Triple-S Management Corp. (GTS) CEO Roberto Rodríguez on Q2 2016 Results - Earnings Call Transcript

| About: Triple-S Management (GTS)

Triple-S Management Corp. (NYSE:GTS)

Q2 2016 Earnings Call

August 4, 2016 9:00 AM ET

Executives

Kathleen Waller - Investor Relations Contact & Media Relations

Roberto Rodríguez - Chief Executive Officer, President and Director

Juan Jiménez - Chief Financial Officer

Analysts

Peter Costa - Wells Fargo Securities

Kathleen Waller

Good morning, and welcome to today's conference call. We are going to discuss the Second Quarter 2016 Earnings. With us today are your hosts, Bobby García, President & Chief Executive Officer; Juan José Román, Executive Vice President and Chief Financial Officer. Also, in the room are Madeline Hernández, President of Managed Care, and Liliana Rivera-Corcino, Corporate Controller.

I'm sure all of you have heard the Safe Harbor statements before, but we still need to get through this housekeeping issue. Each quarter, Triple-S Management executives will provide their current view of the company's future. This means that they will be sharing forward-looking information with you. As you know, these statements can be affected by risks and uncertainties involved in the business. Despite management's best efforts, what actually happens may be immaterially 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 new 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 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 Shortly after then, you'll find an archived version on the Investor Relations page at the company's website at, www.tryiplesmanagement.com. If you do not have a copy of today's news 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'll get one to you immediately.

With that, I'd like to turn the call over to Bobby García. Bobby, please proceed.

Roberto Rodríguez

Thanks, Kathy, and good morning, everyone. Thanks for joining us today as we review our second quarter results. This morning, we announced second quarter revenues of $752.7 million and pro form net income of $2.8 million, or $0.11 per share. While we're not satisfied with these results, we're confident that the organizational changes we made, along with our continued focus on strategically enhancing core capabilities are positioning the company well for bottom line improvement in the remainder of 2016 and top line growth in the coming years.

I want to highlight two key drivers of the quarter's results and share our perspectives on how we are addressing them. First and most importantly, our premium revenue declined by $25 million or 3.3% year-over-year, driven mostly by a reduction in membership. For our Medicaid and Commercial businesses, this is a direct consequence of the weak Puerto Rico economy and the resulting outward migration.

For our Commercial business, it also reflects our continued underwriting discipline balanced partially by premium increases. In MA, it mostly reflects the rate reductions mandated under the Affordable Care Act. For pursuing a number of initiatives to counter these trends, leveraging technology, data, and our strong brand to retain and grow our membership, we're investing in well-researched institutional and product campaigns, agent and retention strategies for MA, sales and distribution capabilities and provider engagement. We continue the revenue management strategies we described on prior calls and our resolve to become a 4-Star MA plan.

These investments are beginning to reap benefits. For example, the decrease in our Commercial membership which has been tapering in recent months grew slightly in the month of July. And our MA retention rates had improved this quarter relative to the first.

Greater engagement with our primary physicians has accelerated the completion of annual health assessments to 81% of the membership compared with 68% in the first half of last year. While this has increased claims expense by approximately $3.7 million during this first half of the year, it helps improve quality of care and Star's measures. Similarly, the roll-out of our new capitation model in MA has aligned PCP and PMG compensation with quality retention and performance measures. As a result, Star rating modeling is showing raw score improvement among our participating providers.

The second key driver of our quarterly results was $16.4 million unfavorable reserve development in the Commercial and Medicare segments. This development was mainly caused by transitory timing issues in the processing of claims adjustments. Excluding prior period reserve developments, adjusted net income for the second quarter of 2016 and 2015 would have been $12.7 million and $9.3 million, respectively. This suggests that despite the current operational and financial results, the underlying trends and business fundamentals remain stable.

To address the identified claims issues, we are working closely with our providers to improve their coding, submissions and reconciliation procedures, making incremental investments in our systems, data analytics, and reporting capabilities, and enhancing our internal processes. These measures, all aimed to increase the consistency of our reserve estimates, enhance the predictability of our earnings.

