• On Monday, Triple-S told the SEC (via 8-K) that the company is “involved in litigating” only 48 cases filed since 6/30/19
  • We spent substantial time and money manually pulling cases from Puerto Rico’s complicated court system (CLICK HERE) – our list is NOT exhaustive, but we now know that at least 165 complaints were filed since 6/30/19 against Triple-S; our incomplete database aggregated to demands of ~$800 million – in total, with cases allegedly tolled, we believe policyholders are demanding ~$1 billion from Triple-S
  • The holding company is in play for litigants – we provide clear evidence of Triple-S inducing policyholders into buying Propiedad policies by claiming that the holding company stands behind P&C policies; Triple-S also failed to update its AM Best rating in certain policy marketing materials we found and marketed the holding company’s solvency as the PRIMARY REASON to buy policies from Triple-S Propiedad – these revelations introduce significant risk of substantive consolidation (i.e. equity wipe-out)
  • On Monday, Triple-S disclosed 230 total active lawsuits and we found an incremental ~117 filed since 6/30/19 (~347 total). Given the hundreds of lawsuits for unpaid claims, we decided to shed light on a troubling related party transaction that we think warrants further scrutiny
  • The Chairman of Triple-S (Clavell-Rodriguez) is also Director and Chief Medical Officer of a private hospital – the hospital received $33 million of insurance payments from GTS in 2017/18 – $12.5 million of those payments occurred in 2017, a year when Triple-S paid out only ~$82 million on Maria claims
  • While we applaud Triple-S’s decision to pay hospital claims, we think the Audit Committee needs to open a probe looking into why Triple-S delayed paying a non-profit hospital until May 2019 (Ryder) while providing prompt payments to a related party hospital that media reports suggest was operational post-Maria

The biggest mistake people make is being co-opted by management

Jim Chanos

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.

Lawsuit Database Now Live

Monday’s surprise and opaque press release relating to reserve adequacy from Triple-S is not the type of announcement you tend to see from a company that is actually healthy.

Despite Triple-S’s management’s continued efforts to deny and deflect our reporting, the company has made no effort to provide transparent disclosures to the market. In its Monday press release, the company stood by its reserves. However, upon further reflection, the press release was filled with legal jargon designed to confuse. Of note, the company claimed that it is “involved in litigation” in a total of 230 cases, including 48 cases filed after June 30, 2019. The term “involved in litigation” is an artful phrase. If a suit has been filed but Triple-S has not yet answered the complaint, we think the company can plausibly allege that it is not “involved in litigation”. We believe Triple-S utilized this crafty language to avoid disclosing the massive rush of lawsuits that hit between 9/5/19 and 9/20/19 that the company has not yet answered. The company also provided no color on the dollar value of litigation outstanding which is a major red flag. The biggest red flag? The company made it clear in its press release that it has “no intention to further update its disclosures until its next earnings announcement”.

The problem with the company’s press release is that there were at least 165 lawsuits filed against Triple-S just in local courts since June 30, 2019. Our database is here and we will continue to update it. You can use this website to confirm the existence of the cases (just punch in the case number). If we are right about Triple-S’s pending P&C insolvency, you can rest assured that Monday’s press release is going to come back to haunt the management team. We do not believe our database is comprehensive as suits continue to roll in and they are hard to track down.

The dollar value of the claims we have dug up – that were flagged as active in Puerto Rican state court databases – sum to ~$800 million. Here is the most crucial point – $630 million of the claims against Triple-S were filed after 6/30/19. In fact, almost all of them were filed on or after 9/5/19 (the Irma statute of limitations).

Our above estimate is conservative because some cases did not specifically identify a dollar claim against Triple-S. Our estimate also excludes certain municipalities that we understand have entered into tolling agreements with Triple-S to extend the statute of limitations. Potential claims we believe are missing include Santa Isabel ($34 million) and Manati ($60 million), and AEP (the $90 million government claim from our first story). Long story short, it is very easy to see a path to $1 billion or more of claims against Triple-S when the dust settles.

