• As we expected, hundreds of enormous lawsuits that confirm our first story have now been filed against Triple-S in Puerto Rican courts – if litigated, these lawsuits will cost tens of millions annually to defend, and based on prior commentary and reserve development, we do not believe Triple-S has adequate legal reserves in place – we therefore believe the OCS will have to intervene
  • One thing is clear to us – Triple-S’s press release from this morning is materially misleading – it only includes lawsuits tied to claims that Triple-S considers open and NOT all lawsuits filed against the company – thereby omitting huge volumes of lawsuits filed before the 9/20/19 statute of limitations.
  • There is now mounting evidence that GTS management knowingly inflated 2Q19 earnings – OCS data shows a huge spike in aggregate claims in 2Q19 yet Triple-S kept reserves unchanged, paid claims progression does not tie out with our research, and management was well aware of litigation risk by the time it filed its 10Q (8/9/19) yet provided no new risk factor or legal reserve disclosure
  • We question if Deloitte and AM Best have an accurate picture of Triple-S’s financial condition given that Deloitte signed off on last year’s 10-K and AM Best took Triple-S off credit-watch negative just a few months ago
  • We highlight three obvious red flags in the 2Q19 financial statements that warrant Deloitte’s immediate attention – if our theory that there is accounting misrepresentation at GTS is correct, we believe that litigants against P&C may be able to pierce the corporate veil and go after Triple-S Management (GTS)
  • Triple-S management is now privately telling Wall Street that it can walk away from its P&C business with no repercussions – in other words, Triple-S thinks it can stick Puerto Rico, the US Federal Government and taxpayers with the bill after eating a five-course meal at a restaurant
  • Thanks to insurers such as Triple-S, lawyers and hedge funds now stand to enrich themselves at the expense of desperate Puerto Ricans because Insurance Commissioner Javier Rivera Rios failed to force orderly and timely insurance payments – we also expect Triple-S’s $50 million share repurchase authorization will come back to haunt the company and Commissioner Rios
  • Given these developments, Governor Wanda Vazquez is morally obligated to install a new Insurance Commissioner who will step in to seize Triple-S’s valuable assets on behalf of policyholders

The insurance company delayed so much in making payments to us…everything was really delayed and put off as much as they could put off and the hospital suffered a lot because we were waiting for them to pay everything…so when we were able to begin construction again all the damage was already there…we had to restart all over again

Triple-S Hospital Policyholder

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.

Hundreds of Lawsuits Have Now Been Filed AFTER JUNE 30, 2019

The court system in Puerto Rico is now clogged up with lawsuits that were filed against insurers in the past week (Mapfre, Triple-S, etc.). Many of these suits demand multi-million dollar figures, with the municipality suits (far smaller in volume) demanding tens of millions. We hired an attorney to pull and translate these lawsuits for us as they are difficult to retrieve and largely in Spanish. Thus far we believe there are ~300 active cases against Triple-S, with an enormous surge of large value lawsuits hitting the court system right before the statute of limitations deadline on 9/20/19.

Source: Screenshot of our database

Law firms involved in the cases include Weisbrod and O’Neill Borges, and many of the suits feature Attenure as a co-plaintiff (the hedge-fund backed litigation finance vehicle we covered in our first story).

These filings are difficult to find because they are filed locally and we believe that our database is not even exhaustive as we have been informed that Triple-S has entered tolling agreements with some municipalities that extend the statute of limitations and keep claims out of court and public view. We are highly confident that the total value of litigation claims against Triple-S far exceeds the company’s available capital at P&C – the company’s RBC was already operating at the bare minimum and with additional legal reserves, there is no doubt that P&C will now be woefully undercapitalized.

The number of active lawsuits (~300) needs to be considered relative to the company’s claim that only 700 claims remain outstanding. We have a hard time believing that 300 of the company’s 700 outstanding claims are now in litigation. We therefore question how Triple-S is defining a “closed claim”. One thing is clear to us – Triple-S’s press release from this morning is materially misleading – it only includes lawsuits tied to claims that Triple-S considers open and NOT all lawsuits filed against the company – thereby omitting well over one hundred lawsuits filed before the 9/20/19 statute of limitations.

For example, in this Attenure-associated lawsuit, the plaintiff demanded over $5 million in damages for a property and alleges that Triple-S has paid absolutely nothing to date:

Source: BY2019CV05166

We ask, does Triple-S consider this claim closed? What reserve has Triple-S put against this claim? There are many, many other lawsuits that allege very similar fact patterns.

The property claims like the one above are voluminous and generally in the $1-5 million range. On the other hand, there are a handful of muni claims against Triple-S we found which are far less voluminous but far larger in magnitude.

We highlight just five muni suits we found filed recently below – these suits exclude a suit that was allegedly filed by Santa Isabel for $34 million and excludes muni tolling agreements that the company entered into last week to extend the statute of limitations on claims. There are also literally well over one hundred condo related cases – many of which feature Attenure – that were filed last week in state court in Puerto Rico.

