Garrett Edson – Senior Vice President, ICR Bobby García – President and Chief Executive Officer Juan Jose Román – Executive Vice President and Chief Financial Officer

Peter Costa – Wells Fargo Securities

Thank you for standing by. This is the conference operator. Welcome to the Triple-S Management First Quarter 2018 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead.

Thank you, Ariel, and good morning. Welcome to the Triple-S Management First Quarter 2018 Earnings Conference Call. With us today are your host, Bobby García, President and Chief Executive Officer of Triple-S; and Juan Jose Román, the Executive Vice President and Chief Financial Officer. In addition, Madeline Hernandez, Chief Operating Officer and President of Managed Care, will be available during Q&A. By now, everyone should have access to the 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 formal remarks, we need to remind everyone that each quarter, Triple-S Management executives will provide their current view of the company's future, and thus, 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, actual results may 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 herein, please refer to the safe harbor section in today's news release and the company's filings with the Securities Exchange Commission. Each forward-looking statement 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 to update 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 In addition, this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.triplesmanagement.com.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 García. Please go head. Bobby García: Thanks, Garrett, and good morning, everyone. Thanks for joining us today as we review our results for the first quarter of 2018. Overall, we are very pleased with our first quarter results. As I noted on our last call a couple of months ago, we closed out 2017 with our strategic agenda firmly on track. Steady progress continues as planned, particularly with respect to our Managed Care segment. For the first quarter of 2018, we recorded diluted earnings per share of $0.17 versus a loss of $0.18 in the prior year period, while adjusted net earnings were $0.60 per diluted share compared to an adjusted loss of $0.20 per diluted share a year ago. Total operating revenue was $770.2 million, up 7% from a year ago, reflecting improved premium trends in our Managed Care segment and particularly in Medicare Advantage. An improved MLR across all 3 Managed Care segments also bolstered our results. Juan Jose will provide more color on our financial performance for the quarter shortly. On our last call, I laid out a 3-pronged approach to grow Triple-S profitably and sustainably over the long term. First, win and retain Medicare Advantage business with a quality product offering that is more consistent and competitive. In the first quarter, we saw a small membership decline from year-end 2017, mostly driven by lower-than-expected retention in our nondual product during the special enrollment period, which was established following the hurricanes to give consumers more time to enroll in and an opportunity to switch their Medicare plans. This period closed on March 31. As the industry's sales and retention efforts have focused towards the dual population, which can continue to enroll throughout the remainder of the year, we are deploying additional go-to-market strategies to reverse the trend with our more competitive 4-star HMO products. Despite the small membership decline, we are very pleased to see a sizeable increase in Medicare premiums earned in the first quarter. Thanks to our HMO products and the first increase in Medicare reimbursement rates in 6 years, we recorded a 20% increase in premium rates for the – from the prior period – prior year period, including the 5% bonus applied to the premium benchmark. The increase in premiums considerably improved Medicare MLR in the quarter. Since we are now 7 months past the hurricanes and believe any pent-up demand for medical procedures has mostly subsided, we believe our clinical and contract initiatives have also contributed to these results. As the 2019 deadline draws near for the bid, we are analyzing the implications of the 3% to 4% increase in the Puerto Rico benchmark. Other elements of the final rate notice – the HIP fee moratorium and potential competitor actions. We understand the importance of continuing to innovate while keeping benefits, premiums and networks as stable as possible for our MA members and are taking a balanced approach to membership growth and margin in preparing our bid. The second prong of our approach is transforming our processes and infrastructure to become a member-centric organization, providing members, customers and providers with improved service at a lower cost while allowing us to further enhance our product offering. That is why we continue investing in technological tools to strengthen the analytical capabilities of our clinical team and better engage both our members and our providers. That is why this quarter, we continued to reduce our operational complexity by transitioning our Medicare Advantage claims from a separate platform to QNX on which we run our Commercial and Medicaid claims. It is also why we entrusted much of our claims processing and IT functions to Optum through a strategic 10-year relationship. The transition of these functions is proceeding as planned, and over time as we offload more our key and back-office functions to Optum, we'll increasingly go – we'll focus increasingly on our go-to-market strategies, expanding our product suite and implementing other initiatives to grow our top line and further