Triple-S Management Corp. Q2 2009 Earnings Call Transcript

| About: Triple-S Management (GTS)

Triple-S Management Corp. (NYSE:GTS)

Q2 2009 Earnings Call

August 05, 2009; 09:00 am ET


Ramon Ruiz-Comas - President & Chief Executive Officer

Juan-Jose Roman - Vice President of Finance & Chief Financial Officer

Kathy Waller - Investor Relations


Chris Carter - Citigroup

Tom Carroll - Stifel Nicolaus

Greg Nersessian - Credit Suisse

Justin Lake - UBS

Nicole Viglucci - Accipiter Capital Management


Good morning ladies and gentlemen, thank you for standing by. Welcome to the Triple-S Management Corp’s second quarter 2009 results conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

I would now like to turn the conference over to Kathy Waller. Please go ahead ma’am.

Kathy Waller

Thank you, Brady. Good morning everyone. Welcome to today’s second quarter 2009 earnings conference call. With us today are your hosts Ramon Ruiz-Comas, President and Chief Executive Officer and Juan-Jose Roman, Vice President of Finance and Chief Financial Officer.

I’m sure you’ve all 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 company’s Safe Harbor section in today’s news release, and in the company’s periodic filings with the SEC.

In addition, the information shared on this call should be considered current, as of today only today. After today, please use this information for your reference only and remember that the company assumes no responsibility 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 Shortly after it ends, you will find an archived version on the Investor Relations page of the company’s website at If you don’t have a copy of today’s news release already, you can find one at the company’s website or you can call my assistant Han Huey at 312-640-6688, and she’ll forward one immediately to you and also make sure you’re on our distribution list going forward.

With that, I’d like to turn the call over to Ramon. Ramon, please go ahead.

Ramon Ruiz-Comas

Thank you, Kathy. I also would like to add my welcome to everyone. We remain 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 from the quarter. Then Juan-Jose will provide the story behind our numbers and provide more details on the quarter as well. Then, I will return to share our updated 2009 outlook. After that, Juan-Jose and I will be glad to answer any questions you may have.

As a reminder for those of you joining us for the first time, Triple-S Management, an independent licensee of the Blue Cross Blue Shield Association, is the largest Managed Care Company in Puerto Rico. It currently serves approximately 1.3 million members or 34% of the population. The company is also a leading provider of life, accident and health insurance, as well as the core largest provider of property and casualty insurance in this market.

Aside from posting another solid quarterly performance, we are currently excited to have completed the purchase and integration of the managed care portfolio of La Cruz Azul de Puerto Rico, effective July 3 for $10.5 million. In addition, our [Inaudible] transaction, the Blue Cross Blue Shield Association transfers the Blue Cross license in Puerto Rico and the Blue Cross Blue Shield license in the US Virgin Islands.

These transactions consolidate the Blue Cross Blue Shield brand in Puerto Rico and the US Virgin Islands. Not only did we retain almost all of the La Cruz Azul 131,000 members, but we were also able to swiftly and seamlessly integrate the acquired business into our existing infrastructure. We continue to anticipate that La Cruz Azul will be slightly accretive to 2009 and additive on a rolling 12 month basis. More specific information on our expectations will be provided when I discuss our 2009 guidance later in the call.

Going forward, we will certainly consider and integrate the appropriate mix of additional asset purchased. Any acquisition must not only be fairly priced, but also adhere to our disciplined strategy of expanding our market leadership in Puerto Rico, enhancing our efficiency by leveraging our well-developed infrastructure and creating long-term value for our shareholders and customers.

We were quite pleased with our performance in the second quarter. We delivered solid top-line growth, managed our operating costs while making the necessary investments in our industry, maintain our track record of excellent member retention, and generate positive operation in cash flow.

We also experienced another significant reduction in our recapped Medicare MLR. With utilization tracking our expectation and higher second half premiums, we anticipate additional improvement in the final six months of 2009. While we did experience an increase in the adjusted MLR for our commercial business, we expect the issues that produced the uptick to be temporary in nature.

