• Most investors have never heard of Puerto Rico-based insurer Triple-S (GTS) OR believe that Triple-S has moved past its Hurricane Maria woes – we fervently disagree and believe that Triple-S is materially understating its Hurricane Maria liabilities – we think the upcoming 2-year statute of limitations on Maria claims will be the catalyst that exposes this to the market
  • Based on our survey work, we believe that Triple-S’s true remaining P&C liabilities relating to Maria could be as high as $1 billion, ~3x higher than the company has publicly claimed; if incorporated on balance sheet, this would render Triple-S Propiedad (the P&C sub) insolvent
  • After blowing through its reinsurance and materially revising upwards its liability estimate in 2018, Triple-S made a desperate attempt to preserve liquidity, stave off insolvency, and save its AM Best rating by abrogating policy responsibilities and trying to run the clock out on the 2-year statute of limitations
  • This strategy has backfired because a cottage industry of special situations investors and lawyers  (including prominent US hedge fund Gramercy) have descended on Puerto Rico in recent months, promising to litigate against insurers such as Triple-S in exchange for a cut of any recovery – already at bare minimum statutory capitalization levels, we question if Triple-S Propiedad has sufficient liquidity to fight the coming onslaught of litigation
  • Triple-S is so underfollowed that the stock was essentially flat on July 10, 2019 when Spanish-language local media reported unconfirmed rumors of an FBI raid at the company’s offices
  • Unprecedented public corruption headline risk renders stock uninvestible: credible local media reports have alleged that Triple-S hired lobbyist Elias Sanchez (reportedly under FBI investigation) to help win the Vital (Medicaid) contract; we surfaced a) a close personal relationship between Triple-S’s Chief Legal Officer and Elias Sanchez and b) allegations that an already indicted former government subcontractor (Alberto Velázquez Piñol) was directly involved in discussions with Triple-S relating to the Vital contract award

PLEASE READ: IMPORTANT LEGAL DISCLAIMER

The author is short shares of GTS (“the issuer”).  The author of this report also has derivatives positions in the issuer.  Use of this report is limited by the Terms of Use on https://friendlybearresearch.com/terms-of-service/.  You should carefully review the Terms of Service prior to reading this report. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. This article reflects the author’s opinion at the time of publication. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author may also transact in equity options of the issuer at any point in time without providing notice.  The author encourages all readers to do their own due diligence.

Key Questions to Ponder:

As the territory’s largest health insurer, we believe Triple-S has a unique responsibility to the citizens of Puerto Rico.  The company is extremely reliant on public funding – 65% of Triple-S overall company-wide premiums come from government sponsored programs (Medicare/Medicaid – p65).  Despite this, Triple-S has dragged its feet in the years following Hurricane Maria and abrogated its policy responsibilities in its P&C business all in an apparent effort to stave off insolvency.  The clock has now run out (Hurricane Maria’s 2-year statute of limitations with respect to Puerto Rico is 9/20/19).  Based on the company’s commentary at the Wells Fargo conference (9/4/19), we believe Triple-S is already considering exiting its P&C business, in what we believe is an effort to wash their hands of the staggering losses.  Puerto Rican public corruption is a top of mind issue for the Trump administration.

We therefore ask readers to contemplate these three questions as they read this report:

  1. Why should Triple-S continue to have the privilege of being the #1 market share health insurer in Puerto Rico when it refuses to pay legitimate P&C claims to the very people who utilize the company’s health insurance?
  2. Why should the US Federal Government (through FEMA) backstop Triple-S P&C losses when publicly traded Triple-S Management generates 65% of annual premiums from federal government contracts?
  3. With those questions in mind, what are the odds that Triple-S’s health insurance segment remains in the hands of GTS, the publicly traded entity?

Following Maria, Triple-S Tripped Reinsurance Limits Yet Magically Remained Afloat

Hurricane Maria (“Maria”) made landfall in Puerto Rico around September 16, 2017.  The storm was a deadly Cat 4/5 hurricane that is considered one of the worst natural disasters in recorded history, with estimates of $90B or more in damage to the island.  In Puerto Rico, Maria caused the largest blackout in US history, with power only fully returning after almost one year.  Unsurprisingly, the high wind speeds, flooding, and lack of power led to enormous and difficult to resolve insurance claims requiring expert engineering reports and complicated business interruption analysis.  Numerous local P&C insurers effectively failed as a result of the hurricane, including Integrand and Real Legacy.  Only a very small handful of insurance companies saw reinsurance spillover (total claims exceeding reinsurance limits) after Hurricane Maria, and Triple-S Propiedad is now the only local major P&C insurer that has somehow survived a reinsurance spillover event.  This is noteworthy because reinsurance spillover events are extremely rare and often followed by insolvency.