strengthen our brand. The final prong of our strategy is to integrate vertically, in particular by expanding our ambulatory clinic network and using it as an additional platform to improve medical access, costs, quality and outcomes across our Managed Care businesses. This network is also meant to support and complement key provider partners. We announced on our last call that we had signed a lease to open a third clinic in the metro area. That clinic, located next to one of our preferred provider hospitals, had since opened. This quarter, we also opened our second Salus@work, a workplace clinic linked to our Salus hub in Guaynabo at a major manufacturing plant in rural Puerto Rico. Our first Salus@work clinic was inaugurated at Triple-S headquarters 3 years ago as a pilot. While we are purposely remaining a bit high level in terms of the clinic and broader vertical integration strategies for now, I do want to stress that over time, we expect our clinic network to become a valuable contributor for Triple-S, and we'll continue to provide you with updates on future calls. Beyond our growth plan, I also wanted to provide an update on the Medicaid RFP and the latest on the island and its recovery. As we noted on the last call, the Puerto Rican Government issued an RFP back in February for the administration of its Medicaid program that is introducing significant changes to the model, including the elimination of geographical areas and allowing participants to select insurance carriers. Proposals were due April 6, and we submitted a proposal that is currently being evaluated. The MCO bid awards are expected to be announced sometime in June, with contracts to be signed shortly thereafter, and the new model to go live in October 2018 for a 3-year term. We expect to be able to provide more detail on Medicaid on our next call. In terms of the island's recovery, we are slowly but surely returning to normal. Electricity is now at 95% of capacity, and running water is at 99%, as are telecommunications and cell phone sites. We expect the island will once again be running at full capacity, albeit, within a new normal by summer. With respect to government, last month was a mixed bag. In Washington, the U.S. Department of Housing and Urban Development announced Puerto Rico would receive an $18.5 billion amount to help build and rebuild the island's housing, infrastructure and power grid. The funds are crucial to get Puerto Rico back on its feet, reverse migration patterns and fuel economic recovery. On the island, the financial oversight board recently certified plans that differed substantially from draft fiscal plans submitted by the Puerto Rico Government. Under the certified plans, the board implied there will be a need for significant debt relief for the Puerto Rican Government. Further, the government has proposed significant changes to the government health plan, including a potential reduction of pharmacy costs through refined drug-coverage list and the use of lower-cost alternatives. We continue to watch developments closely and will update the market as warranted. After solid performance in our first quarter, we are maintaining most of the full year 2018 directional guidance we've provided on our last call and raising that guidance for our P&C segment. Specifically, for our Commercial business, we continue to 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 continue to expect member month enrollment between 1.35 million and 1.45 million and MLR for 2018 to be between 85% and 87%. Life Insurance premiums earned for 2018 are still expected to be between $160 million and $164 million, while we are raising our expectations for Property and Casualty premiums earned for 2018 to be between $82 million and $86 million from our previous guidance of $76 million to $80 million. Finally, we continue to expect consolidated operating expenses for full year 2018 to be between $530 million and $545 million, primarily reflecting the reinstatement of the HIP fee. To sum up this quarter, we continue making significant progress on our operations as evidenced by the increase in our Medicare revenue and the improved MLR rates at our Managed Care segment. We remain very well capitalized and continue to believe we are making great strides to strategically grow Triple-S over the long term and create substantial value for our shareholders. Juan Jose will now provide you with more specific financials by business segment. Juan Jose Román: Thank you, Bobby, and welcome to everyone on this call. I'm going to discuss our first quarter results, mainly emphasizing our Managed Care segment. Net income this quarter was $3.9 million or $0.17 per diluted share versus a net loss of $4.3 million or $0.18 per diluted share for the same quarter last year. Net income for the period reflects the implementation of new accounting guidance that requires changes in unrealized gains or losses of equity securities to be recorded through operations. During this quarter, we recognized an after-tax unrealized loss of approximately $13 million as a result of a decrease in the unrealized gain of our equity security portfolio. Because this amount is not directly related to our operations, we excluded this amount form our adjusted net income just as we have historically done for our net realized investment gains and losses. Adjusted net income for the quarter was $14.1 million or $0.60 per diluted share compared to an adjusted net loss of $4.8 million or $0.20 per diluted share in the prior year period. The increase in adjusted net income reflects the improvement in our Managed Care operating results, mostly due to premiums across all our Managed Care businesses