CorVel Corporation
Q2 2019 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Thank you for standing by. Welcome to the CorVel Corporation Quarterly Earnings Release Webcast. During the course of this webcast, CorVel Corporation may make projections or other forward-looking statements regarding future events or the future financial performance of the company. CorVel wishes to caution you that these statements are only predictions and that actual events or results may differ materially. CorVel refers you to the documents that the company files from time to time with the Securities and Exchange Commission, specifically, the company's last Form 10-K and 10-Q files for the most recent fiscal year and quarter. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. I would now like to turn it over to Mr. Gordon Clemons.

[Victor Clemons:]

Thank you for joining us, and welcome to CorVel's quarterly review of results. The September quarter continued our recent progress on a number of fronts. Michael Combs will discuss those and the quarter in detail in a moment. I want to first take a moment to provide a broader perspective. As most of our investors are familiar, at CorVel, we've been gradually evolving our business and transitioning from the management team, which began the business 30 years ago to a third generation in company leadership. During this transition, CorVel has expanded from a workers' compensation managed care organization to a full service workers' compensation TPA, third-party administrator that is, and from a monoline workers' compensation enterprise to an organization handling claims and other coverage areas such as Regular Health, Medicare and also general liability. Our workers' compensation TPA has been the fastest growing entity in its space, and more importantly is delivering results, which substantially outpace those of the traditional competitors in the industry. CERiS, our payment integrity vendor in the larger health care market, continues to become a more and more important part of CorVel, and SYMBEO, our digital payments and payables enterprise, is as well. While we transitioned our management team at a careful pace over the last 10 years, today, CorVel is increasingly benefiting from the processes and disciplines being established by the newest generation of management. Some of us who began this journey with passion in the late '80s, still stand in the hallway by the coffee machine talking of the invention of the fax machine and perhaps the teletype. Each generation of CorVelians brings its unique contributions. Reflecting upon the results achieved in recent quarters, it is exciting to me to reflect upon the innovations coming soon from the company. I'll now turn the call over to Michael to discuss the details of the quarter.

[Michael Combs:]

Thank you, Gordon. I will be providing an overview of our financial results for the quarter and then some insight into the markets in which we operate. Lastly, I will share our operating results, the status of our product development and the additional statistics, which we include each quarter. Earnings per share for the quarter ending September 30, 2018, was a record $0.67, an increase of 51.4% from the same quarter of the prior year. Revenues for the September quarter were $148.2 million, 8.6% above the $136.4 million for the September 2017 quarter. We realized strong revenue growth and improved margins with our enterprise comp TPA offering. We also experienced improved margins in our Network Solutions services, which offset a decrease in Network Solutions revenue. G&A in the quarter was consistent with expectations. The workers' compensation carrier market has essentially been flat year-over-year. While our carrier clients have not been able to increase their premium rates for the workers' compensation line of business, combined loss ratio for the private carrier market are at historic lows. So while modest wage growth and employment growth would generally result in a similarly modest premium increases, such is not the case in the current market. According to NCCI, the National Council on Compensation Insurance, the number of lost time claims has declined on average of 3.7% per year from 1997 through 2016. During the same time period, there has, however, been an increase in the severity of indemnity claims that more than offsets the decrease in the number of claims. In fact, indemnity claims severity has outpaced wage inflation by 31 percentage points over the past 2 decades, or 1.9% per year. The medical cost component of indemnity claims continues to be the significant driver of claims severity. While the Centers for Medicare and Medicaid Services reported a cumulative increase of 61% in the personal health care price index over the past 2 decades, the cumulative change in the medical lost time claims severity for workers' compensation is 175%, over 2x greater than the personal health price index. CorVel's broad and deep suite of cost containment services continues to assist our clients in staying ahead of this steep cost curve. And while the workers' compensation carrier market has been fairly stable over the past decade, there has been a modest amount of middle-market acquisitions resulting in some equally modest shifts among the top workers' compensation underwriters. CorVel has both lost and benefited from these acquisitions over the years as carriers naturally seek to consolidate program partners. While the worker's compensation payer market has seen modest consolidation, the vendors who serve them have experienced much greater consolidation. We continue to witness the impact of the private equity markets in the workers' compensation vendor space. This past quarter, we saw another merger of 2 of the industry's largest players, a medical bill review provider and a case management vendor. The industry continues to migrate towards CorVel's long-standing strategy of providing integrated services to payers, singularly focused vendors are quickly becoming obsolete while payers recognize a greater efficiency and effectiveness of integrated services. CorVel continues to be very well positioned to take advantage of this evolution with our broad suite of integrated services on a single technological platform. At the same time, CorVel has been able to invest in systems that positively impact both service and outcomes without the encumbrance of increasingly larger interest payments. James Bessen, an economist who teaches at the Boston University School of Law, recently wrote a paper on the challenges of automation and artificial intelligence. He notes that the most successful technology companies build their own software, inventing and perfecting their own processes instead of aligning their business model with some outside developer's idea of it. Inventing and perfecting our core business systems, our consistent investment in technology has resulted in a widening gap in the results that we are able to deliver to our customers relative to other vendors in our space. In addition to market consolidation, we are seeing ongoing pricing pressures, especially amongst industry participants that lack our clear competitive advantage, the strength of our services and the results that we deliver. Some vendors have resorted to below cost pricing or pricing at levels where the customers' experience suffers. The underlying goal being to simply gain revenue and satisfy the private equity requirements. The momentum that we are seeing in the growth of our TPA service is concurrent with the challenges our competition is having providing consistent service and results. We believe very strongly in our model and our prospects for continued growth. As we discussed on previous calls, the broader health care market will be increasingly important to CorVel's overall results. CorVel continues to penetrate the health payment integrity market with the signing and implementation of another top insurer. Payment integrity, as a whole, is continuing to mature in its focus and increases in its depth. CorVel intends to grow into this very large market in both cost-containment and patient management. SYMBEO is expanding and investing in its partner ecosystem with solutions providers in the procure-to-pay space. As more and more corporations embark upon the journey of transforming their procure-to-pay processes, the demand for accounts payable automation services, like SYMBEO's, will continue to increase. SYMBEO has established itself as the de facto accounts payable automation partner for vendors offering procure-to-pay transformation solutions, and expects these partnerships to deliver consistent new sales. Product development efforts were focused on the following key areas this past quarter

[Operator:]

This concludes today's webcast. You may disconnect your lines at this time.