Many investors have likely never heard of Triple-S, and even if they have they likely do not associate Triple-S with P&C lines. Triple-S is the Blue Cross Blue Shield licensee of Puerto Rico, with the #1 share of the healthcare insurance market (34%).  The focus of this report will be on Triple-S Propiedad (the “P&C sub”), Triple-S’s P&C business that in 2017 (prior to Irma/Maria making landfall) had ~8.5% of the overall Puerto Rico P&C market share, and ~21% of the large dollar-value commercial multiple peril market.  The WSJ reported that Maria caused anywhere from $40 billion to $85 billion of insured damage (with 85% of that damage in Puerto Rico).  Using NAIC’s Triple-S’s aggregate share of premiums written in 2017 (8.5%), we would expect that Triple-S damages should have settled out at between $3 billion and $6 billion. Yet, today, two years after Maria, Triple-S claims that its total insured losses amount to $967 million. 

Source: Our analysis, AIR worldwide estimates

Just looking at market share dynamics, Triple-S’s $967 million aggregate liability figure makes no sense, especially because Triple-S specialized in commercial multiple peril policies that carry far higher dollar values.  We spoke with major players in the insurance industry in Puerto Rico who told us that in 2016-2017, Triple-S specialized in municipalities and condos – big dollar policies with multi-million dollar values.

In The Aftermath of Maria, Puerto Rican Insurers Have Willfully Refused to Pay Policyholders

As we show in this report, we believe that Triple-S’s loss levels are too good to be true because Triple-S has played games with its handling of claims – taking advantage of laws in Puerto Rico that allow insurers to call a claim closed even when it has not been paid in full.  In some instances, we believe Triple-S has just outright ignored legitimate claims.  We are not the only ones calling out this behavior and we note that Triple-S Propiedad is not the only bad actor in Puerto Rico – it simply happens to be the only bad actor that would also, we believe, be rendered insolvent if it acknowledged the full scope of its liabilities.  Just recently New Jersey’s state senate called out the entire insurance industry in Puerto Rico for it egregious abuses of policyholders following Hurricane Maria.

New Jersey State Senate Commentary Re: Maria/Irma Claims

“As we approach the two-year anniversaries of both, Hurricane Maria and Irma that devastated Puerto Rico with damages totaling nearly $100 billion, many impacted survivors are still struggling as insurance companies are paying pennies on the dollar, and a critical deadline is looming to claim damages,” the lawmakers said in a statement released August 29, 2019.

On a related note, we believe that one of the most important developments in the Puerto Rican insurance market is the recent emergence of US hedge fund Gramercy.  Gramercy, an emerging markets focused hedge fund with $6 billion of AUM, started a venture called Attenure.  Attenure is staffed with local lawyers and insurance adjusters and has one express goal – helping Puerto Ricans get fair resolution for their Maria claims:

Attenure Mission Statement

In the aftermath of hurricanes Irma and Maria, The Attenure Group was created by a group of Puerto Rican professionals – in alliance with a mainland US based Asset Management firm – to quickly provide much-needed financial relief to policyholders seeking to fight insurance providers underpaying their claims.

You can review Attenure’s website yourself here which lays out the thesis in some detail.  The underlying thesis of Attenure is simple – Puerto Rican insurance companies have not treated policyholders fairly and have attempted to settle claims for pennies on the dollar or worse yet not pay claims whatsoever.  These insurers are banking on policyholders being unwilling to go through the expense and hassle of filing lawsuits. 

Attenure effectively functions as a “litigation finance” vehicle.  Based on our interviews with Puerto Rican insurance industry experts, Attenure has been active in the Puerto Rican market for the past several months, successfully aggregating a critical mass of outstanding claims.  Attenure approaches policyholders and offers non-recourse upfront payments for unpaid or underpaid insurance claims (figures that we have been told are 4-7% of the face value of the policy).  The upside for the policyholder is that the policyholder gets fast cash for a policy that remains unresolved.  Attenure then takes over the policy, hiring adjusters and lawyers to see the claim to fruition.  Attenure is responsible for all costs associated with collecting on the policy, and takes a % cut of any recovery.

