• Despite sitting on an obviously insolvent subsidiary that could bring down the whole enterprise, Triple-S is currently trading at ~1.2x tangible book (ex P&C)
  • Triple-S Propiedad is now undeniably insolvent. The actuary will catch this at year end. The company should have provisioned in 3Q19 to account for hundreds of lawsuits demanding $1B+, but did not because it would have put P&C below minimum RBC levels, forcing GTS to add capital to Propiedad.
  • Even a shareholder who previously disagreed with our work now agrees that Propiedad is insolvent. Management’s failure to provision and acknowledge P&C insolvency in 3Q19 constitutes accounting and securities fraud, in our opinion.
  • Propiedad is now effectively a glorified Ponzi scheme. After blowing up the P&C book, we are now hearing that Triple-S is pricing new P&C business at 15-25% discounts to market, while toasting $25 million on a share repurchase designed purely for optics
  • AM Best reports and statutory filings confirm that GTS tangible book ex-P&C is ~$400 million (~60% below GAAP book value).
  • With P&C now insolvent, all that remains is a healthcare business that does not generate core operating profit, a small and long-tailed life insurance business, and a vanilla bond portfolio mixed with enormous contingent liabilities, including the uncertainty of whether Propiedad liabilities are the responsibility of the parent company

Triple-S GAAP Book Value Materially Inflated Relative to Economic Reality

We find it hard to believe that sophisticated investors who presumably read financial statements continue to parrot a $1 billion tangible book value figure when publicly available statutory filings and even basic analysis of SEC filings so easily knock this idea down.

Triple-S operates in three primary segments – Vida (life), Salud (health), and Propiedad (P&C). All three file statutory financial statements. From statutory filings, we compiled the surplus capital and assets over time for each of the subsidiaries below:

Source: OCS/NAIC/AM Best Stat Filing Data

You can download OCS reports here.

From the above, Salud and Vida together contribute about $423 million of Tangible Book Value, or ~$17.60/sh of true tangible book value.

AM Best also provides ratings information on Triple-S Management that you can purchase online. AM Best claims that book value as of YE18 for Triple-S Management was ~$464 million. Backing out $64 million at Propiedad, this would put YE18 Triple-S Management tangible book value at $400 million or $16.67/sh (assuming a 24 million share count).

Why the discrepancy to SEC filings? Much of the book value shown in GAAP SEC filings is intangible. For example, the company’s latest 10Q book value includes $233 million of “deferred policy acquisition costs and value of business acquired” – i.e. prepaid marketing expenses, line items you are not going to get your hands on in a liquidation and that very well may already be worthless. These are unequivocally intangible in nature and should therefore be excluded from tangible book value.

The company also reports $86 million of PP&E, including furniture, computers (disclosed as most of the PP&E balance), and real estate (purchased before Puerto Rico’s 50-75% price correction), as well as other non-cash line items such as $62 million of deferred tax assets (which, again, are of dubious value at best and not generally considered tangible in a liquidation analysis) and $68 million of unexplained long-term “other assets” that again have no place in a proper tangible book value calculation. Clearly none of these suspect intangible assets are included in statutory filings given the wide gap between statutory surplus and accounting surplus. Below, we lay out the 3Q19 10-Q with commentary and analysis on tangible vs. intangible assets:

Source: 10-Q and our analysis

Our analysis above points to tangible book value at Triple-S Management of around $16/sh. This compares to Street estimates that we have seen of anywhere between $30 to $40/sh of TBV. Our analysis triangulates roughly to analysis compiled by AM Best regarding Triple-S Management’s book value.

Now that even bulls have acknowledged that Propiedad is insolvent, the valuation analysis shifts to a liquidation approach. What everyone now wants to know is what happens if the break up the company – what can be distributed to shareholders? You can’t distribute soft assets such as “deferred policy acquisition costs”.

The various approaches we take above all triangulate to a true tangible book value at Triple-S of somewhere around $16/sh. So at $19/sh, Triple-S is not cheap. In fact, it is remarkable that an insurer with a collection of terrible assets and an insolvent subsidiary that could bring down the whole enterprise is currently trading at ~1.2x tangible book.

As we have already established, we believe Triple-S will ultimately be on the hook for P&C losses and we look forward to management explaining to the federal government why it has refused to pay anything to municipalities yet expects to continue earning 85% of its revenues from federal healthcare programs. But regardless of whether Triple-S ends up on the hook for its P&C losses, we point readers to NAIC data that shows book value at Triple-S is 50%+ lower. With this backdrop, we present our scenario tree analysis for valuation.

Scenario Analysis (Using NAIC Statutory Filing Book Values in Scenario 1)

Source: Our analysis

Neither Salud (healthcare) nor Vida (life) would ever receive a 1.0x book value multiple if traded as standalone entities. We reflect that in some of the scenarios above.