In closing, I'd like to mention two other important developments this quarter. The first is Medicaid. We successfully concluded rate negotiations for the contract year that began on July 1, and has anticipated continue serving the same two regions. New rates are approximately 4.5% lower, reflecting better-than-expected utilization over the last 15 months. The Puerto Rico Government is current on its premium payments and considers the Medicaid program among its top three public service priorities.

The other important development is the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act. PROMESA, as it is known, establishes its fiscal controls and an orderly mechanism for Puerto Rico to restructure its $7 billion (sic) [$70 billion] (06:17) in debt load. It also mandates the creation of a roadmap to resume economic expansion.

Importantly, a Congressional task force was established to draft this roadmap, and among its duties, it must evaluate the Island's healthcare delivery system, including equitable access to federal healthcare programs. We're encouraged by its passage and are working closely with the Puerto Rico healthcare community to present proposals that ensure adequate, permanent funding for Medicaid and Medicare Advantage on the Island.

Overall, we're optimistic that PROMESA marks an inflection point for Puerto Rico's economy, and believe that by staying the course with our strategic transformation program will drive short-term operational improvements in clinical excellence while repositioning the business for long-term growth and greater shareholder value.

I'll now turn the call over to Juan José to provide more specifics about our quarterly financial performance and give you a brief update on our key business segments. Juan?

Juan Jiménez

Thank you, Bobby. I would also like to add my welcome to everyone on this call. Let's look at our second quarter 2016 operating performance. Our pro forma net income for the quarter ended June 30, 2016 was $2.8 million, or $0.11 per share versus pro forma net income of $7.4 million, or $0.28 per share a year ago.

Our financial results were impacted by unfavorable prior period reserve development. As mentioned by Bobby, taken into consideration, this prior period reserve adjustments, pro forma net income for the second quarter of 2016 and 2015 would have been $12.7 million and $9.3 million, respectively. In addition, this quarter includes an additional tax expense of $2.6 million, or $0.11 per share due to the reassessment of certain deferred taxes.

Quarterly consolidated operating revenues decreased by $23 million, or 3% primarily reflecting lower fully insured membership across all sectors of our Managed Care segment, and a reduction to Medicaid premiums of $14.6 million recognized as a return premium to the Government of Puerto Rico. These fluctuations are offset by premium rate increases in our Commercial business. Consolidated claims incurred for the quarter were $16 million lower than those of a year ago. This decrease results mainly from the decline in the Managed Care segment's fully insured membership, partially offset by the impact of prior period reserve development.

Consolidated quarterly operating expenses were down $6 million from a year ago, and the consolidated operating expense ratio for the quarter fell by 20 basis points to 16.5%. The operating expense reduction reflects the decrease in the number of Medicaid regions we served last year from eight to two, and to a lower provision for doubtful accounts. This decline in operating expenses was partially offset by the new business-to-business tax effective in Q3 2015 and an increase in the health insurance provider fees, reflecting the at-risk Medicaid enrollment in 2016 following last April's change in the program business model.

Consolidated income tax expense was up $7 million year-over-year. The higher tax expense primarily resulted from a $3 million deferred tax adjustment associated with the reassessment of the tax rate used to measure temporary differences in our Property and Casualty segment in 2016. Also, 2015 income tax expense reflect the impact of a tax closing agreement we made with Puerto Rico Department of Treasury last year which resulted in a net tax benefit of $3 million.

Now, let me focus on a discussion on the Managed Care segment quarterly results. In the Medicaid business, premium were down $24 million compared to last year, primarily due to a decrease in member month enrollment resulting from Puerto Rico's population decline. The decrease includes the recording of the $14.6 million return premium we just mentioned.

Let me explain. Medicaid claims incurred for the period decreased by $24.3 million, resulting in an 89.3% MLR, 120 basis points lower than last year, due primarily to favorable prior period reserve development and lower membership. The prior period reserve development was, in part, responsible for generating a profit in excess of the 2.5% maximum margin which made even necessary for us to record a return premium.

In other words, approximately $14 million of the favorable reserve development decreased claims incurred, but at the same time require us to reduce premiums earned by a similar amount. As a result, the favorable prior period reserve development is not reflected in our net income for the quarter.

