Triple-S Management's CEO Discusses 2Q 2013 Results - Earnings Call Transcript

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 |  About: Triple-S Management Corporation (GTS)
by: SA Transcripts

Triple-S Management Corp. (NYSE:GTS)

2Q 2013 Results - Earnings Call Transcript

July 31, 2013 08:00 AM ET

Executives

Kathy Waller - Investor Relations

Ramon Ruiz-Comas - President and Chief Executive Officer

Amílcar L. Jordán-Pérez - Chief Financial Officer

Alan Cohen - Chief Marketing Communications Officer

Liliana Rivera-Corcino - Corporate Controller

Analysts

Ralph Giacobbe - Credit Suisse

Peter Costa - Wells Fargo Securities

Tom Carroll - Stifel

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Triple-S Management's Second Quarter Conference Call on 31 July 2013. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Kathy Waller. Please go ahead.

Kathy Waller

Thank you. Good morning, everyone. Welcome to today's Second Quarter 2013 Earnings Conference Call. With us today are your host Ramon Ruiz-Comas, President and Chief Executive Officer and Amílcar L. Jordán-Pérez, Chief Financial Officer. Also in the room are Alan Cohen, Chief Marketing Communications Officer and Liliana Rivera-Corcino, Corporate Controller.

I'm sure all of you've heard the Safe Harbor statements before but we still need to get this housekeeping issue out of the way. Each quarter Triple-S' Management Executives will provide a current view of the company's future. This means that they will share forward-looking information with you. As you know, these statements can be affected by risks and uncertainties involve in the business.

Despite management's best efforts, what actually happens maybe materially different from what you hear in today's call. To get a better understanding of why this may occur please look at the Safe Harbor section in today's press release and in the company's periodic filings with the SEC. In addition, the information shared on this call should be considered current only as of 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 archive version on the Investor Relations page of the company's website at www.triplesmanagement.com. If you don't have a copy of today's release already, you can either find one on the company's website or you can call me, Kathy Waller, at 312-543-6708 and I will get you one immediately.

In addition, you can always make sure you're on a distribution list going forward if you call. With that, I'd like to turn the call over to Ramon. Ramon, please go ahead.

Ramon Ruiz-Comas

Thank you, Kathy. I am pleased to welcome everyone to this morning call. Before providing an overview of our second quarter result on discussing 2013 guidance, I will first like to sincerely thank our management team and employee for accomplishing so much in the period. We've made great progress on several strategic initiative, which I will discuss shortly.

We are pleased with our performance in the period and for the first six months of the year. In the second quarter of 2013, our consolidated revenues were $599.8 million and net income was $20.1 million or $0.72 per diluted share. Pro forma net income was $14.9 million or $0.53 per diluted share compared with $16.6 million or $0.58 per diluted share in 2012. The 2013 consolidated loss ratio was 82.9% and the medical loss ratio was 85.8%.

Our reported GAAP (inaudible) results include among all one item, a $7.7 million adjustment to a company's deferred tax assets. This adjustments reflects recently enacted legislation that raised the tax rate for Puerto Rican corporation from 30% to 39% (inaudible) to January 1, 2013. Our Managed Care adjusted MLR for the second quarter was 50 basis point higher when compared to the same second quarter last year. Primarily reflected the Chief Utilization, resulting from our early Easter holiday in 2013 as we mentioned it's our previous earnings call.

The year-to-date adjusted MLR continued to show improvement year-over-year that stems mostly from the change in American health product declines on our new PBM contract. Our revenue decline year-over-year but were in line with expectation. We have mentioned previously and we are willing to experience some reduction in membership on our market share in a exchange for improved performance.

I am particularly proud of a positive result achieved within our [MA] segment. The actual plans we implement in 2012 is working and we are nearing completion of a realignment of our Medicare union into one organization.

Now let me utter the quarter's accomplishments. On June 27th, we announced extension on expansion of MiSalud contract with the Puerto Rican Health Insurance agency. We are pleased to have extended this important contract, with the Puerto Rican government and to have broaden the scope to cover all MiSalud beneficiaries. The MiSalud program serves more than 1.4 million members across Puerto Rico.