These excerpts from Attenure’s FAQ provide more information about just why Puerto Ricans have been so disenfranchised when it comes to their insurance payouts:

The mere fact that Gramercy entered the Puerto Rican market with its Attenure vehicle speaks volumes to how big of a problem unpaid claims remain in Puerto Rico.  The “opportunity” was large enough that a savvy US hedge fund with extensive experience dealing with emerging market sovereign governments stepped into Puerto Rico to seize on an economic opportunity – an economic opportunity to force insurers to make good on their promises.

We note that Attenure is not the only market participant attempting to litigate claims in exchange for % cuts.  Numerous strategic adjusters have entered the market, generally demanding 10% of any policy recovery.  Furthermore, we have spoken with lawyers throughout Puerto Rico who are successfully aggregating claims with the goal of taking contingency payouts in exchange for seeing claims to resolution.

Notably, while we put little to no faith in the ability of policyholders to battle Triple-S and win full payouts, we believe that entities such as Attenure (backed by a credible institution with significant capital and top notch attorneys) will put Triple-S through the ringer, forcing Triple-S into years of costly litigation and forcing fair payouts on policies. 

Attenure and contingency oriented law firms / adjusters are profit-motivated insurance experts and are spending real money on the ground in Puerto Rico.  We fully expect these entities to demand an ROI on their investments – and that ROI will come in the form of forcing payouts on policies.

Media reports suggest that Gramercy invested about $162 million into Attenure.  Given that significant investment, we expect that Gramercy must be expecting around a 2.5x MoM on its investment (while some claims may resolve out of court, claims that end up in court will take years to settle, which we believe requires a higher MoM to justify the lower IRRs).  Using 30% as Gramercy’s alleged “take rate” (a figure we heard when we spoke with local experts) on successful policy collections, this implies that Gramercy potentially underwrote total gross insurance recoveries of ~$1.5 billion or so.  Granted not all of Attenure’s claims will be with Triple-S, but we do know that Attenure is only looking to amass policies with face values of at least $500,000 per the company’s website.  Given Triple-S had 21% market share in commercial multiple peril policies, implying that Attenure may ultimately look to litigate real dollars against Triple-S.

It should be noted that Attenure is not the only US-backed entity to enter Puerto Rico with this thesis.  For example, leading law firm Weisbrod Matteis & Copley opened a Puerto Rico office last year and we understand the firm has built a significant presence in large dollar government claims.  We were also told that leading local law firm O’Neill & Borges has also built a significant presence in the claims market in Puerto Rico.  One lawyer described the situation in Puerto Rico to us as a “gold rush” for litigators, with a flurry of mainland lawyers coming to the island in recent months with the intent of bringing suits to force insurers to address unpaid claims.

Based on our calls with market participants, and the mosaic of facts including the entry of Attenure and others into Puerto Rico, we believe that Triple-S has sustained insured losses well in excess of the $967 million it currently reports to the market, but has managed to keep these claims off balance sheet by just ignoring claims or offering pennies on the dollar for claims and hoping that policyholders do not file suit.

Triple-S Claims It Only Owes $309 Million In Remaining Claims But Simple Logic and Our Forensic Research Suggest Otherwise

Let’s start with this August 30 press story in which Triple-S has a whopping $90 million claim outstanding to Public Buildings that it has not paid a cent against.  The article reads:López Pimentel said that Public Buildings claimed $127 million in damage from Triple-S Property. The insurance policy covered $90 million….In PBA, inspections were done with internal resources – the public corporation has engineers, electricians, and other construction professionals – and in many of the claims, parties even agree, but Triple-S still has not paid them a cent, López Pimentel explained….López Pimentel, who has been recently appointed by governor Wanda Vázquez to PBA, expects Triple-S to pay the entire policy: $90 million.

If Triple-S is telling the truth about its liabilities and Pimentel is serious about collecting the aforementioned claim in full, then we need to believe that $90 million sits in one single claim and on its own represents ~30% of the total unpaid claims.

Another interesting point in the above article relates to the Commissioner of Insurance’s statement regarding the dollar value of policies that has been paid out by policy holder type. 

The article states:

In a recent interview, Insurance Commissioner Javier Rivera Ríos said the government is among the list of largest claims. Of the total losses claimed, the government received only 55 percent while businesses received 76 percent and homeowners got 93 percent.

