Q4 2019 Earnings Call

[music] greetings and welcome to Triple S Management fourth quarter 2019 conference call. At this time all participants are in listen only mode. A question answer session will follow the formal presentation.

It's been once you require upgrade assistance during the conference. Please press Star then on the telephone keypad.

Please note this cost is being recorded when outside the <unk> Garrett Edson Senior Vice President of I see our please proceed sir.

Thank you and good morning, welcome to the Triple S Management fourth quarter 2019 earnings Conference call.

We are your host Bobby Garcia, President and Chief Executive Officer Triple S. One was a robot executive Vice President and Chief Financial Officer.

She was Madeline Hernandez, Chief operating officer impressive managed care will be available during Q1 day.

Everyone should have access to where the earnings announcement, which was released prior to the school, which May also be found in the company's website, a triple S management dotcom before we get 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 that's they won't be sharing forward looking information.

Statements can be affected by risks 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.

It's are not guarantees of future performance and therefore undue reliance should not be placed upon.

Further information on factors that could impact the company and the statements projections contained herein. Please refer to the Safe Harbor section in today's news release, the company's filings with Securities Exchange Commission. Each forward looking statement a projection of financial information made during this call is based on information available to assess it Didnt school disclaims any obligation to update.

Maintenance unless required by law.

During this call is being webcast an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at Www Dot Triple S management Dot com.

Cannot download a copy of the leasing contract. That's 70 779 to six sport eating we will get once you immediately connect you to distribution list moving forward with that I'd now, let's turn the call over to Bobby Garcia. Please go ahead.

Thanks, Garrett and good morning, everyone. Thank you for joining us today.

This morning, we'll report total operating revenues of $831.2 million <unk> fourth quarter, a 14.9% increase from the prior year.

On the bottom line, we recorded adjusted net income of $6 million or 25 cents per diluted share compared to adjusted net income up $10.1 million were 44 cents per diluted share in the prior year period.

These results capped off a strong 29 team and exceeded the company's initial expectations for both the top and bottom line, primarily reflecting solid growth in membership and premium rates across our core managed care segment.

2019 ended appropriately where they successful Medicare advantage enrollment season that rendered over 8200 net new members as of January 3rd 2020.

M.S. his most recent membership report baked.

Importantly, our membership grew 16% year over year.

We now maintain a 23% market share and I may up 300 basis points from a year ago.

Our success was possible thanks to innovative flexible products, including a quote menu plans. It offers a choice of nonmedical supplemental benefits.

Well as smart brand sales strategies that adapted quickly to a very competitive field and focus retention efforts that manage to renew 93% of our existing members.

Likewise, our fully insured commercial membership continued its upward trend, where they historically high retention rate of 98%.

An increase of 37000 member months into fourth quarter.

Resulting in a 3.5% increase in premiums over the same period last year.

These results reflect the determination of many people from those in product design to the marketing retention and sales teams and wed like to personally thank for their hard work.

It also points to a sound long term strategy focused on providing a unique integrated health care experience in partnership with our provider community.

Before expanding on our strategy and the progress of our ongoing transformation I would like to take a minute to address the seismic activity that should Puerto Rico in the first few weeks of 2020.

The island experienced a 6.4 magnitude earthquake on January 7th.

Numerous aftershocks into following days.

They damage several hundred homes and other structures in the south and southwest of Puerto Rico.

Damages had been limited in scope.

Loss estimates vary and the Puerto Rico government is still calculating the extent of damages, but its initial estimates put total earthquake related island wide losses at $200 million.

As of today. The company has received 45 earthquake related claims and expects losses of approximately $5.5 million related to the reinsurance deductible and related expenses.

We estimate that our total exposure to this event will be approximately $40 million less than 5% of our reinsurance program.

Separately with respect to Hurricane Maria we provided an update on PNC reserves and pending claims in our earnings release earlier this morning.

There were no major new developments in the fourth quarter and we believe this segment remains adequately reserved to handle all remaining claims to date.