Under a 12-month extension, we commence July 1, 2013 Triple-S [MiSalud] will receive of member (Inaudible) administrative fees for its services, and will not be our (inaudible) for the program. The three additional regions will be phased in by October 1st, 2013, as a result we will incur approximately $2 million of expansion costs in the third quarter.

These costs are accounted for in the revised guidelines online in our press release. We are currently awaiting final CMS approval on the contract terms. In fact some concessions made by our administrative fees as part of their negotiation, we expect this contract to remain profitable. Our infrastructure is largely in place for a increment of volume gains from the added membership, you have to offset the (Inaudible) pricing. We also expect to generate synergies and eliminate re-contract fees as we streamline the regional office network.

We remain committed to work in hand in hand with the government to reduce this type of program delivery cost without effecting healthcare (Inaudible).

Turning to Medicare Advantage, as I mentioned earlier, we have made significant progress in [stabilizing] particularly our American Health. The modification and benefit design changed in our capitation agreement with primary care physician as well as reduced fees agreed by especially within our newly created (Inaudible) provider networks all playing a role in the improvement.

We are also continuing to generate pharmacy savings from our new PBM relationships. We are monitoring this business closely and look forward to reporting further progress. Allow me to provide a brief comments on 2014 [MA] rates. In April CMS issue its 2014 final rate notice on CMS adjust their 2014 a bank notice rate calculation methodology to reflect underlying the similar rate structure in Puerto Rico in comparison to the [restrict] its base. This mitigates the preliminary revenue cost anticipate in their bank notice.

As previously disclosed the (Inaudible) cost will impact Puerto Rico (Inaudible) through 2017, accordingly, we have adjusted our benefit and network strategy for 2014. Moving forward we will continue to adjust benefit and network structure and improve operating efficiency to offset these costs.

With regard to our capital structure we are pleased with the success and orderly conversion of the Class A shares into Class B shares under company's secondary offering including the company's repurchase of 1 million of shares. As noted in our release and our last call, we felt that the decision to convert our shares and undertake an offering was in the best interest of our shareholders. The transaction has been driving liquidity of the leased security allow an orderly disposition of the converted shares in the market and so unified the company's share structure.

The Board also recently authorized a new open market share repurchase program of up to 11.5 million in common stock which will become effective August 1, 2013. The potential effect of the newly authorized repurchase program has not been factored in into our guidance update. During the quarter Triple-S Vida, our life insurance subsidiary signed a definite purchase agreement to acquire Atlantic Southern Insurance Company, a life and health insurance entity with strong operations in Puerto Rico and smaller operations in the British Virgin Islands, Anguilla and Costa Rica in Southern America. We estimate that we will incur transaction costs related to acquisition of approximately $0.03 per share in the first quarter. The acquisition will be slightly accretive in 2014 and provide Triple-S Management an entry point for expanding a geographic footprint. We will continue to seek complementary through this acquisition that broaden the scope of our international business.

Now let me address 2013 guidance. Based on the sustained improvement in utilization and other trends in the commercial and MA business, we're revising our full year earnings guidance to $1.95 to $2.05 per share. This revised guidance also considered the extension and expansion of the MiSalud contract under which we expect to incur approximately $2 million of expansion cost in the third quarter. The overall improvement in the Managed Care MLR, the continued benefit of our new PBM relationship and the product design change in the American Health MA business, the costs related to the acquisition of Atlantic Southern, the reduced amount of common shares outstanding after the May conversion of 1 million share repurchase, and the financial impact of the change in taxes in Puerto Rico, both are the corporate and the sales and use levels.

Investors are reminded that we consider all the moving pieces when formulating our outlook and we continually evaluate our final guidance based on current business trends and future prospects.

With that, I'll turn the call over to Amilcar to review our second quarter 2013 results in greater detail.

Amilcar Jordan-Perez

Thank you, Ramon, and good morning to everyone. Our net income for the quarter ended on June 30, 2013 was $20.1 million or EPS of $0.72 compared with net income of $17 million or EPS of $0.60 in the same quarter of last year. When compared to the same quarter in 2012, our growth revenues decreased $23.2 million or 3.7%. This decrease was largely driven by our 26.2 million decline in premiums primarily reflecting 29.2 million or 5% decrease in Managed Care premiums.