We recorded solid growth in our consolidated net operating revenue, which totaled approximately $490.9 million, up 12.2% year-over-year. This rise was primarily due to an increase in premium turn in our Managed Care segment, largely reflecting greater volume in the commercial and Medicare Advantage business, and our Medicare Rate Score Premium Adjustment, as well as higher premium rates across all segments.

Of approximately 89% of the total consolidated operating revenue for the second quarter of 2009, Managed Care continued to be our largest segment. Life Insurance and Property and Casualty Insurance represented about 6% each. When it comes to segment operating income, Managed Care accounts for 68% as of June 30, 2009, while Life represents 16% and Property and Casualty approximately 12%. Other reportable segments account for about 4% of operating income.

Consolidated claims incurred and operating expense for the second quarter of 2009 were $467 million, an increase of 12.2% from a year ago. Consolidated claims incurred were up $43.6 million or 12.3%, principally due to increased claims in its Managed Care segment, driven by higher enrollment and utilization trends.

The consolidated operation increased 90 basis points to 85.5%. The three month consolidated operating expenses were $68.6 million, and the operating expense ratio declined 10 basis points to 14.4%. Consolidated net investment income fell 6.3% to $13.4 million for the quarter, reflecting a lower balance of invested assets and reduced yield.

Pro forma net income for the three months ended June 30, 2009 was $15 million or $0.51 per diluted share, based on weighted average shares outstanding of $29.4 million, compared with $14.3 million or $0.44 per diluted share, based on weighted average shares outstanding of $32.2 million at the same time last year.

Our outlook remains bullish. We continue to be excited about the opportunities to build incremental profitable market share across all segments of our business. We remain [Inaudible] on identifying ways to reduce our MLR, while still providing quality service to all our members. Our attention to stringent expense control continues to be a priority and we are targeting opportunities that will further leverage our Hispanic footprint and expansive distribution channel.

One topic that you will like to know is what we think about the Federal Health Reform. We are following very closely the discussion in Congress about the Federal Health Reform, to determine the effect we may have over the population of Puerto Rico. Today, it’s very difficult to predict the outcome of what is going to happen, as discussions continue and many organizations are taking stances about the effect that suggestion may have.

In the case of Puerto Rico, the government and various health organizations are requesting parity of funds in the Medicare and Medicaid programs, which will be very positive to many organizations and to the economy of Puerto Rico. In our side, we continue to focus on reducing our costs and working the different initiatives to improve health outcomes to our members and impact our MLR.

With that said, I will now turn the call over to Juan-Jose, who will provide you with additional details on our financial and business segments.

Juan-Jose Roman

Thank you, Ramon. I would like also to add my welcome to everyone on this call. Now let’s review our second quarter 2009 financial results. You already have seen our news release, so I will focus on the key areas we used to track our performance and share the detail behind the numbers.

Ramon has already provided you with some consolidated numbers, so let me just say that we were pleased with our top-line performance, the continued reduction in the Medicare MLR, and overall expense management. Our growth was largely attributable to an increase in enrollment in the commercial and Medicare businesses, a favorable CMS risk score premium adjustment, and higher net premium rates in our Managed Care segment.

Let me now focus on the discussion of our segment results. The Managed Care business generated total medical premiums for the three months ended June 30, 2009 of $418.1 million, up 11.7% from the prior year. The increase was primarily due to higher enrollment in the commercial and Medicare Advantage businesses, a favorable risk score premium adjustment, as well as premium rate increases.

An 11.4% increase in the average premium rate in the main business, was offset in part by the $4.2 million premium adjustment which decreased the reform business premiums, because of an increase in the allowance for doubtful accounts. Because we have only reconciled reformed dealings with the government of Puerto Rico through 2006, we deem it prudent to fully reserve for those amounts not yet collected. For the six month period, medical premiums earned were $122.6 million, up 12.1% year-over-year.

