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Triple-S Management (NYSE:GTS)
Q3 2019 Earnings Call
Nov 07, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Triple-S Management third-quarter 2019 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Garrett Edson, senior vice president, ICR.

Mr. Edson, you may begin.

Garrett Edson -- Senior Vice President, ICR

Thank you, Jerry, and good morning. Welcome to the Triple-S Management third-quarter 2019 earnings conference call. With us today are your hosts, Bobby Garcia, president and chief executive officer of Triple-S and Juan Roman-Jimenez, 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, 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 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 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.

Bobby Garcia -- President and Chief Executive Officer

Thanks, Garrett. Good morning, everyone, and thank you for joining us today. This morning, we reported total operating revenue of $836 million for the third quarter of 2019, up 9% from a year ago and adjusted net income of $0.51 per diluted share, compared to an adjusted net loss of $0.97 per share a year ago. Overall, it was another solid quarter in all three of our business segments as we stayed focused on executing our strategy and delivering operational results.

The third quarter marked the second anniversary of Hurricane Maria's devastating pass-through Puerto Rico. So, I'd like to begin my prepared comments with the status of hurricane-related claims at our P&C segment. As is our norm, we conducted a thorough review of case reserves as of quarter's end. This review included the evaluation of developments involving outstanding claims, such as new information submitted by policyholders or adjusters and the status of settlement discussions.

The company also evaluated as is customary, the status of discovery and court proceedings and lawsuits that our P&C subsidiary, Triple-S Propiedad is litigating. This quarter, the company also serves the public record to identify lawsuits that have been filed against Triple-S Propiedad, but not served and conducted additional analysis of case reserves for the claims underlying those lawsuits. Based on this review, we report the following as of September 30th, 2019, with respect to Hurricane Maria. Estimated gross losses remain unchanged from the previous quarter at $967 million.

Triple-S Propiedad has paid a total of $692 million in claims. It received only 10 new claims during the third quarter, increasing the total number of Maria-related claims to 17,746. It has closed approximately 96% of these claims, 709 remain open. Triple-S Propiedad has been served with process in 218 lawsuits related to these 709 claims.

The company conducted a search of the Puerto Rico core systems electronic docket to identify lawsuits filed against Triple-S Propiedad that have not yet been served. The stock at search identified an additional 178 lawsuits filed but not served. All of them relate to claims previously registered with and evaluated by the company. The total number of lawsuits filed against Triple-S Propiedad relating to Hurricane Maria, including those that have been served and those identified in the public record that has not is $396 million.

This total represents only 2% of all Maria-related claims filed by Triple-S property policyholders. Of these, almost half involved personal claims, which tend to be much smaller in dollar amount than commercial claims. And to our knowledge, only 31 involve an assignment of benefits. While we adjusted our loss adjustment expense somewhat to include litigation costs of the new lawsuits filed during the third quarter, this additional expense was offset by the release of reserves during the same period that resulted from the settlement of claims below their reserved amounts.

The company performed additional analysis of case reserves for the claims underlying the unserved lawsuits. Based on this analysis, as well as the customary review I described earlier for all claims outstanding, the company determined there is no need to increase its estimate of gross losses nor adjust reserves related to Hurricane Maria. As in the case for all claim liabilities, the gross losses related to Maria are based on our best estimate of the ultimate expected cost of claims with the information currently on hand and are subject to change. The company will continue to closely monitor all claims made, as well as, lawsuits where process is properly served and will adjust reserves if and when any new material information emerges.

Moving to our core managed care segment, we were pleased with its continued top-line growth and overall consistency during the third quarter. managed care premiums earned were $746.5 million, up 9.7% year over year. Medicare Advantage accounted for most of that growth, with premiums increasing 29.4% from the prior-year period to $367.1 million, driven largely by an additional 52,000 member months and higher average premium rates. Heightened competition marks the 2020 open enrollment season.

Since this is the first AEP where new CMS supplemental benefit guidelines are playing an important role in Medicare Advantage. In our case, we are offering quarterly visits to nutritionists on all products without prior diagnosis, home support assistance after hospitalization to a targeted population and more transportation services for health-related needs, among others. Given the regulatory change, it is still too early to tell how the open enrollment season will play out since we are seeing eligible consumers take more time than in the past to evaluate their options. We are confident, however, that our products will compete well in the market since we have maintained consistency in product design while enhancing many of the benefits we offered in the 2019 season.

