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Executives

Kathy Waller – IR, Financial Relations Board

Ramon Ruiz-Camos – President and CEO

Juan Jose Roman – VP, Finance and CFO

Analysts

Greg Nersessian – Credit Suisse

Carl McDonald – Oppenheimer Funds

Charles Boorady – Citigroup

Justin Lake – UBS

Triple-S Management Corporation (GTS) Q2 2008 Earnings Call Transcript August 5, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Triple-S Management second quarter and six months ending June 30, 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the conference, the conference will be open for questions. (Operator instructions) As a reminder, this conference is being recorded Tuesday, August 5 of 2008.

I would now like to turn our conference over to Kathy Waller with the Financial Relations Board. Please go ahead, ma'am.

Kathy Waller

Thank you, Andrew, and good morning, everyone. Welcome to today's conference call for Triple-S Management Corporation's Second Quarter 2008 Conference Call. With us today are your hosts, Ramon Ruiz-Camos, President and Chief Executive Officer; and Juan Jose Roman, Vice President of Finance and Chief Financial Officer.

I'm sure all of you have heard the Safe Harbor Statement before, but we still need to get this housekeeping issue out of the way. Each quarter, Triple-S Management executives will provide their current view of the company's future. This means that they will share forward-looking information. 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 today. To get a better understanding of why this might occur, please look at the Safe Harbor section in today's news release and the company's periodic 10-Q filings with the SEC.

In addition, the information shared on this call should be considered current as of today only. After today, please use this information for your reference, and remember that the company assumes no duties to update it.

This call is being webcast. Shortly after it ends, you will find an archived version on the Investor Relations page of the company's website at www.triplesmanagement.com. If you don't already have a copy of today's news release, you may find one there, or you can call my office and speak to my assistant, Han Huey [ph], at 312-640-6688, and she'll get you one immediately and make sure you're on our distribution list going forward.

I'd now like to turn the call over to Ramon. Ramon, please go ahead.

Ramon Ruiz-Camos

Thank you, Kathy. I also would like to add my welcome to everyone. We continue to be very excited about the future for Triple-S Management, and I'm happy to have you with us on our call today.

Here is the agenda we will follow. I will begin by giving you some highlights of the quarter, then Juan Jose will provide the story behind our numbers, and I will return to share our revised 2008 outlook. We will then take any questions you may have.

First off, I'd like to remind you that Triple-S Management is a leader in managed care, life and disability insurance, and property and casualty insurance in Puerto Rico. We are the number one managed care company in Puerto Rico and have over 45 years experience in the industry. Presently, we serve nearly 1 million people or approximately 25% of the Puerto Rican population with a broad portfolio of managed care and related products. We also are dominant players in the life insurance and property and casualty insurance market in Puerto Rico, with 13% and 9% market share, respectively, as of June 30, 2008.

We are very pleased with our results for the second quarter and six months ended June 30, 2008. Our operating revenues and our pro forma net income produced healthy increases. Consolidated total operating revenues for the second quarter of 2008 were $437.4 million, or 11.6% year-over-year increase. And for the first half of 2008, total consolidated operating revenues were a record $858.9 million, or 13.8% above those of the prior year. Manages care continued to be our largest segment, representing approximately 88% of the total consolidated operating revenue for the six months ended June 30, 2008. Life insurance and property and casualty insurance represent approximately 6% each.

When it comes to segment operating income, managed care represents 65.1% as of June 30, 2008; life accounts for 19.2%; and property and casualty, approximately 14.7%. Other reportable segments represent 1% of operating income.

Excluding the net after-tax effect of net realized gains and unrealized investment losses, along with the unrealized gains in derivatives included within other income for the three months ended June 30, 2008, the company reported net income of $14.3 million, or $0.44 per share based on diluted weighted average shares outstanding of 32.2 million shares. The comparative net income for 2007, excluding the after-tax effect of net realized and unrealized gains on investment, along with the unrealized gain in derivatives included within other income, totaled with the 2007 retroactive reform premium adjustment recorded in the second quarter for the period from November 1, 2006 to March 31, 2007, amounting to $8.1 million, was $11.6 million, or $0.43 per share, based on diluted weighted average shares outstanding of 26.7 million. This represents an increase of 23.3% in the pro forma net income in 2008 as compared to 2007.