Our maintenance service fees for the three months ended June 30, 2009 were $12 million, 150% above those generated in the prior year, boosted by a self-funded member month enrollment increase of 636,681. This sharp rise is largely the result of the one year ASO contract for the Metro North region that began servicing again in November 1, 2008, as well as new ASO commercial contracts that went into effect January 1, 2009. For the six months ended June 30, 2009, our maintenance services were $21.5 million or 131.2% increase.

The Managed Care segment, MLR, increased 90 basis points to 89.4%, the result of changes in reserved estimates and higher utilization among local government employees, offset in-part by the effect of the MA risk score premium adjustment and the reformed premium adjustments that were recorded in the quarter. Excluding the effect of both 2009 and 2008, the MLR will have decreased by 80 basis points.

While we were able to realize another dramatic improvement in the Medicare MLR, we did experience higher adjusted MLR in the commercial business during this quarter. For the six months ended June 30, 2009, MLR increased by 70 basis points from 89.8% to 90.5%. Excluding the effect of changes in reserved estimates and the recorded premium adjustments, adjusted EMLR decreased 10 basis points.

Our second quarter operating expenses include $2.7 million related to the new Managed Care IT system, compared with $1.5 million in the prior year. We are still on schedule to begin moving to a new system, between the end of 2009 and the beginning of 2010. Just as importantly, we remain on budget. In addition, a contingency accrual of approximately $2.5 million was recorded during the 2009 period, partially offset by a $600,000 insurance recovery receivable of legal expenses.

The operating expense ratio increased by 10 basis points to 10.6% for the three months ended June 30, 2009 and 20 basis points to 10.5% for the six month period. Operating income for the three month period ended June 30, 2009 was $16.2 million, up $2.2 million or 15.7% from a year ago. For the six months ended June 30, 2009, operating income totaled $22 million or 14% above the prior year.

Further breaking down our Managed Care segment, for the second quarter of 2009, premiums earned in our commercial business was $193.1 million, up 7.5%, representing approximately 46.2% of total medical premiums earned in the three months ended June 30, 2009. The year-over-year gain is primarily attributable to an average 3.5% rate increase per member and a rise in fully insured member month enrollment of 47,066 or 3.8%.

Although the commercial MLR increased 12.7 percentage points to 92.5%, when reserved development for both, the 2009 and 2008 periods are considered, the MLR increased by just 2.8 percentage points. The higher than anticipated MLR reflects greater utilization of pharmacy and in-patient benefits among local government employees. The MLR of the other sector within the commercial segment are tracking our expectations.

For the second half of the year, we believe claims within the local government employees sector will be significantly lower due to drug utilization caps; however, we expect the commercial MLR for the full year to be between 100 and 150 basis points higher than our original estimate, due to the increased utilization among the local government employees and the expected impact of the NH1A1 or swine flu during this year.

Our Reform or Medicaid business earned premiums of $83.4 million, 3.1% above last year, accounting for 20% of the total medical premiums earned for the quarter. The increase was largely due to the effect of approximately 10% premium rate hike effective on July 1, 2008, partially offset by an average year-over-year decrease in fully insured member month enrollment of 23,716 or 2.3%, and the aforementioned $4.2 million premium adjustment.

The reformed MLR was 91.6%, 510 basis points lower than in 2008, primarily the result of a favorable reserve development in 2008 and an unfavorable one this year. Excluding the effect of the prior year reserve development and the premium adjustment, the MLR actually decreased by 140 basis points.

In addition, in July 2009, the government of Puerto Rico extended the two fully insured contracts managed by us until October 31, 2009. In July, a request for proposals was issued for all the different regions and we fully intend to submit one for those regions.

The final component of our Managed Care segment is the Medicare business, which generated premiums of $141.6 million, up 24.6% from a year ago. Medicare represented 33.8% of the total premiums earned in the quarter. The revenue gains primarily reflects the effect of the $12.8 million in adjustment related to the CMS final risk score payments for 2008 and the first quarter of 2009, an 11.4% higher average premium rate, and a modest increase in member month enrollment of 431 or 0.2%.