Medicare Advantage premiums were down $6 million or 2% due to lower enrollment and an average 2.5% reduction in 2016 reimbursement rates compared to last year. Claims incurred decreased by $5 million or 2%, and the MLR remained constant at 86.6%. Excluding the impact of prior period reserve developments in 2016 and 2015, and moving the risk score revenue adjustments for mid-year and final 2015 to their corresponding periods, the Medicare MLR increased 280 basis points. This increase primarily reflects higher Part B drug costs mainly related to cancer and rheumatoid arthritis and the effect of the aforementioned reduction in Medicare rates.

In the Commercial business, premiums earned increased $3 million, or 2%, primarily reflecting a 7% year-over-year increase in average premium rates, partially offset by a decrease in fully insured member month enrollment. The lower enrollment has been largely driven by attrition within existing accounts, reflecting the protracted weakness in the Puerto Rico economy, and our continued underwriting discipline.

Commercial claims incurred increased by $11 million or 6% during the 2016 period. The MLR was 89.2% or 380 basis points above last year. The higher MLR reflects the impact of unfavorable prior period reserve development. Excluding the effect of prior period reserve developments in 2016 and 2015, the MLR would have decreased by 100 basis points, reflecting the underwriting discipline I just mentioned. Claims trends in this business continue to be stable, reflecting a single-digit increase in pharmacy trends and a slightly negative in patient trend.

Moving now to our balance sheet. Our investment portfolio totaled $1.5 billion as of June 30, 2016. Of this total, only $26 million, or 2% of the portfolio is held in Puerto Rico Government obligations. Since $16 million of these obligations are escrow bonds collateralized with U.S. obligations and the remainder was incurred last year, our exposure to Puerto Rico rate is minimal.

I will also like to highlight the fact that we continue to receive payment from the government accounts, and Medicaid receivable balances related to the new contracts are up-to-date. Day's claims payable as of June 30, 2016, were 52 days, one day lower compared to the end of 2015.

For the six months ended June 30, 2016, net cash used in operating activities was $11 million, down $87.3 million when compared to last year, reflecting lower claims payment in 2015 related to the startup of the Medicaid at-risk contract.

We continue to repurchase our common stock in the open market. During this quarter, we bought back approximately 285,000 shares under the current repurchase program authorized in November 2015. As of June 30, 2016, we have approximately $6.8 million remaining under this program. Outstanding shares as of June 30, 2016 were approximately 25 million.

We will now proceed to our Q&A section. Operator, we will now open up the call for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the Peter Costa with Wells Fargo Securities. Please go ahead.

Peter Costa

Good morning, guys. A couple of questions for you. The first on the Medicaid rate cut, how much of that would be offset by the givebacks that you've been making in Puerto Rico already to the government? And also, are there any other changes that would offset some of the 4% or 5% rate cut?

Roberto Rodríguez

Peter, we're having a little bit difficulty hearing you. There is an echo on your line from our side. Could you please repeat the question?

Peter Costa

Okay. Is this better?

Roberto Rodríguez

A little better, yes.

Peter Costa

Okay. Regarding the 4%, 4.5% rate cut in Puerto Rico Medicaid, can you tell us how much of that is offset by the givebacks that you've been making already? Are they better performance, and also are there any other changes that would offset some of that rate cut?

Juan Jiménez

Hi, Peter. This is Juan José. So the 4.5% basically reflect the experience during the last year. Basically, the excess profit that we have, or that has been created as we got into contract that will continue for the next year. So that actually say, let's call it, available for use on the next year and any excess will be measured now concerning not only the past 15 months, but also the next 12 months during the year. So it was extended. There was an amendment as part of the contract of the new negotiation to extend the excess profitability. So in other words, the 4.5% really represent the utilization trends, so that should be the adequate rate. However, since the calculation for the excess profit was extended another 12 months, the accumulated excess as of June still available to offset or to reuse we can call it next year, if we still have excess next year, then it will be shared between the government and us.

Peter Costa

Okay. Thank you. And then in the quarter, we calculate there were some out-of-period risk adjustments as well on the Medicare book. We calculate that to be around $12 million. Is that the right amount to think of this as out-of-period risk adjustment from settlements of the Medicare risk scores?

Juan Jiménez

The adjustment for mid-year was $11 million, and the final, 2015 final was $14 million.

