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Edited Transcript of GTS earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 Triple-S Management Corp Earnings Call

San Juan Jul 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Triple-S Management Corp earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Garrett Edson

Triple-S Management Corporation - IR Contact

* Juan Jose Román-Jiménez

Triple-S Management Corporation - Executive VP & CFO

* Roberto García-Rodríguez

Triple-S Management Corporation - President, CEO & Director

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Conference Call Participants

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* Peter Heinz Costa

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Triple-S Management First Quarter 2019 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Garrett Edson, Senior Vice President, ICR. Thank you, sir, you may begin.

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Garrett Edson, Triple-S Management Corporation - IR Contact [2]

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Thank you, Devin, and good morning. Welcome to the Triple-S Management First Quarter 2019 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 Hernández, 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, which may also be found on the company's website at triplesmanagement.com. Before we begin formal remarks, we need to remind everyone at each quarter, Triple-S Management executives will provide their current views of 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 and 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 Garcia. Please go ahead.

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [3]

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Thanks, Garrett, and good morning, everyone.

Thanks for joining us today as we review our results for the first quarter of 2019.

Overall, we had a good start to the year, led by sustained improvements in our core Managed Care segment as well as our Life and P&C segments.

For the first quarter, total operating revenue was $788 million, up 2% from a year ago, primarily reflecting continued premium earned growth in our Medicare Advantage offering.

All in, we recorded adjusted net income, which excludes the impact of realized and unrealized gains of $0.77 per diluted share compared to adjusted net income of $0.60 per diluted share a year ago.

We're continuing to see improved results in our businesses and are tracking well against our strategic and operational objectives. At our core Managed Care segment, we are progressing in all aspects driven primarily by our Medicare Advantage offering. At the end of the first quarter, our membership was nearly 20,000 members higher than at the end of 2018.

We noted on prior calls that our HMO and PPO products are now competing on a level playing field, and our consistent efforts to upgrade our offerings are beginning to pay off.

We expect this improving trend to continue into 2020 when our HMO contract will earn 4.5 stars and our PPO contract will reach 4.

In the new Medicaid program, we continue to make headway outside of the open enrollment period, adding over 20,000 new members since February 1, and bringing us to nearly 356,000 beneficiaries as of March 31. We highlight that in just 5 months, we've gained back a large majority of the membership that was assigned to other carriers when the new program was implemented. And we're happy to report that Triple-S is once again the market leader in Medicaid.

This is a testament to the power of the Triple-S brand that we have built over the past 60 years as well as the quality of experience and services that we provide our beneficiaries. In our Commercial business, we showed sequential growth in our fully insured accounts, adding 5,000 members in the first quarter. Additionally, we are starting to see the benefits of consolidating our Commercial and MA, PBM onto a single platform. As we move forward, we expect to generate sustainable efficiencies through the program and as mentioned on our prior call, deploy clinical initiatives in partnership with our PBM across our commercial and MA lines of businesses to deliver better health outcomes, reduce the total cost of care and further improve our competitive positioning.

Our ambulatory clinic network also continues to develop nicely. In April, we completed the acquisition of 3 clinics, further expanding our overall network. As we noted in the past, the clinics are an integral part of our broader, longer term strategy to improve the overall patient experience and medical outcomes through an integrated care delivery model in partnership with our provider community.

Accomplishing this over time will serve to solidify our brand and positioning in Puerto Rico. Turning briefly to the economic environment on the island, we've been encouraged to see continued signs of recovery. The unemployment rate, 8.5% in February, is the lowest in decades. Total employment on the island has increased slightly since last year, and in March, private sector employment reached its highest level since 2015.

Recent census numbers indicate that net hour migration between September 2017, the month of the hurricane, and the end of 2018 was approximately 111,000. While a significant number compared to prior years, it is on the low end of earlier estimates and importantly, passenger movement through Puerto Rico was net positive by around 100,000 passengers in 2018, the first time this happens in nearly a decade. It is still early in terms of whether these trends will be sustainable, but an improving economy will certainly be a welcome sign. Much of this new activity has been stimulated by public disaster relief funding and private insurance proceeds, and continued progress will depend on the level and speed at which additional federal funds flow into the island. As per the current Puerto Rico government fiscal plan, total anticipated funds flowing into the island is still expected to be around $82 billion over a 15-year period and to generate single-digit GNP growth over the next 3 to 4 years, but will depend among other things on the implementation of fiscal measures and structural reforms by the Puerto Rico government.