Medicare Advantage member month rose 3859 or 2.1%, almost fully offset by a decrease of 3428 or 10.5% in the PDP membership. Although the Medicare MLR fell by 12.6 percentage points to 83.9%, the dramatic decline in this metric were certainly aided by the aforementioned risk score premium adjustment, changes to our products in 2009, lower utilization trends, and a shift in the business mix. Excluding the effect of prior-period reserve development for 2009 and 2008, as well as the risk score premium adjustments, the MLR still fell by 590 basis points.

Moving now to our Life Insurance business, net premiums earned in the second quarter of 2009 were $25.2 million, a 10% year-over-year advance. Total operating revenues were $29.6 million, and operating income was $3.9 million, the latter up $0.7 million or 21.9% compared with 2008. While the segment experienced a 270 basis point increase in its loss ratio to 51.6%, its operating expense ratio grew by 460 basis points to 50.4% in the period.

Looking at our Property and Casualty insurance business, we recorded a net premium of $24 million in the second quarter, an increase of 3.9%. Total operating revenues were $27 million and operating income was $2.8 million, up $0.5 million or 21.7% from a year ago. The segment loss ratio improved by 540 basis points to 48.3%, while the operating expenses ratio rose by 310 basis points to 52.5%.

Consolidated income tax expense for the three months ended June 30, 2009 increased by $2.8 million or 74% from the same period last year, due to a new special additional tax, as well as higher taxable income resulting from an increase in operating income. This special additional tax is 5% over the tax liability and will be effective for three years beginning with the income tax return corresponding for the year ending December 31, 2009.

Now, I would like to discuss the company’s overall financial condition and provide some supplemental information. As of June 30, 2009, total assets were $1.58 billion, up about $30 million on a sequential basis. Total investments and cash were $1.1 billion at the end of the quarter, relatively unchanged from December 31, 2008. Approximately 90% of the portfolio is invested in fixed income and the other 10% in equity, including mutual funds.

Our total investment in fixed income securities breaks down as follows: 52.8% is comprised of U.S. Treasury securities, obligations of government sponsored enterprises, and obligations of the US government instrumentalities; 8% in mortgage backed and collateralized mortgage obligations that are US agency backed; 20.1% in obligation of the government of Puerto Rico and its instrumentalities; and 6.1% in obligations of US states and municipalities. The remaining 13% is held in high quality corporate bonds and non-agency mortgage backed securities.

Our net premiums and other receivables increased by $12.2 million from December 2008 to $249.4 million. The rise is largely the result of increases in premium receivables from CMS as a result of their risk score premium adjustment, which was subsequently collected in July 2009.

In terms of our medical claims payable, they were $238.7 million as of June 30, 2009, an increase of $0.1 million from March 31, 2009. The number of days claims payable as of June 30, 2009 was 58.8, a slight increase of 0.8 days from 58 as of March 31, 2009.

For the three months ended June 30, 2009, net cash generated by operating activities amounted to $19.1 million, principally reflecting a net increase in premiums collected. As of June 30, 2009, we had $42.7 million in cash and cash equivalents in our work balance sheet, compared with $108.7 million on March 31, 2009.

Since authorizing our share repurchase program in the first quarter of 2008, we have bought back approximately 3 million Class B shares at an average price of 12.16 or a total of $36.1 million. The repurchase was conducted in accordance with rule 10-B18 under the Securities Exchange Act of 1934 as amended.

The company continues to have approximately $3.9 million earmarked to share repurchase under our current board authorization. Given the significant increase in the share price over the last several months, we have meaningfully curtailed our repurchase activity.

In summary, our second quarter and year-to-date financial results reflected continuous solid top-line growth, ongoing improvement in the Medicare MLR, and positive operating cash flows. While the commercial segment has a somewhat higher MLR than originally estimated, we continue to anticipate that our overall MLR will decline in the second half of the year, as well as for all of 2009.