Now back to our core managed segment and the membership growth that is taking hold as a result of triple S is multiyear transformation.

Since 2016, and despite the set back of Hurricane Maria we had been developing the capabilities of our workforce investing in systems streamlining processes and strengthening our provider network.

Our vision is to lead the health care market in Puerto Rico by offering our customers seamless access to high value with health care.

We aim to achieve this by building an integrated delivery system in partnership with providers that is enabled by population health and care management programs.

And interoperable technology Echo system, and the alignment of clinical and financial outcomes around the quality of care.

In 2019, we made important progress and laying the foundation of this delivery system.

I like to highlight a few of the initiatives This service building blocks.

First we ramped up the core functions of H.M.S. OSAT, a best in class care management platform. We licensed in 2018 to strengthen our clinical support capabilities across various settings.

This has significantly improved productivity our use of our utilization disease in case management teams, allowing our nurses to spend more time to field caring for patients.

We plan on expanding this tools functionality and 2020 to enable automated authorizations and incorporate analytics to address health conditions at earlier stages of development.

Second the claims processing functions, we transferred to Optum in late 2017 have continued maturing three adoption of robotic process automation.

This has helped accelerate our payment cycle and reduce our claims inventories to historically low levels.

Third during the fourth quarter of 2019 Triple S completed the transition of its technology backbone to a state of the art tier three data center facility administered by Optum.

And migrated our core platforms to the Microsoft as you're sure cloud three real time high availability high capacity connection.

This has added a level or reliability and resiliency that significantly enhances our business continuity capabilities.

Finally by year end, we had opened seven multi disciplinary ambulatory clinics and strategic locations around the island.

Beginning in March of 2020, we will open an eight clegg, which will also be the fourth in the San Juan Metro area.

Completing our initial build out phase focused on the aggregation of an island wide ambulatory care network.

During 2020, we will focus on integrating these clinics through common service platforms clinical programs and a distinctive member experience.

Generally these clinics offer primary care selected specialty care preventive services Radiology laboratory and pharmacy services in a single location to the members of several commercial and Medicare advantage health plans.

As of 29 team yearend, we're also operating for urgent care centers and for workplace clinics unexpected open to more workplace clecs during the fourth for first quarter of 2020.

Together this network of facilities aims to support our primary medical groups in our shared goal of improving the quality of health care in Puerto Rico.

As we look further into 2020 the company is initiating the following full year 2020 guidance.

We expect operating revenue to be between three point $62 billion and three point $66 billion, which includes managed care premiums earned net between three point 25 billion and three point $29 billion.

Our consolidated claims incurred ratio is expected to be between 81 and 83%.

While the managed care MLL R is expected to be between 83.5 and 85.5%.

We expect our consolidated operating ratio to be between 17.5, an 18.5%.

The effective tax rate is expected to be between 28 and 30%.

Finally, our outlook for adjusted net income per diluted share is between $2.60 and $2 an 80 cents.

This expectations considers approximately 24 cents per diluted share related to the estimated impact of losses incurred at the company's property and casualty segment. After the recent earthquake activity experienced in Puerto Rico during January.

Adjusted net income per diluted share does not account for any potential share repurchase activity during 2020.

It also excludes realized and unrealized investment gains and losses as well as any private equity investment income.

The company is assuming a weighted average diluted share count for full year, 2020, or 23.1 million shares.

Summing up we're quite pleased with the advances made across each of our businesses throughout 2019.

We continue to focus on our disciplined approach to implement a strategy that is patient centered and committed to quality outcomes.

I'll now ask one jose's to address our financial results. Thank you well, we and good morning to everyone on this call.

We completed a strong 2019 for two please see when I look what it looks solid premium growth on a successful open enrollment season.

For the fourth quarter were reported GAAP diluted net income per share of 55 things and adjusted diluted net income per share of 25 cents compared to GAAP net loss for sure were 48 sand and adjusted net income per share to 44% in the prior be it the prior year period.