In our commercial business, we've started to see an inflection in fully insured membership, generating a second consecutive quarter of membership growth. This reflects a more competitive product offering and a more strategic approach to the market. Finally, with respect to Medicaid, I'd like to highlight five main points, as we enter the second year of the NOVITA program. First, this quarter, our beta membership dropped sequentially by approximately 10,000 from 364,000 to 354,000 members, reflecting an overall reduction in the eligible population.

Our market share, however, remains stable at around 31%. We second, we experienced a decrease in PMPM payments, compared to last quarter, resulting from a timing difference in the recognition of member acuity by the Puerto Rico Health Insurance Administration or ASES. Juan Jose will address this point in more detail. Third, Vital's 2020 open enrollment began on November 1st and will run through December 15th.

We expect that the quality of our service, the breadth of our network, our brand recognition, and many years of experience in this program across the entire island will again serve us well to retain and grow our membership in this business. Just yesterday, we issued an 8-K disclosing that our managed care subsidiary, Triple-S Salud, extended its agreement with the Puerto Rico Health Insurance Administration for 15 days until November 15th to allow the parties additional time to complete their ongoing revision of the per member per month payments for the second rating period, which runs from November 1st to June 30th, 2020. The agreement provides for a periodic review of these rates and the initial rating period expired on October 31st, 2019. Once the parties agree on the new rates, these rates will apply retroactively to November 1st this year.

Fifth, I'd like to provide a brief update regarding Medicaid funding for Puerto Rico. We are cautiously optimistic with the latest news coming out of Congress, as there is now a senate proposal that would provide $9.8 billion in funding over four years for the island's Medicaid program. Earlier in the quarter, the U.S. House of Representatives' committee on energy e-commerce approved a bill that would provide approximately $12 billion in funding.

Conversations between the house and the Senate regarding the Medicaid spending cliff are ongoing, and our expectation is that a final agreement will be included in an extenders package, likely to be enacted in the first quarter of 2020. This is not the permanent solution that Puerto Rico is seeking, yet it provides a program with greater stability over the next four years. Meanwhile, the continuing resolution approved by Congress that included an extension of temporary funding for Medicaid in Puerto Rico is to expire on November 21st. A continuing resolution, extending funding for an additional term is expected to be approved in the following weeks, which would allow additional time for Congress to reach a final agreement on federal funding -- government spending generally, including for Medicaid in Puerto Rico.

In terms of our 2019 full-year guidance, we are maintaining our expectations for full-year operating revenue to be between $3.29 billion and $3.33 billion, which includes managed care premiums earned net between $2.95 billion and $2.99 billion. We are maintaining expectations for consolidated claims incurred ratio to be between 81.3% and 83.3% and MLR to be between 84% and 86%. We now expect our operating expenses as a percentage of total premiums earned and administrative fees to be between 16.75% and 17.25%, an improvement from the previous range of 17% to 17.5%. We're maintaining our effective tax rate expectations of between 29% and 33%.

And on the bottom-line, we're raising 2019 adjusted net income per diluted share guidance and now expect to be between $2.50 and $2.70. 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, accounts for the most -- for the recently issued share dividend, and does not account for any potential share repurchase activity during 2019. Importantly, given the disconnect between our recent stock performance and the company's consistent execution of its strategic and operational objectives, our board has authorized the expansion of our share repurchase program's availability to $25 million. We remain confident in our business to deliver shareholder value over the long-term and expect to be active in repurchasing shares, either through a 10b5-1 program or in the open market.

Let me close by saying, once again, this was a solid quarter. Results across the company validate the hard work, consumer focus, and strategic intent of the entire Triple-S team. I am proud of each and every employee and thank them for recognizing the company as one of Puerto Rico's 20 best employers earlier this week. Juan Jose will now provide you with more specific financials by business segment.

Juan Jose?

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

Thank you, Bobby, and good morning to everyone on this call. As we reported in our press release earlier today, we continue to show strong operating results during this third quarter. We reported GAAP diluted net income per share of $0.58 and adjusted diluted net income per share of $0.51, compared to GAAP net loss per share of $0.77 and adjusted net loss pressure of $0.97 in the prior-year period. As a reminder, last year's third-quarter results were impacted by the $36 million after-tax on favorable prior period reserve development related to Hurricane Maria experienced by our P&C segment.