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

Ramon Ruiz-Comas

Thanks Juan-Jose. Now, let’s review our 2009 guidance. We are projecting 2009 consolidated operating revenue of between $1.92 billion and $1.99 billion, reflecting the following. Total fully insured medical enrollment is expected to be between $10 million and $10.3 million. Total self-insured medical enrollment is expected to be $4.9 million and $5 million.

We look for the consolidated loss ratio to come in between 84.8% and 85.8%. The managed care MLR is anticipated to be between 88.8% and 89.8%. We expect our consolidated operating expense ratio to be between 14.3% and 14.7%. Our consolidated operating income is anticipated to be between $90.5 million and $99 million, a 13% increase at the midpoint of the range when compared to 2008. We expect our 2009 consolidated effective tax rate to be between 26% and 27%.

Lastly, we are looking for earnings per share to be in the range of $2.03 to $2.13, based on $29.6 million diluted weighted average shares outstanding, excluding any realized and non-realized gains or losses on investments. We have raised our guidance for this year’s earnings per share by $0.10, to mainly reflect the accretion from the acquisition of La Cruz Azul.

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

Questions-and-Answers Session


(Operator Instructions) Your first question comes form Charles Boorady - Citi.

Chris Carter – Citigroup

This is Chris Carter on for Charles. It looks like you’ve been pretty active in investing this year, and I’m just wondering how we should think about your capital deployment strategies going into the back half of ‘09 and 2010 as you almost have reached your repurchase authorization.

Ramon Ruiz-Comas

Can you repeat the question?

Chris Carter – Citigroup

Yes. I’m just curious how we should think about your capital deployment strategies going into the back half of 2009 and 2010.

Juan-Jose Roman

Yes, mostly for 2009, in terms of our capital deployment, we still have $3.9 million to repurchase shares. We will keep our program open for the rest of the year. Until we complete that repurchase, there are no new approvals by the Board of Directors.

In terms of our system as we mentioned, we still have capital to be used to complete our investment in our new system, but as I mentioned, we are ahead on that and we probably still have for 2010 about $20 million in capital investment in the new system.


Your next question comes from Tom Carroll - Stifel Nicolaus.

Tom Carroll - Stifel Nicolaus

There seems to be a number of moving parts in your reported quarter here today. Why don’t I start by just asking you, how do you see kind of your run rate for the remainder of the year, based on what you reported maybe after adjusting out some of the one time items that impacted the quarter.

Juan-Jose Roman

Basically if we go by businesses, let’s start by Medicare Advantage. Advantage is tracking very well as compared to the prediction, even better. Even if you exclude the portion that have to do with ‘08, keep in mind that a portion of the risk adjustment is related to 2009.

So what that means is the premiums for the next six months in the MA business will be higher than has been reported before the recent adjustment. So we do expect the MA business to be kind of inline with reported numbers after you exclude the ‘08 numbers.

So we do expect that the result of the MA business will be better definitely than expected. Keep in mind that, in the second half of the year, for our optimal project, which is a non-dual, we will see the effects also in the second half of the year of the [Inaudible]. So MLRs will be lower for the second half of the year.

In the case of the reform business, as I mentioned the contract was extended to October. Maybe let me add to that; they were extended with the same premiums. So premiums will be flat or the same as compared to what you have been seeing for the six months. Although we have noticed that membership is increasing as compared to the first three months of the year. So in terms of MLR, it should be kind of stable.

We are not seeing any significant trends. So we do expect the reform business actually to be kind of flat for the rest of the year in terms of the MLR, and no surprises there; a slight decrease probably in the fourth quarter.

Finally in Commercial, let me maybe give you a little more color. In the case of Commercial, part of the groups or the sector that we have is what we call the local government employees. The program changed a little bit, where it now required people to get pharmacy or drug benefits; however, it has a cap. What we have been seeing during the first six months is that basically the majority of the members that we do have, have used 100% of the benefit of the drug benefit.

So what we do expect is, especially the pharmacy part related to the government employees will drop dramatically because it is kind of similar to what happened with the MA product. So in that sense, costs will decrease significantly. So we do expect that the government employees program MLR will drop significantly in the second half of the year.