During the quarter, we continued to execute our strategic growth plan and I'm proud to say we have made significant strides. We are particularly pleased with the rapid turnaround that has occurred in our commercial business line last year. We aggressively re-priced or terminated unprofitable business and focused on implementing programs to decrease our MLR.

Our Reform business is very stable, and in fact, we were just informed this week that we will once again be servicing the Metro-North region effective November 1, 2008. Recall that we lost this business in November 2006. This will be an administrative service-only contract, and as such, it will not generate premiums, but instead administrative service fee.

The Metro-North region is expected to have approximately 175,000 members. And in Medicare Advantage, we continue to experience significant enrollment growth, and we still believe it will be a key growth driver for Triple-S in the future. I want to emphasize that we do not participate in the private fee-for-service Medicare segment, which is beneficial, given the recent measures by the Congress.

I am also pleased with ongoing progress we have made growing our revenues while managing our expenses. Although our consolidated operating expenses were up $2.1 million in absolute dollars for the quarter and $5.9 million for the six months ended June 30, our consolidated operating expense margin declined 110 basis points to 14.5% in the quarter, and 120 basis points to 14.6% year to date. Because of our scalable infrastructure, we have identified opportunities to realize additional operating efficiencies as we continue growing our business.

We still have work to do in managing our MLR, particularly in our Medicare business. However, we are fortunate to have a diversified managed care product mix that has enabled us to expand very quickly. Juan Jose will discuss on our initiatives in just a few minutes, as well as give you more color on our business overall.

The bottom line is that we feel great about the opportunity we have to build incremental profitable market share across all segments of our business. We continue to execute on our strategic growth plan. We are actively identifying ways to increase our MLR while still providing quality service to our members. We continue to manage our expenses. We are pursuing cross-selling opportunities that leverage our broad sales footprint on extensive distribution channels, and we continue to consider managed care acquisition in Puerto Rico that would accelerate our growth and scale.

I will now turn the call over to Juan Jose, who will provide you with additional details on our financials.

Juan Jose Roman

Thank you, Ramon. I would like also to add my welcome to everyone on this call. We're very pleased to report our second quarter 2008 financial results. You already have seen our news release, so I will focus on the key areas we use to track our performance and share the details behind these numbers.

Ramon has already reviewed some consolidated numbers with you, but let me just reiterate that we were pleased with our consolidated revenues and pro forma net income. Note that, as we have expected, the increasing consolidated revenues were largely attributable to higher net premiums earned in our managed care segment, principally due to greater Medicare volume. It is important to look at our numbers on an apples-to-apples basis, thereby excluding the stake of realized and unrealized gain and losses on investment in derivatives, as well as the reform retroactive premium adjustment. And when you do so, you will see that we have achieved a solid overall performance.

We did an excellent job managing our operating expenses while growing our revenue base. Our consolidated operating expenses margin declined 110 basis points when compared to the same period last year. Net realized losses during the three months ended June 30, 2008 were $1.8 million, largely the result of other than temporary impairments related to fixed income securities. The net realized losses were offset in part by $0.6 million of net realized gains on the sale of fixed income and equity securities.

Our net consolidated investment income increased by $3.3 million, or 30%, to $14.3 million. This increase is attributed to a higher yield in 2008 as well as a higher balance of invested assets, largely after we sold off the proceeds generated from the IPO. In addition, as you may remember, we sold $18.2 million of our trading equity portfolio during the first quarter of 2008 and invested it in fixed income securities.

Consolidated claims incurred during the second quarter of 2008 increased by $46.8 million, or 15.2%, to $354.8 million year over year. And for the six months, they increased $99.6 million, or 16.5%, to $705 million. The increase was principally due to more claims in the managed care segment resulting from higher enrollment and utilization trends. The consolidated loss ratio rose to 84.6% in the quarter and to 85.6% year to date, which is higher than we have anticipated. The increase principally reflected higher utilization trends in the managed care segment for the period and in the Medicare business in particular.

While we are not certainly happy with our MLR, we still firmly believe that we can reduce this metric going forward. As I go through the managed care product review, I think you will understand why I'm so confident. Looking at our managed care business, total medical premiums earned in the second quarter of 2008 were $374.2 million, up 12.9% from the prior year. The growth was largely attributable to higher enrollment in the Medicare Advantage business.