The vast majority of commercial cases read about the same. Hurricane Maria caused millions in damages to a policyholder. The policyholder submits a claim. After getting no response, policyholder hires an adjuster and formalizes the claim. Still, Triple-S ignores the claim. After a long struggle, Triple-S eventually sends a junior adjuster who has no experience and is completely incapable. Then Triple-S sends an offer – a low ball offensive figure of $20,000 with a suspect Excel spreadsheet with a few lines as the justification. Triple-S conditions the payment on the policyholder signing a release. The litigant then claims that this conditioned settlement offer is a violation of Puerto Rico insurance code (Article 27.161) and brings a lawsuit to recover the full face value of a claim.

With only ~$280 million of reserves left to pay claims (after paying $29 million QTD per the latest press release), it is very clear that litigants should not be expecting to recover the headline value of litigation against Triple-S Propiedad.

But we have good news for litigants. Triple-S has publicly admitted that its management company stands ready to backstop claims against Propiedad. In fact, when you were sold your policy, Triple-S told you that the management company will support P&C (and this is consistent in both the English and Spanish version of the website).

In marketing materials we pulled directly from Triple-S’s website – front and center – we note that the company presents the #1 reason to buy a Triple-S Propiedad policy as follows:

Source: Triple-S Website

When the lawsuits against the management company arrive, we find it hard to believe that Triple-S is going to be able credibly argue that the statement above did not induce people into buying Triple-S policies. Any reasonable person reading the statement above is led to believe that the financial strength of Grupo Triple-S (the holding company, including its stake in the healthcare business) stands ready to support your P&C policy. In fact, the company is shouting from the rooftops that the #1 REASON to buy policies from Triple-S Propiedad is because Grupo Triple-S provides financial support. Any prospective litigant can reasonably claim that s/he was induced into buying policies from Triple-S Propiedad because he believed that Triple-S Management stands behind those claims.

But it gets worse. We note that the company has also been completely misrepresenting the health of its balance sheet in its public marketing materials. On the company’s own website – live as of late in the night on September 25, 2019 – the company still boasts that its AM Best rating is A- and has been so since 1996. This is just a complete and outright fabrication. The company’s rating has been B+/bbb- since November 2018. Almost one year after the downgrade and the company has failed to alert the public about its true credit rating, instead inducing policy sales by claiming that the management company’s solvency supports Triple-S Propiedad.

Source: Triple-S Website

For an attorney considering a potential case, there is now evidence that a) Triple-S had a weak balance sheet and failed to disclose that to policyholders by misrepresenting its credit rating at Triple-S Propiedad (albeit, the company did have the rating above when it underwrote Maria business), and b) that the company induced policy buyers into buying Triple-S Propiedad by claiming that Triple-S Propiedad is supported by the financial standing of Triple-S Management. As a result, we expect these findings will at the very least result in a drawn out battle to go after the management company. These factors point to a significant risk that regulators can invoke the “substantive consolidation” framework and force Triple-S management to bear the debts of Triple-S Propiedad.

In today’s bonus round – not only did Triple-S induce Propiedad sales by claiming management company support – but it even appears to have played favorites with related parties when resolving claims.

Why Did They Pay Themselves First?

Triple-S has given most Puerto Ricans the short end of the stick. We have spoken with adjusters who represent municipality claims in which hospital claims still remain largely unpaid. But the Chairman of the Board had a completely different customer experience with Triple-S.

For any claimant who is angry about their payout – s/he needs to read this section closely.

The Chairman of Triple-S’s Board is Luis A. Clavell Rodriguez. He is the Chief Medical Officer and President of the Professional Board at the San Jorge Children’s Hospital. This is all disclosed in the company’s proxy filings with the SEC. Clavell Rodriguez is listed as Director / Authorized Official on the hospital’s NPI entry as well. San Jorge hospital is a private hospital. In other words, Mr. Clavell Rodriguez directly economically benefits from the hospital’s operations. As an extremely senior executive of a private entity, he certainly draws his income and potentially also holds an equity stake in San Jorge Children’s Hospital.