We have established through our conversations with local insurance players that Triple-S had significance share of the government policy market.  There are 78 municipalities in Puerto Rico so even if each municipality is a $20 million claim on average, and GTS had modest market share, you can easily get to some very large numbers of unpaid claims just from municipalities. This appears to be confirmed by press reports such as the one above.  With government claims remaining so underpaid and being much larger in size, the liquidity challenges facing Triple-S are all the more obvious.

Further, we found more press reports from 18 months after the hurricane such as this report that highlights a major hospital in Puerto Rico that only had 60 of its 172 beds functioning because Triple-S had not paid out a $48 million claim.  And this report about a government building that was still non-functioning almost 18 months after the Hurricane hit – with over $30 million owed by Triple-S.  It is noteworthy that at the time these press reports hit, Triple-S claimed that it owed around $378 million in total claims (that figure is now down to $309 million). 

These two claims plus the first one we highlighted – 3 claims in total – represent $168 million, which can be compared to the company’s assertion that it owes only $309 million across 700 policies.

Between just the three press reported claims above – Public Buildings ($90 million), Ryder ($48 million), ASR ($30 million) we are already adding up to almost $170 million in claims reportedly outstanding.  But we have confirmed through calls in the market and actual review of claims that the number is likely much higher.

Simply put – we are of the opinion that Triple-S is materially understating the full face value of its Maria liabilities.

After we discovered those press reports, we began to actively call Puerto Rican industry players to ask about Triple-S claims and whether the claims were “represented” by either attorneys, adjusters, or Attenure.  Based on our calls, we compiled the following table from our calls with market players, including attorneys and adjusters representing Triple-S policy holders:

Our Survey Sample of Claims Outstanding (Based on Interviews and Review of Public Filings / Reports) ($MM)

Source: Our analysis based on our survey work in Puerto Rico, press reports, and lawsuits – in some cases we reviewed paperwork but in some cases we relied on representations made by the points of contact that we either spoke with or our on the ground analysts spoke with; contacts asked to remain anonymous in all instances because they feared that if their names were exposed, Triple-S would further deny or refuse to pay their claims.  We have no way of verifying the quality of claims we reviewed or likelihood that they will be paid in full.

Based on our sampling, we believe that Triple-S claims outstanding are likely at least $1 billion, $700 million higher than what the company has asserted (larger than Triple-S’s market cap).  Worse yet, we believe that our $1 billion estimate above may still be conservative given that we were not able to connect with every market participant or major law firm that either holds a Triple-S policy or represents a Triple-S policyholder.

Therefore, based on the sample size of our research and our review of actual claims, we do not believe that Triple-S’s $309 million remaining unpaid loss claim accurately captures the true face value of outstanding claims.  Despite our relatively small sample size, we were able to get to outstanding claims that approach $1 billion or more – this compares to Triple-S’s claim that they have only 700 claims outstanding with just $309 million left to pay.

We Just Don’t Buy What Triple-S Is Selling!

We have even had the opportunity to review some of the details of these claims ourselves and saw a repeated pattern of Triple-S offering offensively lowball offers to settle or worse yet just outright ignoring claims.  Perhaps Triple-S does not believe it will ever have to pay out on these claims, but we are very confident that the face value of claims outstanding in Puerto Rico that attach to Triple-S Propiedad are far in excess of the $309 million that the company has claimed on its most recent earnings call.

We also highly recommend that readers read this docket styled OHM3 Resort v. Triple-S Propiedad, which involves a resort with a Triple-S policy.  The resort claimed it was owed about $20 million.  It hired an adjuster and submitted volumes of paperwork and was extremely timely in collecting on its claim.  The policyholder first commenced its claim in late-2017.  It subsequently compiled significant reports that it provided to Triple-S and its adjuster.  Triple-S stalled on paying the claim with the stalling getting so bad that on June 27, 2018, the Commissioner of Insurance fined Triple-S for not paying the claim.  Rather than quickly resolving the claim at that point, Triple-S continued to stall on payment, with OHM3 finally filing a lawsuit in April 2019.  In the months leading up to the lawsuit, Triple-S finally tried to settle the claim, literally offering cents on the dollar to OHM3:

Source: OHM3 v. Triple-S Propiedad

Again, even after being fined by the Commissioner of Insurance, Triple-S still couldn’t cough up an amount of money even close to claim value.  With any claim there is posturing on both ends so perhaps the claim is not truly worth $20 million, but it is hard to believe that its true worth is only $695,000.  It is also noteworthy that OHM3 has K&L Gates as counsel – a highly reputable firm. 