Peter Costa

Okay. So $11 million in this quarter?

Juan Jiménez

Yes.

Peter Costa

Okay. And then can you tell us how far along you are in your changes and your reviews to the claims payment program and getting providers updated in terms of how they're submitting claims? It seems like it turned into a relatively large unfavorable this quarter. So are we done with that, or should we expect more of those unfavorables coming next quarter or next year? How does that play-out?

Juan Jiménez

Yes, Peter. Some of – there are some specific, right? So, we think with some of them were done, the reserve for this quarter, completion factors will decrease. So, we expect that we have, for the reserve as of June, that they are adequate. So, we provide, if we can call it, for any other issues or profit, the timing of the processing of the claim.

We understand we have provided enough specifically, again, because we review the completion factor to establish the reserve as of June. We're still working with some of the – from our side, getting better visibility, better data, better analytics to improve the establishment of the reserve while also working with our providers, trying to get a better timing in term of how fast we get from them. Their claims as well as the timing for them to reconcile between what they charge and what we pay them. Sometimes that's what delay a little bit more than anything.

If we denied some claims, they could take a long time to reconcile and came back to us. And when we're talking about hospitals, then that could be right – significant numbers that could impact the last when we establish reserves. But I think for the quarter for June because as what we saw in the quarter, completion factors were decreased. We're trying to really have, considering to the June 30 reserve, the impact of what happens, there's still some work to go. We think we have captured, at least internally, most of it, but there's still work to be done.

Peter Costa

So let me see if I understand. So you made adjustments to your reserves as if you've gone through all your providers and gotten them sort of re-educated on how to submit claims and whatnot. So that's already taken into account. So we really shouldn't expect anything further as you continue your process improvements?

Juan Jiménez

You are right. So part of that process, as a reminder, we changed ICV to IC retain in October. So there has been, what we saw, a little bit this quarter was the impact, some delays in submitting claims, and these really were a little bit tied to the changes in IC retain which was October 1, 2015. So some of that should be gone by now. So, we do expect to see more stable submission of claims from the provider's side. From our side also, we continue to make changes in our operation, prolific changes, just to make sure we detect – especially that we detect any anomaly, abnormality in the trends, or the trends on how they submit their payments and how we actually process them.

Roberto Rodríguez

Yes, Peter. If I could just add one thing, there's another element that's added to it which is the run-out from the form agreement with the government under TPA program, [indiscernible]. And since the providers were given up to December to submit claims, that led to somewhat of a backlog in those submissions and in adjustments. So, as we've done that to kind of direct go through the snake, we expect that this will decrease significantly into the end of next quarter.

Peter Costa

Got it. And then my last question, when we look at your pharmacy trend, it's a problem everywhere, but in Puerto Rico, it's a bigger percent of the overall cost, the medical cost for members. And it continues to be a problem for you guys as well in terms of the rate of growth in pharmacy. Have you looked at your current PBM contract and thought about changing that at this point? Are you content with how it's performing? And when is that contract up for renewal?

Roberto Rodríguez

I'll address that, Peter. We have renegotiated one of our main PBMs effective June. There's been a reduction in – or some change in terms that will represent savings going forward. Also, we have notified two of the PBMs that we will no longer continue with them. One, that's already effective. The other ends in February. And that means that we will, from then on, have only two PBMs. Right now, we have four. By February next year, we'll have two.

Peter Costa

Got it. And so you say there's some changes that will come in this June already, or started this June, or is that next year?

Roberto Rodríguez

No. It's this June, mid-June of this year, so you'll start to see the impact in these quarterly results, and that will continue going forward to term the contract.

Peter Costa

But what would be the impact of that change to your earnings?

Juan Jiménez

I think it will be around, and this is also an estimate of around $2 million on an annual basis of savings.

Peter Costa

Okay. Thank you.

Operator

There are no more questions at this time. This concludes the question-and-answer session. I'd like to turn the conference over to Bobby García for any closing remarks.

Roberto Rodríguez

Okay. Well, thanks to everyone for attending the call. We appreciate your continued interest in Triple-S and look forward to seeing many of you at upcoming conferences this fall, specifically Wells Fargo in September and Credit Suisse and Stifel in November. Thanks, again. Good-bye.

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