trending better than our claim trends. Let me now discuss the Managed Care quarterly results in detail. Our Medicare Advantage business performed well during this quarter. The performance was driven by a significant increase in earned premiums versus last year, largely reflecting the increase in reimbursement rate for Puerto Rico in 2018 for the first time since 2012 and increasing premium rates related to achieving the 4-star rating in our 2018 HMO product and higher average risk scores, including higher final risk score adjustments by approximately 4 million. As we have noted before, in 2018, the 4-star rating for our MA HMO product provides us with a 5% bonus supply to the premium benchmark as well as higher sharing and rebates. This increases our offsetting power by decrease in member month. In addition, the increases in premium rates, together with our ongoing claim cost initiative, mainly drove our MLR year-over-year improvement of 940 basis point as reported and 800 basis points on an adjusted basis. Our Medicaid business also show an improvement as compared to last year. Increases in our Medicaid earned premium was mostly the result of higher average premium rates, which went into effect July 1, 2017, $4 million in premiums related to achieving the contracts quality incentive metrics and $4 million associated with the reinstatement of the HIP fee pass-through, following the 2017 moratorium. As with the Medicare business, the improvement in the Medicaid MLR was mostly due to the increasing premiums and our ongoing cost-claim initiatives. Our Medicaid MLR improved 860 basis points compared to last year. Excluding the impact of prior period reserve developments and the profit sharing accrual, the recasted MLR would have been 90%, an improvement of 300 basis points compared to last year. In our commercial business, premiums were below those of last year, mostly due to lower fully insured membership and partially offset by $4 million related to the reinstatement of the HIP fee pass-through in 2018. Our commercial MLR was 220 basis points lower year-over-year. Excluding the impact in both periods of prior period reserve developments, the recasted MLR would have improved approximately 30 basis points from a year ago. The Managed Care segment operating expenses were up $21 million from a year ago. The increase reflects an $11.7 million increase from the reinstated HIP fee, higher professional services and personnel costs related to our ongoing operational and clinical Managed Care initiative and additional business promotion expenses incurred during the extension of the Medicare Advantage annual enrollment period to March 31, 2018. Let me share some brief comments on our Life and Property and Casualty segments. Life Insurance premiums were up 2.5% from last year, primarily reflecting premium growth in the segment, individual and group life line of business. The segment operating income was $3.6 million, a $300,000 reduction year-over-year, mostly due to increased debt benefits in the individual and group life lines of business. In the Property and Casualty segment, net premiums earned improved 11.5% or approximately $3 million, driven by higher sales and premium rates in the Commercial, Property and auto products. After hurricanes Irma and Maria, the existing soft market appears to have ended. The P&C operating income improved by $1 million from the year – from the prior year period, mostly due to lower loss ratios compared to last year, attributable to higher premium rates in the Property line of business. As of March 31, 2018, our balance sheet reflects approximately $501 million within claims liabilities as a result of the unpaid estimated gross losses related to hurricanes Irma and Maria as well as $504 million within premium and other receivables because of catastrophe-related losses recoverable from the reinsurance program. As of May 4, 2018, we have received 16,300 claims related to the hurricane Maria and estimated gross losses of $687 million and have paid approximately $244 million. We continue to believe the catastrophe coverage for losses and allocated expenses is sufficient to cover anticipated gross losses. Consolidated income tax was $400,000 compared to a benefit of $6.7 million in the prior year period, primarily reflecting a significant increase in taxable income in the Managed Care segment, which has a higher effective tax rate than the company's other segments. Regarding our reinsurance, property and catastrophe program, we completed the renewal with an effective date of April 1, 2018, for the next 12 months. The new reinsurance program considers an increasing sessions in the commercial property quarter share agreement from 30% to 35% and an increase in nonproportional catastrophe loss protection to approximately $900 million. Finally, as mentioned in our press release, the company's board authorized a $25 million expansion of the existing $30 million Class B share repurchase program in February. Under the repurchase program, during the first quarter of 2018, 563,559 shares were repurchased at an average cost per share of $25.10 for an aggregate cost of $14.3 million. We have continued repurchasing shares subsequent to quarter-end, and as of May 4, 2018, had repurchased an additional 80,404 shares at an average cost per share of $26.55 for an aggregate cost of $2.1 million. As of May 4, 2018, we have approximately $18.5 million available under the repurchase program. Although we are just beginning the year, we're encouraged like by result of our first quarter and the continuous improvement of our operations. We will now proceed to our Q&A section. Operator, please open the call for questions.