Example of Suits: Just 5 Muni Suits We Already Found Amount to almost $170 million in claims against Triple-S And We Are Aware of Other Muni Suits That Have Allegedly Been Filed / Tolled

As a reminder, Triple-S claims that its remaining 700 claims have $440,000 of outstanding value per claim. This is what it holds as reserves on balance sheet. Consider that claim in light of the five muni claims above that demand $170 million in damages.

Thanks to what we believe was an overlay lax insurance commissioner, lawyers and hedge funds will enrich themselves at the expense of Puerto Ricans who did the right thing, bought insurance, and paid their premiums on time. The fact these entities have entered the market and are now extracting huge rents speaks to the massive policy failure on the part of insurance regulators in Puerto Rico.

Unlike the other major insurers facing a litany of lawsuits, Triple-S’s P&C business is operating at the bare minimum statutory capital level (200%) and will therefore either require a massive capital infusion or intervention.

At this stage, given the onslaught of litigation, policyholders should be demanding that Triple-S P&C immediately go into receivership to avoid wasting capital on lawyer fees. Furthermore, policyholders – and every American tax payer for that matter – should be demanding that Triple-S use its remaining valuable healthcare and life insurance assets to make good on its Maria obligations. In our view, FEMA should not put a dollar of additional capital into Puerto Rico until Triple-S is seized. It is disingenuous for Puerto Rican government officials to criticize the federal response to Maria when they have allowed Puerto Rico’s largest local insurer to willfully ignore it insurance responsibilities without any regulatory repercussion.

Dealing with the Triple-S problem would demonstrate that Puerto Rico is serious about solving corruption problems. Triple-S has repeatedly misrepresented its financial health ever since Maria, refused to pay legitimate claims, and has now forced policyholders to take the expensive and extreme step of litigation. While sitting on an under-capitalized P&C business that failed to make timely payments to Puerto Ricans, Triple-S was awarded the lucrative Vital contract despite turning its paperwork in late. It is morally unconscionable that this could happen. Yet now, Triple-S wants the world to believe that the contract award had nothing to do with its relationship to Elias Sanchez [author note: Elias Sanchez denies any wrongdoing].

The company has only one brand on the island and has utilized the goodwill associated with that brand to sell P&C policies. Instead of coming clean last year when it undeniably knew that its P&C business faced significant liquidity pressures, Triple-S pushed forward with a shameless $50 million share repurchase. Those funds should have gone to Maria victims – such as Ryder hospital that was unable to operate most of its beds, including its mission critical NICO unit, thanks to a tardy payment from Triple-S. Instead, Triple-S utilized its capital to prop GTS shares, padding the pockets of insiders and Wall Street at a time when Puerto Rican policyholders desperately needed money. The stock repurchase effectively created the illusion of financial strength at Triple-S which is now unraveling. Despite being massively underreserved, Triple-S continued to write P&C policies since Maria and without raising additional capital to support the P&C subsidiary.

Triple-S is a bad actor and a stain on Puerto Rico and if Governor Vazquez is serious about thwarting corruption, she needs to hold Triple-S accountable for its egregious conduct.

Deloitte Needs to Immediately Review Triple-S’s Financial Statements for 2Q19 As We See Obvious Signs of Material Earnings Inflation and Obfuscation

Red Flag #1 – Triple-S Reserve Development Does Not Correspond With Aggregate Market Data

We were able to get Oficina del Comisionado de Seguros (OCS) data that shows the aggregate claims tendered to insurers relating to Maria, quarter by quarter. When we saw this data, we became convinced that management inflated its 2Q19 earnings per share.

OCS tracks aggregate hurricane-related claims (total losses) and the dollar value of commercial claims spiked materially in 2Q19 – by ~$663 million (see below, we retrieved this data through a source who spoke directly with the OCS and was provided the data directly by OCS).

We know that Triple-S had at least ~20% market share of commercial policies in the hurricane-impacted year. How could Triple-S reserves not move up at all when the OCS saw an additional $663 million in aggregate commercial claims? We would expect Triple-S to have hiked its reserves in 2Q19 by ~$130 million (20% of the $663 million). If it had done so, it would have had to admit that it was totally insolvent in its P&C subsidiary. Instead, Triple-S added ZERO to its total reserves in 2Q19.

Source: Data directly from OCS

The same data shown graphically illustrates that Triple-S reserves are not keeping pace with aggregate claims development:

Source: Data directly from OCS

Red Flag #2 – Paid Claim Development Makes No Sense In Light of Our Research on Ryder Claim

We have confirmed with a source intimately familiar with Ryder’s Triple-S claim that Triple-S paid out ~$50 million to Ryder on May 10, 2019. This is notable because Triple-S’s financial disclosures to the market make no sense relative to what we heard regarding the Ryder claim.