Administrative services were $4.8 million. Operating income for the quarter was $14 million. Our MLR did get up during the second quarter to 88.5% and 89.8% year to date, compared to 86.2% and 88.1% for the same period a year ago.

Our operating expense ratio was 10.5% for the quarter and 10.3% year to date, compared to 11.1% and 11.2% in 2007. The improvement is due to our scalable infrastructure, which has allowed us to grow our volume of business while increasing our operating costs at a slower rate.

Further breaking down our managed care segment for the second quarter of 2008, our commercial business represented approximately 48% of total medical premiums earned, with $179.7 million in premiums earned compared to $180.6 million a year ago. The commercial MLR was 79.8%, down from 91.4%, or an improvement of 11.6 percentage points. This decline was primarily attributable to prior period reserve development in 2007 and 2008.

Still, we saw about 130 basis points of improvement directly resulting from the program we commenced in mid 2006. This included the re-pricing or termination of unprofitable or less profitable customers, implementing stricter underwriting guidelines, increasing our concurrent review of hospital admissions, and intensifying our focus on prescription drug cost saving initiatives. Premium rate increases have been around 5% after considering buybacks, and we expect it to be around that for the rest of the year.

Our claim strength in the commercial business has been about 2% for the first six months of the year and we state that it will be approximately 3% in the second half of the year. Thus we expect to have a solid 2008 result from our commercial business.

Now, turning to our reform business, the reform business or Medicaid business represented 21.6% of the total medical premiums earned, with $80.9 million in premiums earned, a 6.6% decline from prior periods. The decrease was primarily due to the impact of the $8.1 million retroactive premium rate increase received in June 2007 and a decrease in member month enrollment of 30,053 or 3.5%. Partially offsetting this decline was a premium rate increase of 6.7%, which was effective November 1, 2006, but not recorded or received until June 2007.

The reform MLR increased 10.8 percentage points to 93.7%. This is primarily due to the effect in 2007 of the retroactive premium rate increase negotiated in June 2007 as well as the effect of prior period reserve development. Taking into consideration the effect of the retroactive rate increase and the reserve development, the MLR for this business will have actually decreased by 190 basis points.

We are currently in the process of negotiating the rate increases for the two regions we currently serve. In the meantime, we signed a contract with the government to extend the service for those two regions until August 2008 in order to complete the rate negotiation process. The rate increase will be retroactive to July 2008 and will be for a one-year period.

As Ramon mentioned, we were granted the Metro-North region effective November 2008 for one year. We're very confident in our abilities to administer this region, as we are returning after only two years of managing it. It will be an ASO contract. Total revenues or fee revenues for the contract year ending October 2009 are expected to be approximately $18 million.

Now moving toward Medicare, the Medicare segment represents 30.4% of the total premiums earned, with $113.6 million in premiums earned compared to $64.3 million, an increase of 76.7% from 2007. The huge revenue increase is largely the result of enrollment growth, the business mix, and slightly higher premiums. We're very pleased with the market penetration we have made since our 2005 entry, and we believe there's still an attractive opportunity for us to continue to build market share.

The Medicare MLR rose 24.5 percentage points to 96.5% in 2008, from an unrealistically low 72% in 2007. The higher MLR is due in part to the effect of prior period reserve development. If you exclude the effect of this prior period reserve development in 2007 and 2008, the MLR increased by 14.3 percentage points, primarily the result of higher utilization trends and specifically more outpatient visits and drug benefits for dual eligibles. For the three months ended June 30, 2008, member months had a higher concentration of dual eligibles than in prior periods. It is worth noting that dual eligibles tend to have greater utilization than non-dual members.

While we had anticipated a year-over-year rise in the Medicare MLR, it is clearly trending above our expectations. And as a result, we are revising our 2008 MLR estimate for this segment to 88.5%. We do believe that the MLR will decline from current levels due to seasonality and lower pharmacy costs in the second half of the year. This later benefit reflects the fact that at the beginning of a given year, pharmacy costs for non-dual members are typically higher than later in the year because of the period subsequent to the initial annual coverage period, where the beneficiaries pay all costs, commonly referred to as a coverage gap period.

In addition, we have implemented new initiatives to help us further reduce our MLR, such as auditing physician offices to make sure covering is correct and instituting a referral program for specialists in the dual eligible product effective this past April.