We drew this example from litigation but note that we have heard almost identical stories from numerous adjusters and lawyers.  The Triple-S modus operandi? Unlimited stalling, even in the face of regulatory fines.

We spoke with one broker who told us the horror stories of Triple-S post hurricane.  According to this broker, most insurers set up “war rooms” after the hurricane hit, with 50+ people rapidly handling and processing claims.

Triple-S, on the other hand, took a very different approach with the President of Triple-S Propiedad personally overseeing almost every single claim against the company.  The President of Triple-S Propiedad (Jose Del Amo) is a former underwriter who was promoted to the President of Propiedad just months before the hurricane.  Lacking managerial experience and facing a catastrophe of epic proportions, Del Amo was slow to react and we have heard that as few as three employees of Triple-S including the President processed each claim one by one.  Claims processing was so slow that we have heard many policyholders and adjusters believed that the best way to recover payments was to show up physically in the President’s office to resolve claims in-person. 

However, when the company hit its reinsurance limits everything changed.  Rather than processing claims, we have been told that the President was no longer even willing to meet with policyholders and essentially stopped paying on all municipality and condominium claims – which tend to be very high dollar claims.  Some industry participants we spoke with indicated that they viewed this decision to ignore claims as Triple-S essentially daring large policyholders to file suit in order to preserve their rights.  Triple-S gambled on the idea that policyholders would be unlikely to file suit prior to the two-year statute of limitations.

These anecdotal stories are completely consistent with our market research.  We repeatedly heard that numerous condominium claims remain unpaid and that large municipality claims – such as Manati and Toa Baja – remain unpaid.  The press reports on Ryder and the Retirement building also highlight Triple-S’s tardy payout strategy on large claims.

With groups such as Attenure actively stalking Triple-S today, we believe that any attempt Triple-S may have made to resolve claims for cents on the dollar has lost all potency.  In the case of OHM3, the entity was well capitalized and sophisticated enough to actually bring suit against Triple-S on its own. However, with Attenure and others now amassing claims, we expect to see a flurry of similar lawsuits that are financed and facilitated by these organizations on behalf of other policyholders facing similar problems to OHM3.

We also received this photo that is symbolic of the problems at Triple-S.  Below we have a condo building in Puerto Rico (Ashford Plaza 1500) that had a Triple-S policy – and a very large complaint board plastered outside the building advising residents that Triple-S was refusing to make good on the policy claims:

Source: A local shared this photo with us (RHS photo is a close-up of the sign); frames added for effect

Triple-S’s Own Admissions Illustrate A Company Facing Liquidity Problems

In Triple-S’s own financial statements, the rumblings of insolvency are clear.  For example, of the $967 million in total losses that Triple-S claims it incurred from Maria, the company claims that it has already paid out 96% of claims (by volume), representing a total payout of $658 million to date.  The company therefore claims that there are currently only $309 million of remaining claims outstanding – claims which the company assures the market it can pay off with cash on hand.

The company recently stated that only 4% of claims remain outstanding, implying the number of claims outstanding at 700 (this figure was also provided on a 2Q19 call).  This is a spectacular revelation – the 4% of remaining outstanding claims represent a whopping $309 million.  Clearly, Triple-S has “saved the best for last”.

We can deduce then that the remaining claims have an average value of about $441,000 (309 million divided by 700 claims).  Working backwards, this implies that the 96% of already paid claims (~17,000) had an average value of only $39,000 per claim.  Taking the company’s own disclosures at face value, the massive divergence between the average-dollar-value of paid claims versus unpaid claims shows that Triple-S has dragged its feet on paying out larger value claims.  This is not the sign of a healthy company – this is the sign of a company facing a cash crunch. 

The likelihood of a large dollar value claim ending up in litigation is also far higher.  Triple-S therefore needs to start bracing itself for an onslaught of litigation which is costly and will also eat into capital.  We have already seen early signs of insurer litigation in Puerto Rico in recent weeks, such as the $100 million PREPA suit (the power grid) against a different insurance company.