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

A few different questions here. Let's start on the P&C business. If you would, please – I thought last quarter you had 15,200 claims, and this quarter it's 13,300. How did it go down? What exactly happened there? Juan Jose Román: Peter, I'm sorry, it's 16,000. 16,300.

So the one – 16,000 claims? Juan Jose Román: 16,000, yes. It increased close to 1,000.

Okay, that makes more sense. And the gross liability, I think, was $687 million this quarter and last quarter. So you didn't change the amount of expected gross losses at all, is that correct? Juan Jose Román: That is correct.

And then how many claims have actually come in at this point in time? What's the value of the claims that you have in total? I think last time, it was $560 million, what is that at now? Juan Jose Román: I'm getting it, Peter. I don't have it in front of me. Let me get the information, but we're still on the estimated $687 million. So we still have approximately $40 million under the product. So we're close to $640 million.

Okay. So you have about 6 – you have about $40 million left under the reinsurance cap, is that correct? Juan Jose Román: That is correct.

Okay. And how many claims came in over the last month, if you would? Juan Jose Román: What we're seeing is close to about 50 a week. So close to 200 to 400. It varies a little bit by week, but it's close to 400 last month. But it continues to come down, and they are mostly for personal property.

Okay. And then forgive me if you went over this, the reinsurance was going to go up on March 1. I think it was when most of your reinsurance was going to go up. Is that – was that still correct? Or did that get pushed off till April 1? And then if it did go up, was it up the 25% to 30% that you expected it to go up or did it go up more? And then are you ceding more revenues to your reinsurance carriers or less revenues at this point in time? Juan Jose Román: Yes, so we renewed the new program starting April 1, and actually was slightly under, the increase. Net increase was slightly under our expectation. It was coming in around 27% was the net-net increase as compared to last year. We did increase quota share from 30% to 35%. So 2 things, we increased the quota share by 5% from 30% to 35%. In addition, we increased our umbrella at double the tower close to 210 million.

Okay, Got it. Okay, that covers that. You're still feeling good about the claims coming in and how the business reinsurance claims are settling? The business interruption insurance claims are settling, is that fair to say? Juan Jose Román: Yes. No, it is. In average, business interruption represents around 8% of the total claims. So it's not as significant when finally we can look at it. So all in, we expect to be around 8% total business interruption claims of the total expected losses – gross losses.

So 8% of the dollars? Juan Jose Román: Yes.

Okay. Let's move on to the Medicaid rebid to the extent you can talk a little bit about that. With all the responses in at this point, can you talk about the risk or the strategy that you're employing regarding the 2 different risk pools? Is there anything you can tell us about that? Bobby García: With respect to the 2 pools, we plan on – we bid for both, and we are – have incorporated into our bed a new model of care that will address both populations simultaneously but with certain differences. And at this point, it's still under evaluation and we can't say too much more. So we are looking at it – go ahead.