On the topic of Vida (life), we note that the Vida business represents 37% of the company’s assets despite representing a very small piece of book value. As a life insurance business, Vida has a long-tail to policies and is clearly not a 1x book business. It is also engaged in risky business lines such as elderly/death care that have blown up far more sophisticated insurance companies recently (i.e. GE). In other words, that business is not a 1x book value business. Multiples in the life space support this view.

But Vida is not what gets the bulls excited. Let’s turn our attention to Salud (aka healthcare).

Healthcare – Does Not Earn Legitimate Operating Profit, Lives off the Net Interest Margin


Let’s look at the purported – “crown jewel” healthcare asset a little closer.

In its core operations, healthcare has never really generated an operating profit other than in 2017-18. The 2017-18 results were a massive outlier because the power was off in Puerto Rico and the medical loss ratio benefitted massively because people could not visit hospitals or doctor offices for an extended period of time following Maria. FEMA also stepped in to provide medical care. Worse yet, Triple-S itself played a direct role in the problems post-Maria. It did not pay P&C claims to hospitals in a timely fashion after Maria which in turn benefited not only P&C costs but also Healthcare costs. In fact, after Maria, Triple-S management was buying back $50 million in common stock instead of paying local hospitals such as Ryder, with the OCS eventually intervening to force Triple-S to pay mission critical claims.

Healthcare earns essentially all of its operating profit from its investment portfolio – something that makes it very distinct from mainland insurance peers. Therefore, with no operating profit to show from healthcare operations, Salud is little more than a NIM play on a bond portfolio. The primary offsetting factor is that it is a NIM play on a bond portfolio combined with massive regulatory risk and contingent liabilities via the well-known federal corruption probes relating to ASES and questions relating to reserve adequacy given repeated press stories about unpaid medical claims.

As you can see below, the combined ratios at Triple-S Salud have historically been terrible, with only 2017 and early 2018 reflecting outlier years due to post-Maria lack of medical facility utilization.

Source: FY18 10-K (directly from 10-K)

This is not a crown jewel business. Contrast the results above to Humana which in FY2018 on an apples-to-apples basis posted a 96.8% combined ratio (83.5% MLR / 13.3% Opex).

It is clear. Triple-S’s healthcare business is one that should never trade at anything close to 1x book. When buying Salud, you get a plain vanilla bond portfolio combined with an suspect management team, credible allegations of unpaid claims, and credible allegations of contract corruption.

Therefore, when you exclude P&C, you are left with two businesses that should certainly command sub book value multiples. You are also left with book value that is substantially (~55%+) lower than the very inflated book value shown on Triple-S’s balance sheet.

Here is the dirty truth – Triple-S only showed strong “earnings” in the past few quarters because a) Maria resulted in an abnormally low MLR for an extended period of time, and b) P&C results were massively inflated because the company hid the subsidiaries insolvency from the market and refused to pay legitimate claims.

We Believe Deloitte & Touche Is Obligated to Investigate Clear Signs of Accounting Fraud

Triple-S has actively and, with scienter, manipulated earnings results in P&C for the past several quarters, resulting in material earnings inflation that has masked the underlying weakness in the overall business and masked outright insolvency at Triple-S Propiedad.

We have sent all of the allegations below to Deloitte & Touche, Triple-S’s independent auditor, as we believe that there is abundant evidence that the company is actively manipulating its financial results and presenting inaccurate financial statements. Evidence for this position is mounting based on the company’s repeated efforts to deceive the public market with respect to its Maria claims. Per PCAOB rules, Deloitte & Touche is obligated to fully investigate credible allegations of fraud made by short sellers (see AS 2805 Item 6J).

In the past months of reporting, we have surfaced ample evidence of pervasive accounting fraud, insurance fraud, and governance corruption at Triple-S, and the 3rd Quarter of 2019 results only further confirm our reporting as we outline in this piece. We are also concerned that Triple-S has been hiding material information from the lead audit partner on the Triple-S account. Given that Triple-S has also hidden legitimate claims from the market, it is not a stretch to assume that the company has also kept Deloitte & Touche in the dark. We also put little faith in Triple-S’s Audit Committee doing its job – it blessed what appears to be a sham internal investigation into ASES/Vital corruption, did not order any investigation into Dr. Clavell-Rodriguez, allowed management to disclose false figures to the market relating to litigation, and counts as one of its members David Chafey, prior head of the Government Development Bank who was previously linked to contract irregularities pertaining to a Triple-S contract award that was granted right to Triple-S at the same time he was added to Triple-S’s BOD.