The reduction in Managed Care premium reflects lower membership in the Commercial and Medicare businesses. Membership in our Commercial business has been falling principally due to the loss of some account reflecting our risk based pricing strategy and to a greater degree attrition at existing accounts due to sustained difficult economic conditions in Puerto Rico.

In the case of Medicaid Advantage the reduction in membership is related to our MA product designed for 2013 particularly at American Health. Remember that our goal in MA was principally to improve financial performance and (inaudible) reduce membership. These strategies of growth redesign and (inaudible) contracting have proven substantial our financial performance has improved. In addition Medicare advantage premiums in the second quarter of 2012 were positively impacted by additional approval resulting from the midyear risk core adjustment and the prior year settlements on CMS.

Quarterly premium revenues at our Life and Property and Casualty subsidiaries rose by $1.4 million and $1.7 million respectively. Consolidated ASO fees were up $800,000 or 2.9% monthly in the Medicaid ASO business. Investment income increased by $500,000 mostly driven by an increase in dividend income on a higher level of investment securities which was partially offset by a lower yield due to a prevailing lower interest rate environment.

Gross revenues also improved gains on sale of securities of $1.7 million for the quarter. Consolidated claims incurred decreased by $35.4 million or 7.1% during the second quarter driving down the consolidated loss ratio to 82.9%, a 230 basis points decline. A 290 basis point decrease in the Managed Care MLR was the main contributor to this improvement which was partially offset by increase in the loss ratios of our Life Insurance and Property and Casualty placements.

On the other hand consolidated operating expenses rose by $17.9 million from the same quarter in the prior year largely reflecting cost related the special technology initiative and associated with MA business organization that began in the first quarter of 2012.

During the quarter we charged a $1.2 million special assessment from the Puerto Rico Guaranty Fund against our operations to cover the insolvency of our national insurance, our local insurer currently in this relation. This assessment is expected to (inaudible) policies charges and premiums retain after all of 2013 as provided by the Puerto Rico insurance code.

Operating expenses also include the effect of the implementation of our new company's financial and HR information technology systems for all of our entities. The operating expense ratio increased 380 basis points year-over-year reflecting the combination of the higher operating cost and lower premiums earned. On a linked quarter basis, operating expenses increased by $0.3 million.

As Ramon mentioned, we will be [reinserting] approximately 500,000 additional member of the MiSalud program effective on October 1, 2013. In the third quarter, we expect to incur additional implementation cost related to these new regions of approximately $2 million or $0.07 per diluted share.

After these expenses we expect to incur slightly higher incremental cost to manage the three new regions. During the second quarter, we have 3.7 million consolidated income tax benefit. This benefit principally results from an adjustment to our deferred tax assets following the enactment of the budget act of the government of Puerto Rico which included several amendments to the Puerto Rico tax code and (inaudible) on June 30, 2013.

(inaudible) increase in the corporate regular income tax which is effective retroactively through January 1 of this year and an increasing the -- bringing and increasing the highest margin on corporate income tax rate from 30% to 39%. The higher enacted tax rate required us to adjust the deferred taxes on our balance sheet resulting in a one-time expense of 7.7 million or $0.27 per diluted share.

Conversely our current income tax expense grows $2.8 million or $0.10 per share as a result of the previously mentioned reproductive increase in the marginal tax rate. The reason we have approved Puerto Rico tax changes also includes some new taxes like a special tax in insurance premiums earned after June 30 of 2013. This premium tax will not apply to medical advantage in Medicaid and with other premiums and also won't apply to annuities.

I'm now going to focus on the discussion of our segment results. Managed care agreements for this quarter were $499.3 million down $29.2 million or 5.5% year-over-year reflecting over Commercial and Medicare member month enrolment and the receipt of lower Medicare risk score adjustments from CMS as compared to 2012 partially offset by a moderate increase in our risk premium rates in the commercial business.

Our commercial rated group average premiums PMPM increased by approximately 1% compared to a 1.2% rated group average premium rate increase in the same quarter of last year reflecting the strong competition in the market. The Medicare Advantage average premium PMPM decreased approximately 2% compared to an 8% increase a year before largely reflecting the effect of the automatic budget spending costs established by Congress primarily referred to as sequestration for the regional adjustment reflected last year for the CMS midyear and prior year settlement.