Puerto Ricans who have not been paid by Triple-S may therefore be surprised to discover that San Jorge Children’s Hospital was paid a very high proportion of inception-to-date payouts relative to the premiums that the hospital paid in 2016/17 to Triple-S. More importantly, San Jorge hospital was paid very quickly relative to other claimants.

Source: DEF 14A filings, 10K filings, Stat filings from OCS, total claims paid data based on 2Q19 call transcript

First of all, we retrieved the information above from the company’s SEC filings so the payments are not up for debate. However, we cannot be fully sure all of the payments were related to Maria. With that being said, Triple-S separately records payments relating to healthcare services to San Jorge (e.g. about $401k disclosed in 2018). Therefore, in light of the timing and magnitude of payments, we reasonably believe that the bulk of the payments from Triple-S to San Jorge were logically related to Maria.

Notably, within months of Maria hitting, Triple-S had already made $12.5 million of payments to San Jorge hospital (before the end of 2017). To put the $12.5 million in context, Triple-S paid out a total of about $80 million on Maria claims in 2017.

Triple-S then made another $21 million of payments to San Jorge hospital by the end of 2018, for a total of $33 million in payments. This is a spectacular sum when you consider that San Jorge premiums only represented an average of 1.2% of Triple-S Propiedad gross premiums in the 2016/17 pre-Hurricane period.

We certainly understand and support Triple-S providing funding to a children’s hospital. But why did Triple-S not make similar timely payments to the non-profit Ryder hospital? Why did San Jorge get preferential treatment relative to Ryder?

As a reminder, Ryder hospital is in Humacao and is a non-profit hospital. Ryder had received only $15 million by February 2019, with most beds still unavailable all the way into early-2019. Ryder only received its second payment in May 2019. Our understanding is that the money came so late that Ryder had to undertake expensive reconstruction efforts. San Jorge, on the other hand, walked away with timely payments that work out to 5% of total payments that Triple-S has made on Maria claims through 2Q19. Furthermore, from media reports right after the hurricane, it appears that San Jorge was still functioning post-Maria even though it faced some power related issues – the Washington Post reported that the hospital still housed half of its normal 90 patients one week after the hurricane. Ryder, on the other hand, was completely evacuated on October 7, 2017 and FEMA was on the scene.

In this instance, there is ample evidence that Triple-S’s decision to promptly pay San Jorge resulted in favorable treatment for related party beneficiary San Jorge hospital. Again, we support the decision to fund a children’s hospital – we just question why the for-profit hospital directly tied to the Chairman of the Board got special treatment while a non-profit hospital suffered from an extremely delinquent payment.

We expect litigants who do not get paid in full to probe and scrutinize this transaction in detail, again putting the management company at significant risk of future clawback litigation.

One thing is for certain – to make this payment, Triple-S would have needed to extensively document the basis for the payment given the optics. This is especially true given FEMA funding went to hospitals such as Ryder as they waited on private insurance payments. It therefore makes sense for the Audit Committee to release the basis of the San Jorge payments – as we fully expect that if the Audit Committee does not release it, litigants will demand to see the basis for this payment in discovery.

We have thus established that Triple-S a) induced policy sales at Propiedad by claiming the management company provides “financial support” to Propiedad, b) continues to outright misrepresent its AM Best rating in public marketing materials still on its website, and c) made an insurance payment to an affiliate of the Chairman of the Board that appears to exhibit favoritism and is, in our view, very likely to be the subject of significant legal scrutiny given the high volume of litigation against Triple-S P&C. We have also established that the full picture of litigation that the company faces is multiples higher than implied in the Monday press release.

We again reiterate our belief that Triple-S is heading to zero and again call on the insurance regulator to do his job and preserve value for claimants.