To the rest of our commercial business, we do expect the usual seasonality we will have at the end of the year. That’s why in our guidance basically, we do estimate that in the second half of the year, MLR will be lower in each or in all of our segments and overall also it’ll be lower than in the first six months of the year. Maybe one thing to mention is, in the numbers that we provided, they are not net of taxes, so many of the numbers that we just gave in this conference call are gross. So we need really to consider the tax effect.

Probably the last part is that we will definitely expect that effective tax rate will be between 26%, 27%, which is higher than last year, mostly because of the additional tax that we just adjusted as of this quarter.

So in terms of moving parts, again, many of them are one time nonrecurring, but if you take them out and look at just the pure operation of the businesses, except for the commercial, they are tracking better than our estimates, and we do expect commercial to improve and to have a better second half, because of what I just mentioned.

Tom Carroll - Stifel Nicolaus

When I do that, when I take through the nonrecurring items as you mentioned and then tax adjusted and put it on a per share basis, it looks like you’ve got about $0.28 of net favorable nonrecurring items in the quarter, so $0.63, last year $0.28. I mean is this like a $0.35 quarter? Was there negative development in the quarter?

Juan-Jose Roman

There were about $4.6 million, net.

Tom Carroll - Stifel Nicolaus

Of negative PPD?

Juan-Jose Roman


Tom Carroll - Stifel Nicolaus

Okay. Just one other; I think you had negative PPD first quarter as well, is that correct?

Juan-Jose Roman

That’s correct.

Tom Carroll - Stifel Nicolaus

How comfortable are you with it?

Juan-Jose Roman

When I mentioned the $4.6, it’s the active development of the March reserves. At the beginning of the year the December reserves, it was $10 million.


Your next question comes from Greg Nersessian - Credit Suisse.

Greg Nersessian - Credit Suisse

I guess my first question, you mentioned the swine flu, I guess the most recent CDC data has Puerto Rico at widespread status for the swine flu. Is that consistent with what you’re seeing and how are you thinking about the swine flu in the third quarter and second half of the year?

Ramon Ruiz-Comas

Yes. So far what we have seen in the preliminary data that we look at, the cost related to the swine flu has been less than $1 million up to June, but we are cautious about the third quarter and we want to see how it develops. Our understanding is that, at least in Puerto Rico we get a lot of direct coverage starting in June, because we are conservatively precautious about what the impact we could be; it is hard to predict.

So far, it has not been that significant; again, it’s less than $1 million, but we want to see the third quarter. We think it’s going to be the key quarter really to get a good understanding of what’s going on or what will be the effect of the swine flu. Again, because of the big coverage in the press really in Puerto Rico, it started in June when the first cases were reported or the first deaths were reported.

So far there have been about 18 deaths in Puerto Rico which have been related to that. So we are still waiting to see how we’ll develop.

Greg Nersessian - Credit Suisse

But you think you’ve adequately reserved for potential swine flu cases in the second quarter?

Juan-Jose Roman

We think so, we think so.

Greg Nersessian - Credit Suisse

What about the spike in drug utilization amongst the local government employees? Why do you think that’s attributable solely to that market segment and not to your other commercial business?

Juan-Jose Roman

We did look at that separately, so we did put together the data for that group standalone so we can look at it. We compared it to the budget and the premiums that we get for that specific group. It really did have to do with a change in the policy.

For this year they required everyone, because it was before they can elect to get the drug coverage or not. Starting this year, with that policy starting January 1, they require them to be covered, but they also put a cap of about 1500. So what we are seeing is that many of them use the benefit during the first six months.

Actually we did run data to see how many of them were already very close to the cap, and the majority, they were already at the cap so they will not incur any more expenses in the second half or they were very close. That’s why we know that the second quarter, at least in that portion, the pharmacy, we will have a savings.

We also looked at what we call groups, which is basically employers, and the pharmacy trend is actually running at about 2% or 3%, so it’s under control. Let me add, in the government employee, it’s running about 15%.