Let me now discuss the managed care results in detail. Managed care premiums earned for the quarter rose $66 million or 10% over the same period last year, primarily reflecting increased membership in our Medicare and at-risk commercial businesses and higher average premium rate in the Medicare line of business. The higher average premium rates in the Medicare business primarily reflect an increase in the average membership risk score. These premium increases were partially offset by the impact of this year's 8b moratorium and a decrease of approximately 126,000 member months in our Medicaid membership year over year, resulting from the change in the program's model and a new entrant to the program effective November 1st, 2018, and the overall reduction in the eligible population.

Also, this quarter, Medicaid premiums were negatively impacted by adverse reconciliation of a portion of the high-cost high-need population into lower premium tiers. We have raised this issue with ASES, and the agency has acknowledged several challenges in how it is recognizing and paying for the high-cost high-need members. As a result, our sales has extended the reconciliation process for all MCOs until February 2020. We expect the premiums to align with the relative acuity of our membership once this process is stable.

managed care claims were up $79 million year over year while the MLR of 86.4% was 320 basis points higher than last year. The higher MLR largely reflects the improved benefits in our 2019 Medicare product offering, the impact of the 2019 8b moratorium, higher target MLR of the Medicaid contract, and due to the challenges ASES is experiencing with recognition of member acuity that I just explained, a timing difference in the recognition of Medicaid premiums. The result in MLR for this business 99.6% is approximately 14,000 basis points higher than the prior-year period, reflecting lower premium PMPM and not higher-than-expected PMPM medical costs. Once rates are aligned with member acuity, we expect MLR to approximate target.

Moving on to managed care segment quarterly operating expenses. The segment's operating expenses declined $7 million from a year ago, reflecting a $13 million decrease in the HIP fee due to the 319 moratorium that was partially offset by higher personnel costs and commission expense. While we do not provide specific quarterly guidance, we expect operating expenses in the fourth quarter to be higher than others -- other quarters in 2019, due mainly to the enrollment season for the Medicare and Medicaid businesses, as well as, for individual, small groups, and federal employee program in the commercial business. Let me comment briefly on our life and property and casualty segments.

Life premiums earned were up approximately 8% from the prior-year period, primarily reflecting premium growth in the segment's individual and cancer lines of business. The segment operating income increased by $1 million to $6.6 million. Property and casualty premiums [Inaudible] were up $7 million during the third quarter of 2019, mostly reflecting -- mostly resulting from increased sales and higher premium rates, particularly in commercial accounts. The segment's operating income this quarter was $7 million, compared to an operating loss of $47 million during the same quarter last year, which was caused by the $52 million in federal prior-period reserve development related to Hurricane Maria.

Returning to our overall results. Consolidated income tax expense was $6 million, compared to a benefit of $3 million in the prior-year period. The income tax benefit in 2018 mainly reflects the loss before tax reported in that period by the property and casualty segment. Total cash and investments at the parent company level was $35 million as of September 30th, 2019.

As Bobby noted, our board of directors authorized the expansion and the availability of our share repurchase program to 25 [Inaudible], and we will be able to repurchase these shares through 10b5-1 program or through open market purchases. We are pleased with our strong operating results thus far in 2019 and continue focus on our overall long-term growth strategy, further progressing our key initiatives, and positioning the company for the future. We will now proceed to our Q&A session. Operator, please open the call for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question is from Peter Costa, Wells Fargo. Please go ahead, sir.

Peter Costa -- Wells Fargo -- Analyst

Good morning, everyone. A question on the Medicaid MLR. You know you had talked about the claim types coming through, member types, I should say coming through with variation before. It seems like it was worse this quarter than you saw before.

Is this some kind of catch-up going back to some of the prior quarters where there was variation? Or was this all in this quarter? And then beyond that, you talked about the extended time to renegotiate the contract here for the next month of November for yourselves. Is that looking at sort of the variation of the contract? Or is all that taking place by February 2020?

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

Hi Peter, this is Juan Jose. So, regarding the extension, we're in the middle of reviewing the rates for next year. It will be retroactive to November 1st. We just started the negotiation later in the month -- last month.

So, it has been taking a little more time than expected, but we are waiting for the negotiation, as well as, our order in fields, and we do expect to complete this by mid of this month, and we'll have a new rate for the next 12 months.

Peter Costa -- Wells Fargo -- Analyst

OK. And then regarding the prior rate. And I know there's been noise with the members moving back and forth between higher acuity and lower acuity, where there's variation of rates. Did this quarter have some catch-up from prior quarters of the way the members were moving back and forth? Or was this all tied to this quarter?