Do you believe there is a risk that you would pick up more of the sicker population? And is that a good thing if you did pick up more of the sick population, given the fact that you're known island-wide, more so than other carriers? Bobby García: Yes, there is always that risk, Peter. And what we're counting on is that the risk-adjustment formula will work properly.

Okay. Can you talk about your PBM in the potential for the rebid there? And what your thoughts are on the PBM at this point in time? Bobby García: Certainly, the RFP is out, and we are currently evaluating our options. And we continue to have the same time table we talked about before where we'd have the PBM – our PBMs in place by the end of the year 2019.

Okay. So the – so you have what's selected by the – when would we know who you selected for your PBM? Bobby García: We'll have that by summer. Yes, by the end of the second quarter, we'll have that in place, when – with the transition to be effective beginning of 2019, January 1.

Got it. In the quarter, how much of the difference between your loss ratio, adjusted versus the reported loss ratio, was from prior period favorable development versus how much was from other out-of-period things like the Medicaid performance fee or Medicare risk or adjustments? Juan Jose Román: Yes, the – during the quarter, we recognized around $4 million related to the final payment adjustment. So that is related to the previous year. Reserve development really has been around favorable couple of $2 million, $1.5million. So it really plays a small portion of the impact of the MLR. So mostly, it's coming from the $4 million of the final risk adjustment in MA and another $4 million in the Medicaid program related to the quality incentive program. So those 2 are the biggest adjustments to the premiums that when we reported adjusted MLR, we move and exclude them to the previous year.

Okay. And then sort of my last question. Can you talk about – well, I actually have 2 more questions, sorry, first on the balance sheet. Looking at your balance sheet, looks like you did a lot of adjustment of your investment portfolio this quarter. Was there any particular reason for all the ins and outs this quarter? Juan Jose Román: No, in reality, what it shows more than anything is a new accounting guidance specifically for our equity portfolio that we recognize the market – we – first of all, we adjusted at the beginning of the year from comprehensive income to retained earnings, the unrealized gains of that portfolio as of the beginning of the year. Then second, throughout the quarter, we recognized through the P&L the changes in the unrealized gain and losses of that particular portfolio. So those are one of the major changes. The second part is...

I was looking more at the cash flow statement. The changes that you see for the cash flow. Juan Jose Román: Yes, we did make some changes. We sold some of the equity portfolio. We reviewed our common stock equity portfolio and invested more in certain fixed income, taking a little bit the opportunity of the changes in rates.

Okay. That's what I wanted to understand. And then the last question is just getting on to your Optum agreement. How is that going at this point in time? And can you talk a little bit more about – through the time frame on what more can be done there? And sort of what mathematically it will do to your operating expenses over the next year or two? Bobby García: Yes, certainly. I'll address that, Peter. The transition continues as planned. As we said, last time, there was a slight setback in the time frame as a result of the hurricanes, but we're now back on track. And as also we've said in the past, this is not only about savings, but rather about getting access to the best technology out there we can for our back-office functions, especially claims processing and IT functions. But we do expect that over the life of the contract, which is a 10-year period, we will be saving approximately $10 million against the run rate we had previous to the contract. Another important element is that it's not just the savings and the improved outcomes but the fact that we were, I would say, due for some major investments in our own system. So by outsourcing that to Optum, we're avoiding that cost.

Okay. That $10 million is an annual savings number, not over the whole kind of... Bobby García: No, that's over the life.

[Operator Instructions] At this time, there are no more questions in the queue. I would like to turn the conference back over to Mr. Garcia. My apologies. Bobby García: Thank you. No problem. Thank you very much, operator. We want to thank everyone for your time and ongoing support of Triple-S. If you have any additional questions, don't hesitate to reach out, and have a wonderful morning. Thanks again.

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