Now a quick update on P&C. We remain comfortable with the levels of our reserves with respect to hurricane-related claims based on current information, and this segment continues to be profitable, growing its operating income 16% from the prior year period.

Juan Jose will provide more details on our P&C business during his remarks.

Overall, we're pleased with our first quarter financial performance and the continued progress we're making in terms of our long-term strategy. In terms of guidance, we are raising a couple of our full year metrics while maintaining a few others. Specifically, we are raising our expectations for full year operating revenue to be between $3.11 billion and $3.15 billion, which includes raising expectations for Managed Care premiums earned net to be between $2.78 billion and $2.82 billion. We are maintaining expectations for a consolidated claims insured ratio to be between 81.3% and 83.3% and MLR to be between 84% and 86%. Our expected operating expenses as a percentage of total premiums earned and administrative service fees continues to be between 17.6% and 18.6%.

We're also adjusting our effective tax rate expectations to be between 29% and 34%, up from 25% to 30%.

And on the bottom line, we're raising expectations for 2019 adjusted net income per diluted share to be between $1.90 and $2.10.

As a reminder, adjusted net income per diluted share excludes realized and unrealized investment gains and losses as well as any private equity investment income and does not account for any potential share repurchase activity during 2019.

To sum up, it was a strong start as we celebrate our 60th anniversary as a company, and we remain optimistic for the remainder of the year and beyond. We continue to make progress in all facets of our business and our longer term three-pronged strategy remains firmly on track.

We are winning and retaining in our core Managed Care business. We're making headway in upgrading our infrastructure to further improve clinical outcomes and member experience as well as control expenses. And our clinical network continues to expand as its [important] grows and further developing our integrated care strategy.

We remain well capitalized and well positioned to generate sustainable long-term growth and profitability for the company.

Juan Jose will now provide you with more specific financials by business segment. Juan Jose?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [4]

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Thank you, Bobby, and good morning to everyone on this call. Today, I will discuss our first quarter results, emphasizing the result of our Managed Care segment and will also briefly discuss how we're progressing with Hurricane Maria claims payments. We opened the year with a strong start and we're pleased with the 2019 results so far.

We reported first quarter GAAP diluted net income per share of $1.52 and adjusted diluted net income per share of $0.77. In the same quarter last year, we reported GAAP diluted net income per share of $0.17 and adjusted diluted net income per share of $0.60. Our first quarter results were driven by the improved operating results of our Managed Care Medicare business and our Life segment.

Let me now discuss the Managed Care results. Managed Care premiums for the quarter were $19 million higher than a year ago, primarily reflecting increased membership in the segment Medicare business following a successful open enrollment period. We're also experiencing higher average premium rates in this business. These increases were partially offset by a decrease in our Medicaid business of approximately 142,000 member month year-over-year because of the change in the program's model and a new entrant to the market on November 1, 2018.

In addition, the 2018 period includes approximately $6.7 million of premiums related to the HIP fee pass-through.

Managed Care claims were up $6 million year-over-year, and it's MLR was 83.6%, 140 basis points lower than last year.

After adjusting for reserve development and risk of revenue, the adjusted MLR of the Managed Care segment was 84.5%, 60 basis points higher than last year.

The higher adjusted MLR reflects the impact of the suspension of the HIP fee pass-through in 2019, which accounts for approximately 50 basis points of increase, increasing penetration due to an early Easter holiday in 2018 and higher target Medicaid MLR as required by the new contract. The adjusted MLR, considering all of the above, is performing as expected, reflecting the impact of the new PBM and cost-containing initiatives, including claims editing, providers contracting and certain network rationalization among others.