The CMS risk score adjustment for 2013 was $6.8 million, an increase of $8.5 million from the prior year. Our MA membership was down from the same quarter a year earlier mostly due to changes in the product design for 2013 as we have previously mentioned. Managed Care segment claims for the three month period declined by $40.4 million or 8.6% from last year. The quarterly MLR for the Medicare business was 84.1%, an increase of 450 basis points from last year.

Excluding the effect of prior research developments and risk score adjustments, the Medicare MLR decreased by 50 basis points reflecting lower constraints, largely the result of the formal cost savings achieved through American Health new premium agreement with (inaudible) File 12, 0:46 and the effect of the changes in product designs for 2013 offset in part by increased utilization trends.

The MLR for the commercial business excluding the effect of changes in prior period research developments and other adjustments increased 160 basis points when compared to last year. This increase reflects slightly higher utilization and constraints and the higher level of competition has dissipated in the health insurance industry in Puerto Rico which has challenged renewal premium rates.

Overall in this quarter, we have experienced higher utilization trends due to (inaudible)File 12, 1:40 in utilization into the second quarter, following on early Easter holiday in 2013. Managed Care operating expenses were $17.3 million, higher than the prior year and mostly due to initiatives and increased (inaudible) File 12, 1:55 through greater expenses particularly those associated with the current organization on our star ratings compliance program.

The Managed Care segment currently have several IT projects on their way to ensure compliance with IT return via Blue Cross and Blue Shield Association deadline of March of 2014. On our linked quarter basis of origin expenses in this segment increased by $8.7 million or 10.6%. Our Life insurance segment generated operating income $3.7 million compared with $4 million a year ago, the decline reflect higher trends incurred principally treated by increased counter product range which have set the ground in premium revenue.

The Property and Casualty Insurance segment, which we made under pressure because of the top commercial market reported operating income of $200,000 compared with $3.5 million in the last year's third quarter. This decrease reflects higher trends incurred principally triggered by increased claims in commercial package, general liability and oral insurance product that will set the growth in premiums earned.

As I mentioned before, this segment also recorded within this operating expenses of $1.2 million special assessment to cover the insolvency of all of our insurers currently in liquidation. This assessment is expected to be recovered with policies or charges in the premiums occurred August of this year.

For the six months ended June 30, 2013 net cash generated by operating activities amounted to $24.3 million, or $100 million close to $100 million lower than last year, and this equated basically the result of the fact that last year we (inaudible)File 13,1:47 advanced payment CMS segment corresponding to unite at the end of June. We will now proceed to the Q&A session.

Alan Cohen

Good morning, we will now proceed with the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Ralph Giacobbe from Credit Suisse. Please state your question.

Ralph Giacobbe - Credit Suisse

With the recent Medicaid renewal and expansion, just wanted to make sure I understood the commentary you talked about maintaining profitability, I guess the question is where the new business sort of offset by the pricing to the ASO fee be accretive from the current base or be a little bit of drag?

Ramon Ruiz-Comas

I will say it will be reduced a little bit, the answer is yes, but what happened is that taking into consideration that reduction in the fees that we are receiving, the price that we gain additional that we look there a little bit, the reduction in fees that we are going to have. However, it is important to mention that profitability that we are expecting is within the range that we don't only expect on the ASO business.

Ralph Giacobbe - Credit Suisse

Okay, and then beyond the $525,000 and so lies from Humana, do you expect Medicaid provide to expand more in 2014?

Ramon Ruiz-Comas

We are not giving any guidance to 2014. So, what we are going to see what is the current development of what continue to happen in the economy and when we announce the 2014 guidance, we will provide you more color about what we are going to be effective in 2014.

Ralph Giacobbe - Credit Suisse

Okay, fair enough. And then the acquisition the Atlantic Southern, maybe help us understand or frame the opportunities there, in three territories, do you feel that you maybe grow organically share gain wise versus more incremental fields within these markets?