Let me know this cause they managed care segment results in detail.

Managed care premiums earned for the quarter rose 99 million or 15% or the same beat it last year, primarily reflecting increased membership in all lines of business and higher average screaming rates, you know, where Medicare and Medicaid businesses.

The higher I wish beaman rates in the Medicare business, primarily reflect any increase in the Irish membership re score.

It's pretty much increases were partially offset by gain back of these years suspension of the heat feet pass through.

Medicare claims were up 82 million year over year, while the M.L.R. at 83.7 person was 10 basis point lower than last year, reflecting lower him a large into Medicare and commercial businesses.

These decreases were partially offset by higher EMR in their Medicaid business and that you think of their 29 thing he moratorium on the mitigate and commercial loss ratios.

These increases in their Medicaid M.L.R. is mainly due to the challenges I say sees experiencing with the recognition and payment of the heico's highly population and challenges they need required to win the implementation I don't know where providers only by many basis to support their heico's high need clarification of our member.

We're dealing with this issue on two fronts first as mentioned last quarter, we continue working with us as dork on the challenges they have with respect to their recognition of the heico's high need membership.

Second we're also working with our providers to make sure members conditions are properly documented and that they some meeting counters that will support each member's I could be going forward.

Once this process is stellar lies with big Freeman rates to align with their rent happy Paqui the of our membership.

Moving onto the managed care quarterly operating expenses.

Segment operating expenses increased 11 million from a year ago, reflecting higher provision for bad debt I'm personally because we also incur higher business promotion and commission expenses.

Which we have no it would occur on our priority ankles, and which were mainly due to the Medicare and Medicaid will open enrollment seasons.

These increases were partially offset by a decrease in the heat fee digital if any 19 more authority.

Let me go in briefly on our life on property and casualty segments.

Life premiums earned were up approximately 90% from the prior year period, primarily reflecting but he means growth in the segments individually and concern lines of business. The segment's operating income decreased by 1 million to 4.3 million.

Mostly due to higher amortization of deferred acquisition cost.

The M.C. net premiums earned work 23 million 6 million at higher than last year, reflecting higher reinsurance costs in 2018.

Including the back of the multi year reinsurance contract and increased sales of commercial products.

This segment operating loss this quarter was <unk> 0.5 me again compared to operating income of 4.7 million during the same quarter last year.

The fourth quarter of easier includes approximately 1.6 million over get MP phone assessment, which is expected to we request that opinion surcharges in future renal wells and new business and higher net commissions in care by 2.2 million due to the increase in net premiums earned.

The 28 in quarter includes a favorable prior period reserve development.

Returning to auto results consolidated income tax expense was 3.3 million to meet in higher than the prior year period, mostly due to the back a phone or realized gains and losses.

So thanks, guys trending better and other budding company lever.

And it worked 28 million as of December 31st 2019.

As we discussed on our last quarter's call effective November 2019, our board of directors authorized expansion of our share repurchase program to 25 million.

During the fourth quarter of 29 thing.

Hundred 27881 shares were repurchased at an aggregate cost of 10 million.

So savvy already 26 10 million remain available for repurchase under the program.

We're pleased with our external but keeping resourcing plenty 19 and remain focused on our oil managed care goes but at the further progressing on a word key initiative.

We will know proceeds will work you on a sanction operator, please open the call for questions.

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One moment why we pull for our first question.

Peter Your line is live you may speak.

Hi, good morning.

First let's start with a Medicaid business, the MSR and that business trended up over 100% this quarter.

So we had expected you know some.

[music].

Third quarters problems to continue to this quarter, but then we expected some resolution in February.

That might be retroactive is there any expectation of any retroactive adjustment at this point in time or or has that gone at this point and when should we expect to see some improvement the Medicaid EMR.

Good morning, Peter This is Juan Jose, Yes, you're right. We continue working we would the guard we got says to complete our reconciliation of the accounts. They heico's hi need a membership. So yeah. We have submitted a additional information and we're working on some of the some of the premium that.

