. Yes, that number is just net off -- it's excluding the hold up of insurance.

And can you talk about how much did your reinsurance go up? This year you talked about perhaps delaying some of those reinsurance hikes, by few months did you get that -- I think you had some of that accomplished; how much was accomplished and what were their rate increases on the reinsurance? Juan José Román: Yes, we extended our reinsurance program until the end of March. So we're in the middle of the negotiations for the new programs starting in April. So we have not finalized that, we do expect rates to increase but we're still in the middle of the negotiation as we speak, so that is not closed yet as to how the new program will look but we do expect those rate increases in general, some place from 25% to 30%.

Looking at through to the Board's decision to increase the share repurchase, does that imply that they are very comfortable that you're going to stay under the growth cap at this point or should I take any other read from that? Juan José Román: No, I think the program obviously is part of overall strategy of capital allocation but yes, the Board and management is comfortable in terms of our exposure to the catastrophe, we think our reinsurance is very strong and based on the data we have, we feel comfortable that we will be under our reinsurance program. So part of it is really the confidence that on the business and how we are treating our business.

And how are they comfortable with the business interruption insurance level that you provided and the claims coming in on that? Can you give me some kind of way -- where you stand now in terms of what you understand the business interruption insurance claims? And then what risk there is still in terms of that building going forward?

Yes, primary difference is that this last quarter was pretty early. As of today, we have closed around 50% of the cases are really closed, so now we have an experience -- real experience in terms of claims received, the payment, how it looks vis-à-vis the model, so that gave us a much better sense where are we vis-à-vis what we knew at the time in the previous quarter. So the big difference really is that we have to go sort really 50% of those claims received and many of them are personal and commercial but those include big commercial accounts, they are still in way to go, another 50% of the claims received but it gave us, it provide us a good view or a better view of what is the real numbers we are seeing -- the number of claims, what is clean [ph] and based on that is -- on the data we have today, we have enough room for IVNR and development and claims development before we actually go over our reinsurance coverage.

I guess the number of claims settled doesn't help me because I figured you've settled the ones that are easy to identify like damages but it's the business interruption ones that I'm more concerned about because those are the ones harder to figure out the magnitude of it. So I'm trying to figure out how to scale the business interruption claims that makes so complicated [ph], is there any metrics that you can give me to talk about the business interruption coverage in particular?

No, I don't have that detail. What I can mention to you is that some of those that have been closed include business interruption. So what we know to date is what has been claimed, how much has been claimed and how that compared with the policy with the coverage. So when I said that we have more data, more information than now I have to see how much they are claiming for property to your point but also, how much they are claiming for business interruption. So now we have data that we are happening for -- so that's why we feel more comfortable in terms of our coverage. In addition to that as I mentioned, we're still vis-à-vis with what we have received and the initial reserve that has been booked, we still have around $200 million to go of coverage in our program. So not only is what we have in the books, it's that on top of that we still have around $200 million to go for additional claims to be received and as I mentioned, the number is coming lower and lower every day, but also that will cover any payment that goes over the initial reserves. But clearly, I think that all that together is what gave us a better sense as to where are we in terms of our coverage. The other point to make is that, in terms of business interruption we have our own 6,000 policies out of the 40,000 more or less that we have that actually have that coverage. So not every claims -- catastrophic claim that we will receive came with a business interruption of claim.

[Operator Instructions] There are no further questions at this time. I would like to turn the conference back over to Bobby Garcia, President and Chief Executive Officer of Triple-S Management for closing remarks.

Thank you. We've come a long way over the past couple of years for transforming our business and we recognize there is still work left to accomplish before we're positioned where we want to be. With that said, we made a great deal of progress to improve our operations, we remained very well capitalized, and we believe there is wonderful opportunity to grow the business by focusing on the island. We will continue to work hand-in-hand with our providers and partners to provide best-in-class access and service work lines; we remain focused on driving long-term value for our shareholders. Thank you very much for your time and your ongoing support of Triple-S.

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