Ramon Ruiz-Comas

I will say we are open to both with, we are looking for both growth, one organically and if we are able to obtain the license of Blue Cross Blue Shield that would be very helpful, because in the case of Puerto Rico which have an economy that have a lot of companies, our US companies doing this in Puerto Rico. We are going to look for that briefing. So we are expecting organic growth, but by the same token we are going to continue to pursue opportunities in the region that we are willing to make a decision. So our objective is grow both organically and through activities in production

Ralph Giacobbe - Credit Suisse

Okay. And then I guess on the MA Star program, can you maybe update us how is your work going with the third-party sort of progressing here?

Ramon Ruiz-Comas

I will say we are working very hard, we are working very hard there. And then we receive a -- we think that we have improved but at this stage it's early to tell you whether we are going to have an increase in the rates. So we continue to work very hard. We have seen progress but at the end, we have to see the results of what CMS does to the (inaudible) rating to be able to give a conclusive answer.

Operator

The next question comes from Peter Costa from Wells Fargo Securities.

Peter Costa - Wells Fargo Securities

Back to the acquisition a little bit, it looks like a relatively small acquisition can you give us some idea the revenues there, I don't know if you said I don't think you did but can you say what the revenues are and then why do you select a relatively small acquisition to do internationally, I think your goal is to-

Ramon Ruiz-Comas

Maybe I'm sorry Peter I think as we have told you before we were working by this transaction at the same time, this was the ones first completed. You know the fact that it includes an operation in Costa Rica, it provides opportunity to pursue the license of Blue Cross Blue Shield so actually this acquisition was accretive for us in terms of the [actual bidder] I have, but at the same time it provides us a good stream. So we come into the market first through as we said before company, U.S. companies doing business in Costa Rica to pursue to offer the products that we have through the entity that is operating in Costa Rica. So that's why it is not the only transaction that we are looking for but [with the first] that was - that have been at this stage, we have a signed agreement.

Peter Costa - Wells Fargo Securities

Okay, great and do you expect to get this business rebranded in Costa Rica?

Ramon Ruiz-Comas

(Inaudible) we are pursuing that, I am not a type of person that will tell you that we have that branded until -- branding and that point, then we will mention the market in that branding.

Peter Costa - Wells Fargo Securities

And looking at the quarter's revenue, is there a medical loss ratios and adjusted medical loss ratios, it looks like you had a lot of prior period development in the quarter that was mostly tied to the first quarter. Can you break out for us how much of the prior period development in this quarter was for first quarter and how much was for prior years?

Ramon Ruiz-Comas

Maybe, Peter the details that you're maybe what I would prefer that we obtain the information and we share that information with everybody. I don't have it here at that time, can we provide you that information later?

Peter Costa - Wells Fargo Securities

That's fine, but just simple math of the MR suggested as mostly for the first quarter, why is your performance in the first quarter actually even better than look like in Q1? And that suggest there is perhaps some, you have less good year-over-year performance in Q2 relative to what you showed in Q1, just you were actually conservative here in how you looking at the second quarter or was the business a little bit deteriorated in the second quarter relative to how the first quarter look?

Ramon Ruiz-Comas

I will say remember that in this case, we mentioned before the first quarter will have good run but it includes the effect of the Easter holiday. We are very satisfied with the business when we compared it two quarters at the same time the results year-to-date. We have seen an improvement in utilization, so we need to be very careful, but we say that the deterioration because we have in fact that this year when compare to prior year we have the Easter holidays in the first quarter that will the productivity when comparing this year to last year. So when we see it as a whole, I will say we have seen improvement in our utilization trend as reflected in the overall business.

Peter Costa - Wells Fargo Securities

Okay and just more items as it start to break out, can you talk a little bit of the cash at the parent into the quarter and then?

Amilcar Jordan-Perez

I will say the cash (inaudible) was almost nil, because we utilize that in the share repurchase. However we expect to receive some cash during the second quarter to -- in the fourth quarter to -- second part of the year to, I would say to pay for their repurchase programs that were provided, the new repurchase program shares of the $11.5 million to fund that share repurchase.

Peter Costa - Wells Fargo Securities

Okay. And then can you breakout the operating income in the Manage Care business between the Medicare and Medicaid and the Commercial business?