Furthermore, Triple-S has made it very clear that their P&C sub is operating at the regulatory minimum capital levels today.  On the 2Q19 earnings call, the company stated the following:

As of June 30, 2019, our P&C RBC ratio is approximately 200% after the $12 million in additional capital we contributed during the second quarter and the positive results of its operations. As in the case of all claim liabilities, the gross losses related to Hurricane Maria are based on our best estimate of the ultimate expected cost of claims with information currently on hand and are subject to change.

[Author note: 200% is the minimum regulatory requirement according to the company’s own disclosures]

The company did secure $50 million of retroactive reinsurance which gave the company some ratings agency relief should claims exceed the current estimates.  The company has been opaque about the mechanics of the retroactive relief, but has stated the relief amounts to $50 million.  However, the company has openly admitted that it is operating at the bare minimum level for capital requirements in the P&C sub (see above).  We therefore believe that any upward revisions from this point onwards will require additional capital, particularly if the upward revision exceeds the $50 million of retroactively acquired reinsurance (which itself is a dubious construct – what reinsurer in their right minds writes a $50 million retroactive reinsurance policy on a Cat 4/5 hurricane event without taking a massive pound of flesh?).  The ratings agency has already demanded new capital at the P&C sub and the current rating is based on the company seeing no new claims.  Any additional claims will come as a major surprise to AM Best and almost certainly have a ratings impact.

We furthermore believe that the magnitude of the capital required to plug the hole in the P&C business is on the order of magnitude that matches the company’s current market cap.  We therefore see a capital raise as unlikely and view the insolvency of the P&C sub as more likely.

Source: We spread data from conference call disclosures

As can be seen above, Triple-S has already had to upward revise its loss estimates to the market.  In November 2017, just weeks after the hurricane and when power remained out throughout the island, Triple-S very quickly – and in our view recklessly – came out and claimed that it had around ~$600 million of insured losses.  This figure, provided haphazardly while the power remained out in Puerto Rico and adjusters had no ability to even assess damage yet, happened to be complete nonsense.

On the 2Q18 earnings call, GTS revealed that its Maria insured losses were in fact much higher than the original estimate of $600 million, disclosing that it now estimated over $900 million in losses from Maria.  GTS shares dived, getting cut in half on the news.

Despite this corrective disclosure, GTS continued to reassure the market that everything was fine.  Yes, they had blown through their reinsurance limits at this point and yes their P&C sub was under regulatory minimum capital levels (which were subsequently cured with a modest capital infusion, support from the parent company, and a modest “retroactive” reinsurance policy).  After all these developments, GTS still wanted the market to believe all was OK.

As an amazing aside: GTS actually repurchased shares immediately following the hurricane and also in the period leading up to announcing higher damage levels.  GTS had authorized a $30 million buyback in August 2017 – prior to hurricane landfall.  The company utilized $20.2 million of the buyback in FY17 (p72).  The company then expanded the repurchase authorization by $25 million in February 2018 – at a time when it no doubt knew that losses were piling up.  Even more shockingly, GTS actually went ahead repurchased $22.4 million of shares in 2018 after the February 2018 authorization (p71).  This is amazing because the company subsequently had to provide support to the P&C sub.

In November 2018, AM Best downgraded GTS ratings.  Notably, AM Best downgraded Triple-S Propiedad from A- to bbb-.  This development was materially negative for Triple-S because many commercial insurance customers require an “A” rated balance sheet in order to buy an insurance policy.  In fact, in our conversations with an insurance broker in the market, we learned that many commercial insurance buyers cannot buy policies from Triple-S anymore because of the ratings downgrade.  Why buy a Triple-S policy with a bbb- rating when Mapfre and Chubb have stronger balance sheets?  Triple-S admitted as much in its own 2018 10-K, when it omitted language about the significance of its AM Best rating that was available in the 2017 10-K.

In the 2018 10-K in fact, GTS noted the following:

Since the lines of business that this segment writes and the market in which it operates are particularly sensitive to changes in A.M. Best financial strength ratings, the November 2018 downgrade and any further downgrade of our Property and Casualty segment’s rating could limit or prevent us from writing and renewing certain types of business or accounts that requires insurers with stronger ratings.