Ramon Ruiz-Comas

I think it’s very important to recognize that this year there was a change in government in Puerto Rico and I think one of the things that the new governor talked about when he started his office was that he was going to reduce the number of governmental employees.

So actually one of the things that we saw normally happened, is that there was a lot of uncertainty about how many employees were going to be dismissed and fired. Actually the number that have retired and have been dismissed is around I think between 4000, 5000 employees. So actually it was lower than the initial numbers that they were talking about, that it was about 30,000.

So we might see that the level of uncertainty should go down a little bit during the second part of the year, but in the first part of the year, it was something that was discussed as part of the governmental strategy to reduce the amount of expenses in the government of Puerto Rico.

Greg Nersessian - Credit Suisse

Then the last question was on the reform business. So your contract I guess has been extended through October; are all the contracts, including yours, going out to bid this year?

Juan-Jose Roman

Yes. There are eight regions, and all of them will go out for bid.

Ramon Ruiz-Comas

And we plan to participate in all of them.

Greg Nersessian - Credit Suisse

In all eight regions; and they are all being put out to bid on a risk basis, including Metro-North or no?

Juan-Jose Roman

It looks like it. It’s not clear yet, the Metro-North, but it looks like all of them are at risk, including Metro North. That’s one of the clarifications. We are in the process of clarifying that.

Greg Nersessian - Credit Suisse

Okay, so it’s possible that if you win the contract, you could potentially be serving that one on a risk basis. Are you concerned at all that you may lose any of your existing contracts?

Juan-Jose Roman

Well, you never know, but we feel very confident. We think that our results happening there and we have demonstrated to the government, our ability to control costs, especially in the Metro North. We are doing very well or the government is doing very well based on the initial savings we have provided to them. So there is some confidence from our part, that we will renew them based on our performance.

Ramon Ruiz-Comas

We feel that we have been a partner with the government, therefore we have been there. In difficult situations we have stepped up, so we feel comfortable that we should renew the regions that we have.

Greg Nersessian - Credit Suisse

Is there a price component of the bid? You are always worried if there’s a price component, somebody is going to underbid you. Is that a part of the bidding process, that criteria?

Juan-Jose Roman

Well, that could happen, but it will depend. It’s hard to say, Greg, however, since all eight regions are up for bid, that should give us a lot of chance really to retain the ones that we have. Although as Ramon mentioned, we probably will bid for all of them, not that we plan to win all eight regions, although that could happen. You always can see and negotiate or discuss the rationale with the government.

At least that has been the case in the past; that not always it’s just pricing, you need to be credible and we do have the best data to demonstrate how much it costs. We actually have demonstrated to the government, when we took the Metro North this year, that we were able to reduce their costs. So we suppose that will be part of the discussion and negotiation process, we will see.

Ramon Ruiz-Comas

Also, one of the things that we are aware is, we have been in the reform for almost 40 years. So we have the experience to manage one region; it’s not very easy. You have between 150,000 and 200,000 members. So actually not too many companies have the capability and have the strength, financially speaking, to have regions in the reform business.

Therefore we think that we are very serious when we compare our bids. We feel that we have the responsibility to work with the government. We are very proud as to our cost initiative, to reduce the cost of the program, so the government can have savings and we can produce the results that they expect.


(Operator Instructions) Your next question comes from Justin Lake - UBS.

Justin Lake – UBS

I just wanted to get a little bit more color on the negative development. It sounded like you said there was $4.6 million of intra-year and then another $10 million of prior year.

Juan-Jose Roman

No, let me clarify. If you get year-to-date, up to June 30, what we have is the $10 million of the December 31 negative development. If you isolate the second quarter alone, then we have about $4.6 million.

Justin Lake – UBS

Okay, and all of that is prior year? Is there any intra-year development in there?

Juan-Jose Roman

The $4 million?

Justin Lake – UBS

No, within your development, is there any intra-year development or is it all versus the prior year?

Juan-Jose Roman

No, the $10 million is just 100% prior year. The $4 million of March, there might be some small adjustment to the December, but it’s mostly the month of March.