Although we're not providing any guidance at this time for 2009, we believe it is worth mentioning that the trends we have experienced year to date are being incorporated into all our 2009 bids. We continue to have a healthy and balanced business with a lot of momentum and our underwriting discipline remains very strong. We firmly believe we can continue to execute on our proven record of achieving operating efficiencies while leveraging our scalable infrastructure and making investment in our future, by working closely with our actuaries to continually assess our reserves, thereby hoping to avoid significant subsequent development of our reserves. Our ultimate objective is to provide investors with meaningful year-over-year comparisons.

Switching to membership, total managed care members month enrollment was 2,975,559 for the second quarter of 2008 versus 2,936,756 in 2007. The second quarter 2008 breakdown is as follows. In the Medicare segment, including PDP, member month enrollment was 215,828, a 58.4% increase from 136,214 in the second quarter of 2007. Total commercial member month enrollment was 1,720,100, or relatively flat overall due to the re-pricing or terminating of unprofitable or less profitable customers that I mentioned earlier.

Let me emphasize that while enrollment was flat year over year, we saw a 3.1% increase in membership of self-funded groups or ASO groups. In the case of the Reform business, there was a slight decrease of 30,053, or 3.5%, primarily due to the tightening of membership restrictions by the government of Puerto Rico.

Moving now to our life insurance business, total operating revenues for the second quarter of 2008 were $27 million, a 2.5% year-over-year increase. Operating income was $3.2 million in 2008, up $500,000, or 16.7%, compared with the same period a year ago. The claims incurred decreased by $500,000, or 4.3%, to $11.2 million. The decline is primarily the result of a $700,000 reduction in actuarial reserve, partially offset by a $200,000 increase in claims incurred, mostly in claims related to the cancer [ph] business due to the higher volumes of business during this year. This resulted in a 290-basis-point decrease in the loss ratio to 48.9%.

Operating expenses increased by $700,000, or 5.9%, to $12.6 million. The higher operating expense ratio basically reflects greater operating expenses and commissions due to a shift in product mix.

In terms of our property and casualty insurance business, we had operating revenue for the quarter of $26.1 million, a decrease of $700,000, or 2.6%. Operating income was $2.3 million, down 36% from the same period a year ago. The claims incurred increased by $1.9 million, or 18%, primarily the result of a favorable change in the net claim reserve during 2007, which elevated the loss ratio by 10.5 percentage points.

Operating expenses in the quarter decreased $1.3 million, and the operating expense ratio fell to 49.4%. The decrease in both operating expenses and the operating expense ratio was primarily due to a distribution of an experience refund of $1.1 million from the compulsory vehicle liability insurance Joint Underwriting Association during June 2008. Last year's distribution was received during the month of September. This refund was recorded as a decrease in the period's operating expenses.

Now, I would like to discuss the company's overall financial conditions and provide some supplemental information. As of June 30, 2008, total assets were $1.57 billion, compared with $1.63 billion as of December 31, 2007. Total investments and cash were $1.11 billion at the end of the second quarter of 2008.

We have a high quality investment portfolio. As of June 30, 2008, 85% of our total investments and cash were invested in fixed income securities, 4% in cash and cash equivalents, and 11% in equity securities. Looking at the total investment from fixed income securities, 89% is held in obligation of government-sponsored enterprises or obligation of the US government, US states, and Puerto Rico (inaudible) and instrumentalities, including mortgage-backed and collateralized mortgage obligations that are US agency-backed. And a reminder, 11% is held in corporate bonds, other mortgage-backed securities, and mutual funds. Notably, the company has no subprime or CDO exposure.

Net premiums and other receivables increased by $35.5 million to $237.8 million when compared to December 2007. The increase is largely the result of increases in premium receivables from the managed care segment amounting to $44.4 million, mostly related to the government of Puerto Rico and instrumentality accounts, many of which were subsequently collected in July, in addition, net of premium collected in advance in December 2007 that corresponded to January 2008.

If you remember, in our previous conference call, we mentioned that we collected about $24 million in premiums in December related to revenues of January 2008. This situation has the effect of reducing – both the situations had the effect of reducing our cash flow from operations.