Moving on to the Managed Care segment quarterly operating expenses. The segment operating expenses were up $1 million from a year ago, reflecting higher personal cost and commission expense as well as an increase in the provision for doubtful accounts.

These were partially offset by an $11.7 million decrease in the HIP fee due to the moratorium of the fee in 2019. Moving to our Life and Property and Casualty segments. Life premiums earned were up approximately 7% from the prior year period, primarily reflecting premium growth in the segments individual and [cancer] lines of business. The segment's operating income was $6 million, $2 million higher year-over-year, reflecting the combination of higher volume of premiums and lower loss ratio and operating expense ratio.

Property and Casualty premiums were down $5 million from a year ago, mostly reflecting the lower insured value of the segment's portfolio. These were partially offset by higher premium rates, particularly in commercial accounts. The segment operating income this quarter was $3.6 million, a $0.5 million improvement over the same quarter last year.

The increased operating income results from the segment's improvement in its loss ratio and operating expense ratio during this quarter.

Our P&C segment saw very little new claims activity related to Hurricane Maria, receiving only 30 new claims so far during 2019. Our efforts continue to be focused on settling and closing of hurricane-related claims. As of April 30, 2019, the estimated gross losses related to this event remain unchanged. As of April 30, 2019, we have paid $627 million in gross hurricane related claims and expenses and have closed 95% of total cases.

As of March 31, 2019, the P&C segment RBC ratio is approximately 160%.

While still under the 200% minimum regulatory requirement, as we have noted on prior calls, we expect to contribute up to $12 million in additional capital in the second quarter to ensure we return to the minimum RBC ratio.

As in the case of all claims liabilities, the gross losses related to Hurricane Maria are based on our best estimate and the ultimate respective cause of claims with the information currently on hand and are subject to change.

Returning to our overall results, consolidated income tax expense was $17 million compared to an expense of $0.4 million in the prior year period mostly reflecting the higher operating income in all our segments.

Total cash and investment at the parent company level was $46 million as of March 31, 2019.

As Bobby mentioned, we're pleased that we have gotten off to a strong start in 2019 and are optimistic for the remainder of the year. We continue to be focused on our overall long-term growth strategy, making progress in our key initiative and position the company for the future.

We will now proceed to our Q&A session. Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Peter Costa with Wells Fargo.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [2]

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I wanted to start by saying congratulations on the strong quarter in the -- particularly the growth in Medicaid, picking back up the membership there. That looked really good.

Can you tell us a little bit why after such a good quarter with the strength in Medicaid that you're showing and the strength in the Medicare product, you left the guide relatively the same. You added $0.05 but did you -- were you really expecting to have over 35% of your earnings in the first quarter?

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [3]

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Peter, this is Bobby. I would say it's still early in the year, and we want to make sure we have all the pieces in place before making any other adjustments. We feel that we've achieved a lot of progress this quarter. The Medicaid program is still early, so we want to see how that plays out specifically before making any further comments, but we do feel that we have numbers that we can achieve, they're achievable, and we are looking forward to continue working on improvements. You want to add something, Jose?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [4]

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Peter, also I just wanted to call out that Q1 included a favorable prior period [reserve] developments. So that's why the $0.77 also included a portion that is really related to the release of reserve of year-end that probably represents around $0.28, $0.29.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [5]

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Yes. Although, that's -- even though that's onetime, you think you'd add that to your earnings going forward. So it still seems a little bit cautious. The only thing, Bobby, you called out there was just the caution on the Medicaid MLR and I can see being a new program, you'd be cautious about that. But was there anything else that is more negative coming in the back half of the year that you were expecting?

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [6]

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No. I would say, it's mainly Medicaid as a new program. You got it right.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [7]

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Okay. And then just within the quarter, if you could talk a little bit about the headwinds and the tailwinds on the medical loss ratio. We booked that out pretty well. I'm wondering if you could talk about specific claim areas in terms of physician, hospital and pharmacy, and how that is developing.

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [8]

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In terms of the medical trends...