Amilcar Jordan-Perez

Okay, for the quarter?

Peter Costa - Wells Fargo Securities

For the quarter, yes for the $13.4 million in the quarter?

Amilcar Jordan-Perez

Operating income for the quarter in the Managed Care was close to $13.4 million and operating income mainly close to 50% of that is coming from the Medical Advantage business, the MiSalud and the commercial accounting for the other 50% of the operating income.

Peter Costa - Wells Fargo Securities

Is that more on the MiSalud or is that more on the commercial?

Amilcar Jordan-Perez

More in MiSalud.

Operator

(Operator Instructions) Your next question comes from Tom Carroll from Stifel.

Tom Carroll - Stifel

Two items. I wonder if you could give us goodwill at the end of the quarter. I wonder if you could let us know your view on Medicaid enrollment by the end of the year. And then lastly, I wonder if you could maybe go over your Medicare Advantage comments again from the prepared remarks, it seems like you might have more of a headwind than we thought. Thank you.

Amilcar Jordan-Perez

I'll take the first one in terms of goodwill at the end of the quarter, we have $27.7 million, there was no change in terms of the goodwill balance at the end of the quarter.

Ramon Ruiz-Comas

Okay.

Amilcar Jordan-Perez

Most of that is related to our Medicare Advantage operation.

Tom Carroll - Stifel

Yes.

Ramon Ruiz-Comas

Okay. In (Inaudible) of our forecast for the Medicaid population, a site from the additional members we assume the same membership that we have today because it is very difficult to assume that we are going to increase, there will be increase or decrease in the Medicaid population. So for our purpose we assume that same amount that we have as of June and we had the 540,000 members that the new region bring to our business.

Tom Carroll - Stifel

Okay. And I wonder if you could just maybe go over your MA comments again for us. Thank you.

Ramon Ruiz-Comas

Can you repeat the question Peter, excuse me, Tom?

Tom Carroll - Stifel

Hey guys why don't you go over your Medicare Advantage comments again for us. Thank you.

Ramon Ruiz-Comas

Okay, in Medical Advantage I think that we have made a lot of progress and actually the progress that we report on the first quarter I would say that we want to see where they work if they know. In the second quarter, we are aligned to what happened in the first quarter. So we believe that the progress that we have done in American Health and the MA as a whole has been sustainable. I would say the modification imperative design changed in our capitation agreement with primary care physicians as well as the rebuttal in phase to especially with our new created adverse, preferred provided network has played a huge role in the improvement. Also I would say the benefit that we have obtained from the change in the premium relationships have been better than expected.

So what we say also we are going to continue, we are going for in this business closely but our expectation based on the second quarter it has been sustainable, the report of our expectation that for the rest of the year there should be no significant change.

Tom Carroll - Stifel

How about your comments that you made regarding 2014?

Ramon Ruiz-Comas

Okay, what we've said was that the CMS issue in 2014 (inaudible) and CMS adjusted 2014 are above rate calculations to reflect underlying the similar rate structure in Puerto Rico in comparison to the states. This mitigates that the preliminary revenue cost anticipate in their bank notice and what we have done is we have adjust our benefit, our network strategy for 2014 and moving forward, we will continue to adjust benefit and network structure and improve operating efficiency through our strategy cost.

So what we're saying is that we understand that we have space to continue to adjust benefit by just our network structure and by the same token, improve our efficiency to maintain the profitability or to improve the profitability through more efficiency or through growth for the coming years. So that's our strategy to continue to roll.

Tom Carroll - Stifel

Okay. I misunderstood something. But one another question as you talked here. Into 2014, do you believe that you are making more adjustments to your provider networks than benefit or vice versa?

Ramon Ruiz-Comas

There will be more or less similar somewhat.

Operator

There appears to be no further questions. Please go ahead with any point you wish to raise.

Ramon Ruiz-Comas

Okay. On behalf of Amilcar and all my group of management and myself, I would like to thank you for participating in today's call. We appreciate your time and interest and look forward to seeing many of you at our coming conference. Thank you.

Operator

This concludes the Triple-S Management's second quarter conference call. Thank you for participating. You may now disconnect.

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