Medical claims payable were $222.7 million as of June 2008, an increase of $21.1 million from December 2007. The number of days claims payable at the end of the second quarter was 60.5, an increase of 1.1 days from 59.4 as of March 31, 2008. For the six months ended June 30, 2008, net cash used in operating activity amounted to $25.2 million. This is mainly due to the fact that we collected $22.8 million of managed care premiums in December 2007 that were recognized in January 2008. In addition, premium receivables for the six-month period increased by approximately $43.2 million in our managed care, mostly from the government of Puerto Rico and in instrumentality accounts as mentioned before. Excluding both situations, cash from operations would have been $47.9 million.

Now, I will turn the call over to Ramon for our guidance and outlook.

Ramon Ruiz-Camos

Now that we have discussed our second quarter performance, let's focus on the future. While I want to reiterate the 2008 earnings per share guidance that we previously provided, several other components of our financial outlook have been favorably revised. We are now projecting 2008 consolidated operating revenues to be between $1.70 billion to $1.74 billion compared with our earlier estimate of $1.66 billion to $1.70 billion based on an expected 1% to 1.5% increase in our managed care membership enrollment. The Medicare Advantage program is expected to show membership enrollment growth of 45% to 48%, up from our previous expectation of 30% to 35%.

We look for the consolidated loss ratio to come in between 83.5% and 84.0%, 50 basis points above what we have previously forecast. The managed care MLR is now expected to be between 88.0% and 88.5%. Nonetheless, we'll continue with our strategy to improve our MLR margin.

We expect our consolidated operating expense ratio to decrease about 100 basis points to around 14.7% – 50 basis points to around 14.7%, compared with our prior estimate of 15.2%. This improvement will be achieved as we continue increasing our business volume at a higher rate than our costs due to our scalable infrastructure. This estimate also takes into consideration the effect of lost associates [ph] with a new IT platform for our managed care segment, which we estimate will be represent an additional expense in 2008 of approximately $4 million, as well as increased costs associated with being a public company.

We still anticipate achieving earnings per share of $1.88 to $1.98 based on 32.2 million diluted weighted average shares outstanding, excluding any realized and unrealized gains or losses on investments.

Now that we have shared our thoughts with you, we would like the opportunity to answer your questions.

Question-and-Answer Session

Operator

Thank you, management. (Operator instructions) Our first question comes from the line of Greg Nersessian with Credit Suisse. Please go ahead.

Greg Nersessian – Credit Suisse

Thanks. Good morning. I was just wondering if you could quantify the magnitude of the prior period reserve development in both the commercial and Medicare segments, and then also update us on your specific MLR expectations for each of those segments in 2008.

Ramon Ruiz-Camos

Yes. When we look at the reserve development for 2008, overall, reserve development has been actually a very small amount. But we know this is within the different products is where we noticed the differences. Starting with the commercial business, for the year to date 2008, we have a favorable development of $4.9 million. Last year, 2007 period for the six-month period of 2007, we had an unfavorable development of $6.8 million. That's for the commercial business.

In our Reform business, our reserve development for the year to date 2008 was an unfavorable development of $5.5 million. For the year to date 2007, we had a favorable development of $9.8 million.

In the Medicare, for the year to date 2008, we have an unfavorable development of $600,000. Last year, 2007, we had a favorable development of $8 million.

Greg, in the model looking at the specific businesses, we figured that in the commercial MLR for this year, it will be around 86% plus or minus 60 basis points. In the case of the Medicare, it will be around 90% plus or minus 50 basis points. And in the Reform business, it will be around 90.5% plus or minus 50 basis points.

Greg Nersessian – Credit Suisse

Okay, great. And then maybe if you could just give us a little bit more color on the Medicare book with the issue with the dual eligibles. What percent of your total Medicare Advantage enrollment is duals, and what's the MLR on that book running relative to your non-dual membership?

Ramon Ruiz-Camos

Yes. In terms of our membership, duals represent about – actually, out of June, we have 32,000 members in the dual product from a total NA, including Part D, of 72,100. In terms of our MLR by the duals, we're running about, right now, running about 96% MLR year to date.

Greg Nersessian – Credit Suisse

So when you make the comment that you think you've captured the escalating medical costs on Medicare in your '09 bid, I guess you would primarily relate to design changes on this dual eligible product. Could you just provide any additional color on what specifically, how specifically you're making these changes to improve the MLR next year? And then also, did you get any risk adjuster payments in Medicare this quarter?