It's possible that would be retroactive a related to some of their membership in 2019 a.

We do expect a process in general do stuff well, ISO Q1 will be more stable in them off and while our on the opinions that as compared to Q3 in Q4. So were seeing some stabilization now we do expect that going forward. In addition to the fact that there was an increasing premium rates.

Effective November Onest.

Yes. The November one rate increase really didn't help you very much considering them our continued to higher and I guess.

Where you stand on one sort of February date that you talked about but not happening now or is that.

Yes.

No. We continue working with them, we have I'd say that we have submitted a significant amount of information, but something that process is not completed a once it is completed we know.

How much of any premium.

That will be to is locked it would be collected a but we are we understand we are approaching the finally stage of that process and I worked out at least to completed a this week.

Okay. Thank you.

Let's move onto the earthquake a little bit here.

I think I understand you just say.

As a charge of five.

Point 5 million or something.

In terms of the quarter, but then I look at the dollar amount.

Oh, the charge that bps impact it looks more like a seven unchanged million dollar charge.

What's the then the math there about 2 million roughly.

Yes, Peter they'll be price is that these deductible.

Plus expenses, which is 5.5 belows, we do expect a restatement that we'd be around 3 million dollar. So all in east are only eight 8.5 million dollar digital dialing back.

But to reinstatement of the reinsurance program.

So that's for higher cost for reinsurance coming forward.

I will be aim in it you will be a restatement because it but odom ends on March so since we will use the catastrophe program for DC event, then we will restate it different over them anyway, because those are on 3 million daughter.

I see incremental costs, though.

Now that that's going to.

Impact you going forward and this quarter you know the business didn't really generate any earnings.

So we're getting to the point, where there's tighter capital and in that business.

Relative to where it's been and beyond that it's not generating earnings.

Is it time to consider selling that business or perhaps putting it into run off if you can't find a buyer and bring what capitals there'll back to you.

Or or is it something that you continue you continue to expect them run ongoing and contribute more capital.

The Q4 last really or have some items that are nonrecurring like the guarantee fund assessment.

We do expect a the our protection for the use that that segment, we'd be profitable. So is say Q 47 outlier. If you look at Q1, two and three of last year. They were profitable and we do expect the segment to be profitable again in 2020, so there somehow like during Q4.

Like they've got to be a fun, but so in general we do we do not expect to but any other copy them.

RBC increase again at the end of a year. We are approximately at 220. So we continue improving our RBC for does business as we go right. So in demo Butte performance business continue to be profitable what I'm, we do I want expectation that 20 to any we'd be this thing.

Yeah, So that's a.

Right Peter.

So just wanted to clear no no added need to capital no plans to sell or remove the business at this point in time.

Put in Reno run off correct.

So Peter this is Bobby Juan Jose was referring to the quarter. So is one part of the answer which is that the oh, the RBC continues to improve.

The loss that you saw for the quarter reflect some some onetime charges specifically the guarantee fund was was the major assessment there was a major impact so with respect to the future the PNC business.

We will always maintain options open and that's a continuous dialogue with our board of directors and.

Strategic considerations that we've always had on the table, what what future of the businesses with respect to our overall strategy.

So.

That's as much as I can say at this point Oh PNC is performing as expected.

And it's part of our legacy business.

And we will continue to focus our future on on managed care and and what we consider close adjacencies to managed care.

Okay, let's dig into the Maria business, it's a little bit again.

You know the claims went up a little bit from from a [noise].

I think 11 incremental claims in the court.

If I count what you talked about last time versus this time.

In total.

396 identified last time 407. This time, so only 11 new claims in court did is that in that not that I guess that's in that number. So we are any of those claims in court settled at this point or or is that just the I'm presuming that number.

What's gross as well.

Yes, so the number we reported in the press releases is the net number so we do deduct cases closed.

And so.