Source: Company CC transcripts 1Q19/2Q19

Triple-S claimed that total paid claims between April 30, 2019 and June 30, 2019 increased by $31 million (627 to 658 million). We remain confident that Ryder ended up being paid about $50 million. According to this story, Ryder was paid $15 million by February 2019. So, we would have expected paid claims to increase by at least $35 million between 4/30/19 and 6/30/19 (a gross payout of $50 million less $15 million already paid in February). Instead, paid claims increased by only $31 million.

So how could Triple-S have closed an additional 1% of all claims (which would be around 178 claims), yet seen its paid claims increase by less than the incremental dollars paid to Ryder?

Red Flag #3 – Triple-S Fails to Alert Market of Significant Legal Risk to P&C Sub

By August 2019, Triple-S was well aware that it was about to face a deluge of litigation. By that time Attenure had come to the island and promised to sue insurers to recover condo claims. Furthermore, by that time numerous law firms had already taken on representation of large claims and were in communication with Triple-S demanding payments. The company was well aware that the Maria statute of limitations was September 20, 2019. Despite these points, Triple-S did not even add any legal disclosures as a risk factor, let alone take any additional provision expense to account for the coming legal fees. We believe that by doing so, management inflated earnings per share in 2Q19, showing an earnings beat when the company should have actually seen a substantial earnings miss.

How did we get to the point that Puerto Ricans have had to turn to expensive lawyers and hedge fund financiers to recover money legitimately owed to them?

We believe that by mid-2018, Javier Rivera Rios recognized that many local Puerto Rican insurers – including the storied Triple-S – were likely to fail under the debts of Maria. Instead of forcing capital raises and instituting strict capital plans, Rios allowed local insurers to usurp their responsibilities, occasionally levying small fines for non-payment. Foreign insurers quickly caught on that local insurers were not being held accountable for payments and followed suit. Before long, private insurers stopped paying Maria claims and Puerto Rico was left lacking the money it needed to rebuild. Hence why the ratio of FEMA dollars to private insurance dollars in Puerto Rico is a massive outlier relative to Hurricane Katrina.

We find it appalling that Javier Rivera Rios still has a job when he allowed Triple-S to move forward with a $50 million share repurchase authorization after Maria hit Puerto Rico.

We believe that Rivera-Rios must resign or be removed from office. A commissioner who will act in the best interests of policy holders must replace him.

Governor Vazquez Needs to Intervene Because Triple-S Believes It Can Keep its Healthcare Business While Bankrupting P&C

We have confirmed from conversations with more than one source that Triple-S has reassured Wall Street that it can walk away from its P&C debts with no recourse to its management company – in other words, enjoy a five course restaurant meal and then skip out on the tab.

While this claim does appear to have some legal merit due to the complexity of insurance receivership cases, we believe that Triple-S has acted with malice towards Puerto Rico. It could have supported its P&C business last year with the $50 million of cash at the holding company level, but instead it used that money to prop up its stock price. It could have been honest with ratings agencies, its auditor, the market, and the Puerto Rican public, and admitted that it did not have enough capital to pay its P&C debts. Instead, the company continued operating and continued to sell P&C policies and utilize the goodwill associated with its brand to sell these policies. The company undeniably knew that it had serious problems at the P&C subsidiary after it tripped its reinsurance limits yet carried on.

Furthermore, Triple-S has acted with bad faith. It could have paid claims at a much faster pace – particularly mission critical claims from municipalities and hospitals. Instead, the company has forced these entities to bring expensive lawsuits.

We have spoken with noted insurance bankruptcy attorneys at this point. If we are right and the P&C business ends up in near-term receivership, the company cannot just simply wash its hands and walk away from its debts. Litigants will come after the management company and attempt to pierce the corporate veil. Securities related suits will also come against the management company as there is strong evidence to suggest that Triple-S management misrepresented the financial condition of the P&C business. We raise these points to remind the market that there is legitimate risk that the corporate veil will be pierced in this situation. Either way, even if such arguments are unpersuasive, Triple-S’s management company is likely to be stuck in costly litigation for years to come.

We also raise these points because we believe it is now imperative that Governor Vazquez steps up and attempts to seize Triple-S assets for the benefit of policyholders.

Conclusion

Triple-S now faces hundreds of lawsuits that hit right before the statute of limitations on Maria came to an end. We doubt the company fights all of these lawsuits as it is in the best interest of policyholders for the insurance commissioner to step in, stay all of the suits, and resolve them in a receivership proceeding. In light of these developments and Triple-S’s egregious conduct, we believe Governor Valquez needs to step in and seize Triple-S assets and use them to help rebuilding efforts in Puerto Rico. We also believe that both Deloitte and AM Best need to immediately re-underwrite their positions on Triple-S in light of the flurry of lawsuits that arrived last week and evidence that earnings were materially inflated in recent periods.

The healthcare business should belong to the people of Puerto Rico who paid their insurance and deserve their policies to be paid in full. It should no longer belong to GTS. We reiterate our belief that Triple-S is heading to zero.