Ramon Ruiz-Camos

Okay. Yes. We're working with some strategy to impact 2008. Besides the normal seasonality – and just as a reminder, keep in mind that historically, in the second half of the year, we have a much better experience in all of our products as compared with the first half of the year. But we're taking so much specific metrics regarding the MA, especially the dual. Let me mention that the known dual eligibles MLR is in line with our forecasted number and our bid. So it's really, there, the issue is really there for the dual.

What we are doing is at first in April of this year, we implemented the requirement that to visit specialists, members have to get a referral first. That will allow us or will help us to control a significant increase in office visits to specialists. As I mentioned, that was implemented in April, so we will start seeing in the next quarter the effect regarding the referral.

Second, we are, we already started the process of auditing physician offices just to be sure that the coding is correct.

That was to our risk adjustment that we received as of this July, we received two adjustments – in June, one that totaled $4 million, and in July, one that totaled $2.6 million. Both and that are brought together, that's a total amount for all the products. That's basically what we've received, which is kind of in line with last year, that we received about $4.5 million.

So in general, that, in terms of improving MLR, again, the implementation of the referrals, the auditing procedure we're going through the offices of our physicians that will impact, could have the potential to impact 2008 and 2009. From the bid standpoint, when we prepared our bid last June, we took into consideration the trends we were noticing at the moment in the dual eligibles. So maybe the fact that we have this increase at the beginning of the year allows us to incorporate this high trend in our bid for 2009. So that's why we're confident in 2009 to correct the situation because of the combination of putting into our bid what we'll show in terms of our trend, together with the metrics, or the work we are doing in controlling our costs.

Greg Nersessian – Credit Suisse

Okay, that's helpful. Then just a last follow-up. The risk adjustment that you mentioned. The $4 million in June, is that what was booked in the second quarter, and then the $2.6 million will be booked in the third quarter? Or was that all booked in your second quarter?

Ramon Ruiz-Camos

All, it's all booked because both are related to (inaudible). The $2.6 million received in July is related to the 2006 – 2007, I'm sorry – year. So it was booked in June, like within last year.

Greg Nersessian – Credit Suisse

Okay. So of the, the part that's sort of going to be in your continuing MA rates for the rest of the year would just be the $4 million?

Ramon Ruiz-Camos

Exactly. Yes. That (inaudible) beat our premium rate. We have a slight increase effective July that the MPA will receive from CMS.

Greg Nersessian – Credit Suisse

Okay.

Ramon Ruiz-Camos

As a result – yes, you are correct.

Greg Nersessian – Credit Suisse

Okay. Thank you.

Ramon Ruiz-Camos

Thank you, Rick.

Operator

Thank you. Our next question will come from the line of Carl McDonald with Oppenheimer Funds. Please go ahead.

Carl McDonald – Oppenheimer Funds

Thank you. When we look at the Medicare PMPM for the second quarter, would you argue that that is actually a good run rate, or do you think that that number is understated because there's generally a delay in getting the right payment for the dual eligible members? Because my understanding is that when you sign up a dual eligible member, it takes a while to get the coding accurate and get the right payment, so I guess the question is should we expect the Medicare PMPM to increase in the back half of the year because of the big increase in dual membership as you get the coding accurate?

Ramon Ruiz-Camos

Actually, you are right on target. Although we cannot at this moment assure that, but that's basically what we are doing. As you very well said, that's what we have noticed, that there are some, we found some risk scores that are not properly completed. But that's why we intensify our audit of the offices, especially in the dual, because of the significant growth that we had during the year. So it could happen, Carl, but we're not yet counting on that until we have better visibility. But you are correct.

Carl McDonald – Oppenheimer Funds

Do you have a sense of how long it takes between the time when you sign up a new member and when you think the payment actually is accurate relative to the risk score?

Ramon Ruiz-Camos

I really don't have an estimate, Carl.

Carl McDonald – Oppenheimer Funds

And then the second question was just what you're seeing right now around the January 1, '09 renewals in the commercial business. Anything new or different from a pricing perspective from the competitors?

Ramon Ruiz-Camos

No. Up to now, it's the same as in the last conference call. It has been a very rational market. So basically, that's what we are seeing. We have been keeping our full underwriting policy of strengthening our commercial, and that's why it will take a little bit of decreasing our members, because we keep our policy of only underwriting at the adequate premium level. But in terms of competition, it looks, up to now, that it has been rationalized. It was at the beginning of the year.