We believe, based on our conversation with a leading broker, that Triple-S Propiedad is now largely only sold to commercial buyers that have some sort of blemish.  Given the balance sheet weakness at Triple-S versus other insurance providers, we have been told that Triple-S is now facing a significant adverse selection problem.  However, rather than exiting the P&C market, the company continues to write business which we believe is likely due to the company’s precarious liquidity issues in the P&C sub that leave it cash strapped and in need of ongoing premiums.

As a slight aside, we’ve only covered the P&C liquidity issues thus far.  However, the healthcare business has also shown signs of liquidity stress as is evidenced by this recent media report in which the Mennonite Health System announced that it would stop accepting Triple-S insurance because Triple-S had not repaid $25 million of debts owed to Mennonite.  Triple-S subsequently reached a settlement with Mennonite that avoided this fate, but even then structured the debt repayments using a long duration schedule.

Triple-S’s balance sheet woes are not the only reputational problem the company is facing…

Triple-S’s Vital (Medicaid) Contract Award Is the Subject Of an Ongoing Pay-For-Play Corruption Scandal

On July 24, 2019, Ricardo Rossello resigned as Governor of Puerto Rico.  His resignation came after a series of text message leaks and investigative reports that pointed to significant corruption within his administration.

One of the primary allegations against Governor Rossello that led to his resignation is that he had given unfair advantage to a former staffer of his named Elias Sanchez, who worked for Wolf Popper, a law firm.  Leaked chats included instances of Sanchez discussing privileged information and government contracts directly with the Governor.  Sanchez is now reportedly under FBI investigation for influence peddling.

[We should note: Elias Sanchez has publicly stated that he has not committed or participated in any act of corruption]

What has subsequently emerged from the investigative press is that Sanchez was in fact lobbying for Triple-S during the time Triple-S received a significant government contract (Vital, the Puerto Rican term for Medicaid).  Triple-S has admitted to being a client of Wolf Popper PSC / Sanchez, and investigative reports have questioned whether Triple-S was improperly granted the Vital contract due to its relationship with Sanchez.  Triple-S has thus far denied utilizing Sanchez for any sort of improper pay-to-play activities but did announce an external investigation in July 2019.

According to the media report, Triple-S opened its external investigation relating to Sanchez at the beginning of July 2019.  We find this development rather noteworthy for one simple reason.  On July 10, 2019, Triple-S provided a comment to a reporter denying rumors that the FBI had raided their offices:

Interestingly, a series of indictments involving individuals linked to ASES (the Puerto Rican Health Insurance Administration or ASES by its Spanish acronym) were filed on July 9, 2019 – the day before the press first reported on these rumored and unconfirmed FBI raids of Triple-S.

We find it remarkable that a public company – and a regulated financial institution – had to put a statement out denying an FBI raid without the stock seeing any nose dive whatsoever.

Whether or not the raid was real, the timing of the external investigation in context of the rumored raid, combined with the relationship between Triple-S and Sanchez point to potentially significant regulatory woes on the horizon at Triple-S.  Despite all of these public allegations, Triple-S did not bother to update any of its risk factors in its most recent filings, with the most recent 10-Q containing no risk factors relating to the Vital contract.

The touchpoints between Sanchez and Triple-S go beyond lobbying, with former Governor Anibal Acevedo Vila (Governor of Puerto Rico prior to Rossello) recently tweeting a photo that purportedly shows that Principal Legal Advisor and Corporate Secretary of Triple-S, Carlos Rodriguez, was member of Elias Sanchez’s wedding party:

Making matters worse, Alberto Velázquez Piñol, who was arrested by federal authorities, was present on behalf of ASES in meetings related to Triple-S’s Vital health program.  Questions have been raised about whether Triple-S should have even been allowed to bid on the Vital contract, and therefore the indictment against Alberto Velázquez Piñol in conjunction with Triple-S’s relationship with Elias Sanchez raise serious questions about whether Triple-S attempted to peddle influence in exchange for the Vital contract.

[We should note: Alberto Velázquez Piñol has pled not guilty to all charges]

Triple-S and other insurers were actually dragged in front of government officials to ask about their contacts with Sanchez and with Velázquez Piñol just days before related corruption indictments began to hit in Puerto Rico.  On July 3, when asked about whether Velázquez Piñol or Sanchez were included in meetings with Triple-S pertaining to Vital, Triple-S’s representative said she did not know the answer.  This was a stunning response as there is little doubt that Triple-S would have anticipated this line of questioning ahead of the hearing.  Press reports claim that the other insurers called to testify provided answers to similar questions that day.