We reconcile it against the last numbers, we gave and so that's a cases, we had a reported and what we say the cases, we reported cases.

Where we had been served.

And we subtract cases, where we've closed and any new cases, rather than that's number one reported.

Okay.

So where their cases settled.

Oh that work cases so.

Okay.

The if I would consider the average.

Of and I know averages or gross and not a great way to do it but.

You settled for an average of 440000 in terms of the number claims that went away.

I don't have incremental payments.

If we continue that at that rate you double over the growth liability.

So was there something that caused that used to be a little bit higher and your expectation for the remaining went through a little bit lower given that the number of case in court has actually grown.

Peter as you say to you you can note average billings fading at quarter right, because some quarters, what we pay someone a number of claims with a high average amount and you know there's we'd be by the company's right like say were so.

So as I know that why did we went through our detailed analysis of our reserve and we really focusing case by case. So we continue to be comfortable we know where reserve. So really you cannot extrapolate one quarter to the over there and the reason on this quarter to be more to specific is that we do have.

Some <unk> individual cases, a handful of them that the outages most he's the amount Bay is more a is bigger than the average.

Perfect Okay.

Yeah, if I could just add one thing here.

As far as it once they will say we look at this on an individual case basis. So are we settled cases as when we believed that the settlement made business sense, meaning that we were paying fair amount.

And we do a reserve on the same basis so.

Yeah, We reserve what we believe is the fair value of a claim there for we don't believe it will impact our overall reserve amount. That's why we haven't seen reserve isn't last quarter.

Okay last question Maria the public adjuster on on some of the claims that are being litigated or many of the claims that are being litigated.

Showed up in some news reports about I guess potential questions about you know is.

Is that what not has that.

Impacted your view or anything that you've done at this point in time.

I know Peter we don't factored that in we really do try to keep focused on on the information we have at hand, and and or are we rely on our adjusters and on the experts that.

Or PNC segments. So are we consider that.

Say extraneous noise, and we prefer not to get involved and those kinds of controversies.

So yes, we will continue I mean with any public adjust for with any claim it would any broker. It comes in wants to sit down and and have a reasonable conversation about the value of claims.

We want to close the claims as much as anybody else, but it has to be for what we consider fair value not for.

What we consider sometimes be exaggerated in unfounded claims.

Okay and then last question, then maybe I'll get back into queue, but just talk about the Medicare advantage business a little bit more.

Thats going well, you're taking some share there.

Where is that share coming from is it new Pete new lives coming onboard to you.

Most others or is it coming from your competitors.

I would say both the odd them the market grew slightly year over year overall size of the market. Yeah, I think it was a little less than 1%.

Closer to 2%.

So we did we did gain some a share of market.

Oh from some of our competitors. So we had to not just the highest number of membership member growth, but also percentage wise the highest percentage within the Puerto Rico marketing in Medicare This year.

Open enrollment season, we are the highest percentage increase in our membership.

And also the highest number of <unk> members.

So these numbers are coming in with risk scores that have already been.

Looked up by another managed care company. So there were scores are probably better than your typical new new lives in Medicare advantage is that fair statement.

Well, there's some new membership so some agents, but there was also you know there's a mix. There are so we are in fact, you that the the.

The average risk scores that new membership at this point is it's going to be either higher or lower than what we typically see.

Okay. Thank you very much.

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At this point.

At this time I would like to turn the call back over to management for closing comments.

Oh, Thank you despite a challenging environment in Puerto Rico, we made significant strides nor market. During 2019, we were honored as the best employer. This recognition reflects the level of engagement of our employees.

They've shown as we transformed the company.

Over the past three years, we've laid down key pieces to deliver a holistic member experience. We're now focused on designing an integrated delivery system that will sustain and drive our transformation and contribute to healthier communities long term growth and profitability.

Thank you for your time and ongoing support please reach out to US if you have any more questions and have a great day.

Thank you ladies and gentlemen. This does concludes today's teleconference. You may disconnect your lines at this time.