Carl McDonald – Oppenheimer Funds

And then from a timing perspective, when do you get into the heart of the renewal cycle? Are you there now, or is that something that really starts to heat up over the next couple of months?

Ramon Ruiz-Camos

We're basically done, the majority for '08. We renew about 40% in the first quarter, and the second strongest month is July, which we already have done and we did well. We have a very high retention effective for July, so basically, at this moment, commercial should be kind of stable for the rest of the year.

Carl McDonald – Oppenheimer Funds

Okay. Thanks.

Ramon Ruiz-Camos

Thank you, Carl.

Operator

Thank you. We'll move to the next question from the line of Charles Boorady with Citigroup. Please go ahead.

Charles Boorady – Citigroup

Thanks. Good morning.

Ramon Ruiz-Camos

Good morning, Charles.

Charles Boorady – Citigroup

Can you give us the components of your medical cost trend, please, for inpatient, outpatient, physician and pharmacy? And if you can characterize what the driver is in terms of volume growth versus price increases for those components, that would be helpful, too. Thanks.

Ramon Ruiz-Camos

I don't have all the details, but I can share with you, specifically in the commercial, our inpatient has been actually, basically flat. A small decrease in total trend for the first half of the year. That's mostly the net operating increases that have been in average about 5% to 6%, and together with a decrease in the length of stay. As we have mentioned before, we're really focusing our review in hospital admission in the commercial. We basically have increased the number, more than triple, the number of days we have reviewed, and the program, basically, we're almost up to speed in terms of reviewing all our admissions in commercial. So basically, what happened in the inpatient has been directly of the combination of both situations.

In the case of outpatient, the trend has been growing about 2%, and in the drugs, about 4% in the first half. But we expect for the second half, this kind of inpatient around 1% to 2%, outpatient between 2% and 3%, and pharmacy around 4%.

Charles Boorady – Citigroup

Got it. And on the hospital front, a couple of other companies have observed that there's been an increase in the intensity, and some have attributed that to changes in hospital coding practices. Are you seeing any increases in the intensity of the claims that you're getting in? And if so, would you attribute any of it to changes in coding practices by hospitals?

Ramon Ruiz-Camos

Well, in general, hospitals, our negotiation with them is on a per diem basis, so it wouldn't – even if that happened, it would not impact our costs. So we have not seen that.

Charles Boorady – Citigroup

Are there outlier provisions in those per diem contracts?

Ramon Ruiz-Camos

No.

Charles Boorady – Citigroup

Okay. Okay, great. And then a separate question. The recent legislation on Medicare Advantage, cutting IME payments and eliminating DGME. Have you had a chance to assess what that might mean for you? I know it's not until 2010 and 2011, but just give us a sense for your exposure to IME and to DGME?

Juan Jose Roman

I'll take that question, Charles. Actually, thank you very much. In our case, I want to mention that we expect no impact in our operations. Keep in mind that we do not have any private fee-for-service products.

Charles Boorady – Citigroup

Great. And just finally, if you can comment on the uses of cash flow, as you're planning to generate a reasonable amount of cash in the future, how you might use that. In particular, M&A is something that you had talked about during your IPO road show quite a bit, but it appears that you're growing very fast on an organic basis. So I'm wondering, is the risk-reward of doing an acquisition versus just acquiring your own stock back, in light of your strong organic growth, different now than what you thought it might have been when you came public?

Ramon Ruiz-Camos

No, actually. We keep committed and focused in pursuing some acquisitions in Puerto Rico, specifically. So it is, our strategy has not changed. We still have the capacity to keep growing, so we think this is a good moment to keep looking for opportunities. So our strategy in that sense stays intact.

Charles Boorady – Citigroup

And your criteria for acquisitions in terms of, would it need to be accretive immediately to your EPS, or would you be willing to do a deal that would dilute EPS but would generate higher growth down the road?

Ramon Ruiz-Camos

We're focusing having immediate EPS growth.

Juan Jose Roman

Both growth in terms of revenue but also in terms of earnings per share. Both of them.

Charles Boorady – Citigroup

Okay, great. Thank you.

Ramon Ruiz-Camos

Thanks, Charles.