Timeline of Accounting Fraud / Material Weakness in Internal Controls

Mid-2018: Triple-S blew through reinsurance. It was fully aware that it did not have enough capital to pay off its P&C claims. It stopped paying municipalities and condominiums and utilized the assistance of questionable adjusters such as Acosta (and its related engineering firm Greenwave) to deflect and deny legitimate claims, mostly through an aggressive campaign of stalling meetings and skipping investigations in an effort to kick the can and run out the clock on the statute of limitations

Mid-2018: Controversial hospital associated with public fund misappropriation (CCC) enters into contract with Triple-S and this is not disclosed in FY18 10-K. Chairman Dr. Clavell-Rodriuguez runs CCC and it has been alleged that he was directly involved in public fund misappropriation in a whistleblower lawsuit from earlier this year

FY2018 10-K: Deloitte signs off on a 10-K that should have had going concern language relating to the P&C subsidiary and should have had related party disclosure pertaining to CCC

Early 2019: Law firms and hedge funds recognize that Triple-S and other insurers are delinquent on legitimate insurance payments and begin to mount an attack

May 9, 2019: On the 1Q19 earnings call, Triple-S claimed to be involved in 230 lawsuits relating to P&C claims

July 10, 2019: Media reports that FBI raids Triple-S HQ in connection with ASES/Vital bid rigging probe

September 24, 2019: The company again claims that it is involved in 230 lawsuits as of 9/23/19 relating to P&C claims – amazingly the exact same number of lawsuits that it had claimed as of May 9, 2019.

Commentary: The claim was clearly inaccurate on its face given that Triple-S claimed that 48 lawsuits were filed against it after June 30, 2019 – almost two months after the 1Q19 earnings call. It is clearly implausible that 48 new lawsuits were filed yet the absolute volume of litigation remained static between May 9, 2019 and September 23, 2019

September 24, 2019: After the September 24, 2019 morning press release, we immediately called out management’s lie in a public report – we had already gathered ~200 lawsuits against the company filed after June 30, 2019, rendering the company’s claim of 48 new lawsuits since that period completely and utterly false

Commentary: Given we could find these suits, we knew that management was undeniably aware of the suits and believe they misrepresented the volume of litigation. The company also reiterated its reserve adequacy on September 24, 2019, despite working with clearly inaccurate litigation data to form the reserve opinion

September 24, 2019: Making matters worse, Juan Roman, CFO of Triple-S, held selective calls with shareholders including one NY based shareholder during which he claimed that Triple-S had conducted an extensive litigation search on the Puerto Rican E-Filing system and that their lawsuit count was accurate, standing by their press release

October 2, 2019: We provided ~200 lawsuits to the market via DropBox

Week of October 2, 2019: Juan Roman, CFO, again holds selective calls with shareholders (including aforementioned NY shareholder) during which he admits that the litigation count that Triple-S provided to the market in September 24, 2019 press release was materially inaccurate

Commentary: In an apparent Reg FD violation, management selectively disclosed that it had misrepresented litigation to certain shareholders in the weeks between the September 24, 2019 press release

November 7, 2019: Management finally came clean about the volume of litigation against the P&C subsidiary (albeit, with remaining data inaccuracies) but this time concocts a reversal in reserves that magically and perfectly offsets the purported loss adjustment expense the company claims that it provisioned in connection with all of the new lawsuits filed against P&C. Two years after a catastrophe, with conflict growing not subsiding (now allegedly 396 active lawsuits), the concept of a reversal in reserves is absurd and speaks to the levels management is willing to go in terms of accounting malfeasance to avoid revealing true state of P&C subsidiary. Company also manages to keep P&C at the minimum RBC level by avoiding a provision. Had company provisioned, it would have had to put additional capital into P&C or admit insolvency. Management also indicates internal investigation – that involved conflicted securities counsel and was poorly and inappropriately disclosed – is essentially complete, finding no problems with ASES/Vital contract.

Our Conclusion: In light of management’s repeated lies, misrepresentations, and games with words, it became clear to us that as of the 3Q19 10-Q filing that Triple-S had engaged in accounting fraud to avoid taking a provision in connection with the new lawsuits. The internal investigation also appears to have been a sham investigation given the various conflicts of interest.

Book value at Triple-S is somewhere around $16/sh. On a scenario-adjusted basis, we believe the stock’s fair value is around $8/sh at best but continue to believe Propiedad could bring the whole enterprise down given the company’s marketing claims regarding Propiedad. The company is currently trading at around $19-20/sh as of publication, a ~20% premium to tangible book value.

The truth is Triple-S really makes no operating profit in healthcare, has a small, risky, and long-tailed life business, and is sitting on an insolvent P&C business that management used as a cookie jar to inflate earnings for the past several quarters while the subsidiary was clearly insolvent since at least mid-2018.

Again, it is remarkable that a collection of terrible insurance assets and an insolvent subsidiary are trading at 1.2x tangible book and there is no rational basis for a share repurchase at these trading levels.

The book value estimates above do not take into account any of the contingent liabilities relating to the volumes of corruption and fraud related allegations we have surfaced against the company.

Is there really a margin of safety in this stock? Or are shareholders buying into a clearly nonsensical book value that the market has historically seen right through?