Justin Lake – UBS

As far as your Medicare Advantage looks, can you tell us how you bid for 2010 as far as margins and what kind of cost trend you bid to?

Juan-Jose Roman

Yes. Probably in the case of the dual eligible is where we will have the most significant change, is that we’re changing our product and our model, basically where in the IPAs now we’ll assume much more risk. So in terms of the bidding, we considered the fact that we changed our model.

We do expect our rates to increase or at least we submitted an increase in our rates based on the trends of our program. So overall, although the benchmark is basically flat or minus 0.3 for Puerto Rico, our bid is a little higher than this year in terms of the premiums.

We understand that the margins will be kind of similar to this year, no major changes really in terms of the margin. We think we will not have a significant increase in members, so it will be kind of a 5%, 10% membership growth next year; so it will be kind of a flat year in that sense. So membership is 5%, 10% which is kind of average now and in terms of the premium, there will be a slight increase in the premiums that we submitted to CMS, because of the trends we are seeing when we submitted our trends.

In terms of the cost, again, in the dual eligible we just changed the models, so that will impact our costs and we will be more steady actually. In the non-dual, we did make some adjustment, although they are minor, in terms of the benefits that we provide. We reduced some of them.

Justin Lake – UBS

Then just finally, it looked like the margins in your life insurance and P&C businesses did very well in the quarter. I’m just curious; do you feel like these are sustainable run rate margins or do you feel like there’s some out performance here in these businesses right now?

Juan-Jose Roman

In the case of the Life, I think that is sustainable, that basically the improvement has a lot to do with the growth that we have in the cancer product, which is very profitable.

In the P&C, that probably is the one we keep looking at. Although the end results are doing well, we’ll keep a watch on that one, basically because of the soft market that we are seeing and the economic situation, where many of the new business is really slowing down.

If you remember, basically that business does a lot of dwelling and new loans for new housing and outdoors are really very low now due to the current situation. So probably that’s the one that we’ll keep an eye on it, seeing how it’ll develop for the rest of the year, but the life company definitely is looking very well on track in the second year of what you saw in the first half.


Your next question comes from Nicole Viglucci - Accipiter Capital Management.

Nicole Viglucci - Accipiter Capital Management

Of the 100 to 150 basis point increase in the commercial MLR for guidance for 2009, if you could just break that out into components, how much is utilization in the government business and how much is swine flu?

Juan-Jose Roman

I will have to look at that Nicole, I don’t have that detail with me.

Nicole Viglucci - Accipiter Capital Management

Okay, if you could get back to me, I’d appreciate it.

Juan-Jose Roman

Swine flu probably, I think we are estimating 50, 60 basis points.

Nicole Viglucci - Accipiter Capital Management

50 to 60 of 100 to 150?

Juan-Jose Roman



Thank you. There are no further questions in the queue. I would like to turn the call back to management at this time for any closing comments.

Ramon Ruiz-Comas

Well, I first want to thank you for your participation in the conference call. I would like to leave you with our final thoughts. Triple-S Management has a strong competitive advantage that has been further solidified with the acquisition of La Cruz Azul de Puerto Rico and in consolidation of the Blue Cross Blue Shield Brand in Puerto Rico and the US Virgin Islands.

Puerto Rico remains a great place for you and for us to operate. We know the market, and as market leaders, we have an ample opportunity for growth. There is also still many opportunities for us to improve our operations and the profitability of our business, as well as levering our infrastructure. Our financial position is sound, which will support us in whatever economic climate we find ourselves over the next 12 months.

Finally, we have sufficient capital to fund our growth, and we have not only the best employees, but an extremely capable and seasoned management team. Juan-Jose and I would like to thank you for joining us today, and we look forward to updating you again with our second quarter results. Thank you.


Thank you. Ladies and gentlemen, this concludes the Triple-S Management Corp. second quarter 2009 results conference call. If you would like to listen to a replay of today’s conference, please dial 1303-590-3030 or 1800-406-7325 and enter access code 4102405#.

Thank you for your participation. You may now disconnect.

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