Operator

Thank you, sir. (Operator instructions) Our next question comes from the line of Justin Lake with UBS. Please go ahead.

Justin Lake – UBS

Thanks. Good morning.

Ramon Ruiz-Camos

Good morning, Justin.

Justin Lake – UBS

I apologize. I jumped on a little late, so if you've already answered this, feel free to let me know. But I was just curious on the Medicare side, with the, it looks like you mentioned that some of the higher costs there are coming from Medicare Advantage. And how much of it do you think those higher costs, do you think you were able to capture in the bidding process for 2009 when you submitted those bids in June?

Ramon Ruiz-Camos

Well, when we submitted our bid in June, basically we already had noticed a significant increase in the trend that had been experienced. So what we are noticing right now is that the trend is definitely going down in both businesses, Med One and then on dual. But we think, we feel very comfortable that the majority of the trend increases as compared to previous years, we were able really to capture that, or noticed the situation before we submitted our bid.

Justin Lake – UBS

That's helpful. So as you think about the MLR in that Medicare Advantage business specifically, would you be looking to, do you think that those bids would improve the MLR in 2009, all other things being equal? Or would the MLR, do you think, stabilize here at these levels?

Ramon Ruiz-Camos

No, we think it will improve. We're still trying to target 5% to 6% margin. So if we consider it will end up close to 90, for next year it will be probably 87 or 88.

Justin Lake – UBS

In Medicare Advantage.

Ramon Ruiz-Camos

Yes.

Justin Lake – UBS

Okay. And what kind of margin is implied with 90?

Ramon Ruiz-Camos

Right now it's about 2%.

Justin Lake – UBS

Okay.

Ramon Ruiz-Camos

I'm sorry, from 2.0% to 2.5%.

Justin Lake – UBS

From 2.0% to 2.5%?

Ramon Ruiz-Camos

Yes.

Justin Lake – UBS

Okay. And as far as, a couple of plans have mentioned they were going to be receiving significant risk order payments in the third quarter. Is there anything you could tell us about that and what it might add for the third quarter?

Ramon Ruiz-Camos

No, we did already receive it. It was $2.6 million, and it was booked – I tell you, it was (inaudible), we have part of it booked, so it's already booking our numbers and it was $2.6 million, Justin.

Justin Lake – UBS

Okay. Was that in line with the accrual, or did it benefit the quarter at all?

Ramon Ruiz-Camos

Actually, that, the additional from the – the $2.6 million was the net after considering the accrual, yes. It was in addition.

Justin Lake – UBS

So there was a small benefit in the quarter from risk orders versus what you expected?

Ramon Ruiz-Camos

Yes.

Justin Lake – UBS

Perfect. Thanks very much.

Ramon Ruiz-Camos

Okay, you're welcome.

Operator

(Operator instructions) And management, at this time we have no additional questions in the queue, and what I'll do is turn the conference over to you at this time for any closing remarks.

Ramon Ruiz-Camos

Yes. Thank you, sir. I would like to leave you with a few final thoughts. Triple-S management has a strong competitive advantage in this market. Puerto Rico is a great place for us to operate. We know the market, we have ample opportunities for growth, and we are the market leader. Moreover, we are not experiencing the same issues on the commercial side of our business. Our largest managed care product as a US managed care company. In fact, we have already weathered the cycle and are now really positioning for success. We have a very stable Reform business, and we feel great about our growth opportunity with Medicare.

There are also still many opportunities for us to improve our operations and boost the profitability of the business we already have in-house. We can leverage government relationships to increase our revenue and create new products that will further enhance our value in those relations, as well as attract new customers. We are in a solid financial position which will support us through whatever economic challenge we may face in the coming years. And we have sufficient capital to fund our growth.

Juan Jose and I would like to thank you for joining us today. Thank you.

Operator

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference presentation for the Triple-S Management Second Quarter Results Conference Call. We thank you for your participation on the program. If you'd like to listen to a replay of today's conference call, you may do so by dialing 1-800-405-2236 or 303-590-3000, and enter an access code of 11116721, followed by the pound sign. Once again, if you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000, with the access number of 11116721, followed by the pound sign.

We thank you for your participation and for using ACT Teleconferencing. You may now disconnect, and please have a pleasant afternoon.

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Source: Triple-S Management Corporation Q2 2008 Earnings Call Transcript
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