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

No, it wasn't tied to this quarter. So, what we know is there is a reduction in Q3 of the classification of certain high-cost high-needs that happened during Q3. What we do expect is to catch up in terms of the premium on Q4 or before the end of February 2020.

Peter Costa -- Wells Fargo -- Analyst

And when you say catch-up, do you mean they'll go back and look at the Q3, where, clearly, these members seem like they were in the wrong bucket, where you're getting lower paid for them? Or will they just adjust them going forward?

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

No, it will be retroactive. That's why -- and let me clarify when I mentioned that the reconciliation process. [Inaudible] will be extended to February is the time they extended the time in order to provide us time to reconcile with ASES a retroactive to the time where we believe the reduction or the reclassification was wrongly done.

Peter Costa -- Wells Fargo -- Analyst

Got it. All right. Then moving on to the P&C claims, spend a little time there. Back in September, you had had 745 claims that were outstanding, now you're down to 709, so you resolve 36 in this time period.

Were any of those claims that were litigated or claims that were, say, over $1 million in terms of what the members were claiming relative to what you settled them for?

Bobby Garcia -- President and Chief Executive Officer

Of the 709 Peter, you're asking how many of them were in litigation?

Peter Costa -- Wells Fargo -- Analyst

Actually, of the 36 that you resolved.

Bobby Garcia -- President and Chief Executive Officer

Oh, of the 36 that we resolved. We don't have that number with us. I can tell you that we've looked at the cases at the claims that were closed. And overall, we've been able to close about one in five cases that were already in litigation historically.

But I don't have a precise number of the 36.

Peter Costa -- Wells Fargo -- Analyst

OK. When we look at the court cases and some of the big damages that some of these cases are wedging relative to the relatively smaller amount of money that you have left to pay these claims within the loss reserve, what gives you the confidence that your lower number is the right number relative to sort of what the cases are alleging against you?

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

Peter. Well, first of all, we need to take into consideration that, for many of those big cases, we actually have provided cash advances. So, what is in the reserve is the difference between our estimate of the incurred loss minus the advances. So, for some of the especially biggest cases.

We have provided cash advances. So, that reviews our reserve, right? So, even those -- many of those are out in litigation now, they do have advances already provided in the past two years. So, that is an important critical data point to understand is that not every case that you see or we have been so or is outstanding or in process of settling, we don't necessarily owe them the whole amount because of the advances. We're very confident, again, what we evaluate is the claim, the data that we receive from that claim, and the work performed by our adjusters.

So at this point, the main majority of these cases, we have done extensive work as to what the losses are. That's what provides us the confidence of our reserve. As Bobby said, as we go, we have been able to close cases under the reserve, and we allocate that to other cases. So as of September, as has been in the last year, we are confident with our reserve because of extensive work that has been done with each of the most important claims of the biggest value of claims.

And when we look back in average, we have been able -- when we look the last two years for the case we serve, in average, we have been closing cases under the initially estimated reserve.

Bobby Garcia -- President and Chief Executive Officer

Yeah. And if I may add, Peter, we don't really focus on what the stated amount is in the lawsuit, just like we don't necessarily focus on what the stated amount is in the underlying claim. And that's been the case from day one, and that's why we have not, in response to questions from you or investors, stated what is the total sum of claims amounts because that could be misleading. Some people claim very reasonable amounts, and we settle very close to what is claimed.

Other people claim what we consider exaggerated amounts. Some could even be considered fraudulent. So that said, we don't look at it in the aggregate, but we go one by one. As we look at the underlying claim if the lawsuit brings in any new information we need to consider, we will do that.

Focusing on cases served because that's what really triggers the beginning of litigation, as once you're formally notified under law. So again, we don't look at it as there are these cases out there according to the public record, they amount to expelling the dollars, therefore, you divide that into 709 or into 396, and you come up with an amount, and you compare that to reserves. That's not the way we look at it.

Peter Costa -- Wells Fargo -- Analyst

Got it. Help me understand the assignment of benefits a little bit, those 31 where there's an assignment benefit. Is that all being assigned to a contractor who's doing the work? Or is that being assigned to some other third-party that perhaps is just a financial interest in looking to pursue something against you guys?

Bobby Garcia -- President and Chief Executive Officer

Yeah. You know this is a very specific case. And we provided the data point, which we don't consider necessarily important in the scheme of things, but we wanted to provide it because there -- you know, we imagine there are investors that look at, let's say, experience in Florida, right, and they compare this with Florida. Well, this is a very different market, and the experience has been very different.