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [9]

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In terms of medical trends, what we're seeing is very low trend in pharmacy and this is related to the new PBM agreement. So obviously this year as compared to last year, we do expect to see a very low increase in term of trends, but obviously, we put in part of the benefits in our Medicaid product. The other part in the case of commercial is a portion actually goes to be more competitive in the market.

But that's probably the main one that we can call out is that one. On top of that, we see very low trends on inpatient and outpatient. It's a combination of the initiatives that we have been working on for the last 1.5 years that goes from network rationalization, meaning we're providing a smaller network to our groups that help us control trends -- increasing trends as well as negotiating new fees with different providers.

In [campaigning], in the case of the PBM, Peter, we were able actually -- it was very successful in term of not only moving to a new PBM, but we actually effective January 1, were able to change all our accounts from the previous PBM to the new one.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [10]

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And that went smoothly, apparently. Remind me again what portion of your business or your medical costs are pharmacy related. I know in Puerto Rico it's much higher than it is in the U.S. But is your mix is evolving to be more Medicare business now.

Is that changing at all or where do we stand with that in terms of the portion of your costs that are pharma?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [11]

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Still higher than the U.S. but it's around 25% give and take.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [12]

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Okay. And will that grow as the Medicare business grows or will that decline, do you think?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [13]

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The Medicare, it will grow a little bit because in the case of the Medicaid, pricing it a little higher than 25% because of the -- how low the premium is.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [14]

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Okay. And then let's move on to my favorite topic, the P&C claims. What have you got so far for actual claims in house at this point in time? You said the paid claims was $627 million. Was that quarter end or is that April? That's April, I think. What was it at the end of the quarter?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [15]

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At the end of the quarter, we have paid $617 million. As of the end of April, we have paid $627 million.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [16]

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Okay. And how many -- what's the remaining claim balance that you have in-house?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [17]

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It's around 856 cases open.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [18]

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And what's the dollar amount on that?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [19]

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So we have $340 million for those claims in reserves.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [20]

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Okay. And the gross was still $968 million. Is that correct?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [21]

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Yes.

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [22]

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$967 million.

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [23]

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Yes.

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [24]

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$967 million.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [25]

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Okay. $967 million, okay.

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [26]

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Yes.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [27]

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All right. So just a couple of million for IBNR remaining. Is that fair?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [28]

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That's correct. That is correct.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [29]

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Okay. And how many cases are now in court and what's the dollar value of the cases that have been challenged in the court ?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [30]

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We have around 230 cases. Of those, around 190, 80% are for personal claims and the difference is for commercial. I don't have with me the exact number, but all of them -- for all of them, we have a reserve, a claims reserve, in our books. And we do expect to -- for those to resolve basically in what we have in our reserve. I want to mention that for the -- probably more than half of them, we continue our conversation. There are offers out there, so we do expect that for many of them will be closed without getting to court.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [31]

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Okay. And of the, I guess, 40 cases or so that are commercial, how many of those are business interruption claims?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [32]

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I don't have the number with -- the detail with me, but in the majority really is related to the whole claim right. So that includes property.

And the majority of the claims, as we have discussed, is for property -- related to property. So I will guess really that the majority have to do with property claims and not business interruption.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [33]

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Okay. And then overall, where do you stand on the business interruption claims at this point?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [34]

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We are around -- as of March, the total incurred is around $102 million. And of that, we have paid $77 million, so we have in reserve around $25 million.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [35]

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And how many cases does that account for in reserve?

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Juan Jose Román-Jiménez, Triple-S Management Corporation - Executive VP & CFO [36]

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It's around 400. Let me see. Hold on a second, please. Yes, still open around 400. Yes, more-or-less 400, which are part of the 856 right, so it's part of those claims. It's not incremental.

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Operator [37]

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(Operator Instructions) Since, there are no further questions back in the queue, I would like to turn the floor back over to management for closing remarks.

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Roberto García-Rodríguez, Triple-S Management Corporation - President, CEO & Director [38]

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Thank you, operator. I would like to thank everyone for your time and ongoing support of Triple-S. And if you have any additional questions, please don't hesitate to reach out. Have a wonderful morning.

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Operator [39]

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This concludes today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.