Then in a letter dated July 25 – after the Velázquez Piñol indictment – Triple-S answered the questions and at this time confirmed that Velázquez Piñol was involved in Triple-S Vital meetings and confirming that Triple-S had used Elias Sanchez as a consultant.

In response to this letter, Jesus Manuel Ortiz (a Minority Popular Democratic Party Representative) made a referral relating to Triple-S to the US Attorney’s Office and FBI.

While the crux of charges against Alberto Velázquez Piñol and others related to BDO, the DOJ indictment also specifically calls out “another company represented by Velázquez Piñol”:

Investigative reporters in Puerto Rico have claimed that Triple-S was a beneficiary of its relationships with Sanchez and Velázquez Piñol:

Source: Article

While Triple-S has not been accused of any wrongdoing to date, it is clear that Triple-S had numerous touch points with individuals of interest in pay-to-play corruption scandals and that further scrutiny of the Vital contract award is warranted.  If Triple-S was in fact improperly granted the Vital contract, this could have dire implications for the company and for its relationship with BCBS.  We are not alleging any wrongdoing on the part of Triple-S, but point out that this is yet another example of significant undisclosed risk at the company (notably, the 2Q19 10Q makes no mention of these corruption allegations within new risk factors).

We also note that corruption in Puerto Rico is a major topic of interest to federal authorities currently.  First, President Trump has been rather vocal about his distaste for corruption in Puerto Rico recently:

Furthermore, on September 10, 2019, a FEMA official was arrested in Puerto Rico relating to recovery effort fraud.  This is on top of the aforementioned DOJ indictments from July stemming from the pay to play corruption scandal.

Given Triple-S has been stalling on payments related to Maria, we believe the company could also find itself in the crosshairs of FEMA…we note that Maria FEMA payouts relative to private insurance payouts have been a massive outlier relative Hurricane Katrina, consistent with the notion that Puerto Rican insurers have not made good on their insurance obligations, forcing FEMA to cough up additional funding.

We raise these points not to allege that Triple-S has violated any law, but rather to point out that investors need to tread cautiously as it comes to Triple-S given that the company very clearly had significant touch points with the highest levels of the controversy-ridden prior administration.

BCBS Contract Is Potentially At Risk

Assuming our thesis relating to the pending financial insolvency of Triple-S Propiedad is accurate, we believe that the BCBS contract that drives the entire healthcare business is at significant risk of non-renewal.

In its 2018 10-K, the company specifically indicates that “impending financial insolvency” is a risk factor that can lead to the BCBS contract being terminated.  We also note that in the November 2018 downgrade of Triple-S Propiedad, AM Best specifically indicated that it was placing the healthcare subsidiary on credit-watch due directly as a result of the issues at Triple-S Propiedad.

Furthermore, in light of the public corruption allegations facing Triple-S and the risk of potential fallout from Triple-S’s involvement with Elias Sanchez / Wolf Popper PSC, we believe that BCBS may simply view its relationship with Triple-S as having too much headline risk to justify an ongoing relationship.

Conclusion

In our view, shares of Triple-S are likely worthless.  Any attempt to raise capital will likely be unsuccessful given that Triple-S has a market cap ~$400 million versus unpaid claims that we believe are likely larger than the entire market cap today.  The company has tried to hide P&C losses by assuming that policyholders would not have the wherewithal to litigate, but the arrival of entities such as Attenure on the island have smashed that strategy.  Now, we believe the P&C sub is likely to face a barrage of lawsuits similar to the OHM3 lawsuit which we believe will expose that Triple-S is materially understating its liabilities.  In turn, we expect yet another AM Best downgrade which we believe will a) preclude Triple-S from writing any new P&C business and therefore b) likely trigger a receivership proceeding for Triple-S Propiedad.  We believe that this alone could cause BCBS to drop its relationship with Triple-S.  With the P&C issues in the backdrop, the corruption probe into Elias Sanchez remains ongoing.   Additionally, Velázquez Piñol’s trial is in its early stages.  Both of these ongoing law enforcement matters could potentially draw in Triple-S.  If that happens, we believe BCBS is likely to walk.  Puerto Rican government corruption is a top of mind issue for the President himself. We therefore see numerous paths to zero in this stock and, given the continued weak macroeconomic backdrop in Puerto Rico, we see no legitimate bull case in the stock.

As a result, we think GTS is heading to zero.