So, we know that that was a big issue in Florida, will be signed with benefits to contractors, and it's had repercussions there. But we just wanted to point out that that is not really a significant concern here. Those 31 cases are very specific. They're -- it's not a contractor, it's a company here called the Tenure.

And it describes itself as a Puerto Rico company, but we understand based on its website, it's funded by an asset management company out of the U.S. And so, we just wanted to highlight that out of the total, there are only 31 cases to date that is -- where benefits have been assigned based on the lawsuit against them, which we were able to see in the public record. They take a cut of any claim adjustment, paying off an amount, and they take a portion of the claim, and then, they represent claim.

Peter Costa -- Wells Fargo -- Analyst

Got it. And does Puerto Rico have any laws like the recently passed law in Florida on assignment of benefits?

Bobby Garcia -- President and Chief Executive Officer

Not to our knowledge, no.

Peter Costa -- Wells Fargo -- Analyst

OK. Moving away from the claims for a minute before I pass on to others. You lowered your assumptions for the G&A ratio. What is behind that? Did you -- is it just the higher revenues? Or is there something more in terms of cost-cutting that you've been doing?

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

No, it mostly is higher revenue.

Peter Costa -- Wells Fargo -- Analyst

OK. And then you didn't talk very much about 2020 and color going into 2020 from headwinds and tailwinds, perhaps you could go through a little of that for us?

Bobby Garcia -- President and Chief Executive Officer

Yeah. I would say, Peter, that the headwind that everyone is, of course, fairly closely watching as Medicaid funding, which I mentioned. Of course, there's also a lot of focus on what's happening with the recovery post-hurricane and the influx of federal reconstruction funds. And because those will be driving the economic growth in the short to medium term.

So, that's what everyone is focused on. Of course, we are closely watching everything that happens with P&C claims and very focused on that, making sure we get that behind us. And as we mentioned, Medicare Advantage, it's a very interesting open enrollment season, given all the changes in non-medical sub benefits. So those are, I think, the main things come in on top of mind for me.

With respect to tailwinds, we continue really just focused on delivering on our strategy, and we believe there's a lot of momentum in the company, a lot of energy around what we're doing, and a lot of focus on continuing with our clinical initiatives with that longer-term goal of transforming healthcare through an integrated delivery model. We think there's a lot of interesting work going on within the company that will support better integration of care and better outcomes for our affiliates.

Peter Costa -- Wells Fargo -- Analyst

Great. Thank you very much. I appreciate it.

Operator

The next question is from Austin Hopper, AWH Capital. Please go ahead.

Austin Hopper -- AWH Capital -- Analyst

Hey, guys. Thanks for taking my question.

Bobby Garcia -- President and Chief Executive Officer

Good morning.

Austin Hopper -- AWH Capital -- Analyst

Good morning. It looks like you made about $33 million of payments to [Inaudible] Children's Hospital last two years. Was that all Hurricane Maria related?

Bobby Garcia -- President and Chief Executive Officer

No. Actually, that was not, I'd say, the vast majority of that is basically related to payments for services by the hospital as a provider of our network. So, I'd say all-in payments related to P&C claims as an insured of our P&C subsidiary is approximately $3 million. The remaining $30 million was all related to healthcare services and that's under a contract or contracts that are all arms-length and they're disclosed in our proxies.

Austin Hopper -- AWH Capital -- Analyst

Great. Thank you.

Operator

This concludes today's Q&A session. I would like to turn the floor back over to Bobby Garcia for closing comments.

Bobby Garcia -- President and Chief Executive Officer

Thank you, operator. I'd just like to sum up by saying we've had a solid 2019 as we move into the final months of the year, showing continued progress in our strategic, operational, and financial objectives. We continue to gain and retain membership in our core managed care business. We continue optimizing technology to further improve clinical outcomes, member experience, and our cost structure, and we're making progress in building out our clinical network, all in a concerted effort to build out an integrated care delivery strategy over the next several years to transform the healthcare experience in Puerto Rico.

And with that, I'd like to thank you all for taking your time today, and your ongoing support of Triple-S. If you have any questions additionally, please reach out. Have a great day.

Operator

[Operator sign-off]

Duration: 37 minutes

Call participants:

Garrett Edson -- Senior Vice President, ICR

Bobby Garcia -- President and Chief Executive Officer

Juan Roman-Jimenez -- Executive Vice President and Chief Financial Officer

Peter Costa -- Wells Fargo -- Analyst

Austin Hopper -- AWH Capital -- Analyst

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