TRIPLE-S MANAGEMENT CORP GTS S
February 21, 2020 - 7:23am EST by
mojoris
2020 2021
Price: 17.50 EPS 0 0
Shares Out. (in M): 25 P/E 0 0
Market Cap (in $M): 438 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

Quick hitter thesis: GTS is an optically cheap stock on price/earnings and reported book value, and due to a highly aggressive share repurchase program, the equity price has been fairly resilient over the past 6 months.  However, 1. the direction of the business is deteriorating and is facing numerous headwinds that may prove difficult to recover from in the near term (as the company conducts significant business in Puerto Rico), and the company is not currently reserved appropriately and may need to raise new capital. 2. GTS writes policies/collects premiums, then doesn’t pay claims.

 

Trade set-up: updated disclosures and filings will lead to a negative domino effect event path of negative catalysts beginning in the near future.

 

Trade duration: ~6-12 months (likely close the trade out when the 2020 10K is filed)

 

Company Description:

Triple-S is a significant player in the managed care space in Puerto Rico serving 876k members and has nearly 30% market share. Triple-S through three segments: Managed Care, Life Insurance, and Property and Casualty Insurance. The company offers various managed care products, including health maintenance organization plans; preferred provider organization plans; BlueCard program; Medicare Supplement products; Medicare Advantage products; Medicaid plans; and claims processing and other administrative services to employers, professional and trade associations, individuals, and government entities. It also provides various life, accident, disability, and health and annuity insurance products primarily to individuals; and property and casualty insurance products comprising commercial multi-peril package, personal package, commercial auto, hospital malpractice, commercial liability, and commercial property for small to medium size accounts. The company markets and distributes its products through a network of internal sales force, direct mail, independent brokers and agents, telemarketing staff, traditional media, and digital media, as well as e-commerce. It holds rights to the Blue Cross Blue Shield name and mark throughout Puerto Rico, the United States Virgin Islands, Costa Rica, the British Virgin Islands, and Anguilla.

Snap-shot financials (Source Bloomberg):

Performance

2010

2011

2012

2013

2014

2015

2016

2017

2018

5 Yr Avg

Price Change

8.4%

4.9%

-7.7%

5.3%

23.0%

0.0%

-13.4%

20.0%

-30.0%

-0.1%

S&P 500 INDEX

0.0%

13.4%

29.6%

11.4%

-0.7%

9.5%

19.4%

-6.2%

28.9%

10.2%

Industry (INDU Index)

5.5%

7.3%

26.5%

7.5%

-2.2%

13.4%

25.1%

-5.6%

22.3%

10.6%

Div Yield

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Financials

12/10 Y

12/11 Y

12/12 Y

12/13 Y

12/14 Y

12/15 Y

12/16 Y

12/17 Y

12/18 Y

5 Yr CAGR

Sales

1,998.6

2,153.2

2,422.0

2,381.6

2,320.1

2,902.7

2,984.8

2,916.1

3,021.0

4.9%

EBITDA

112.4

111.6

101.2

92.9

99.7

81.7

32.8

99.0

47.5

-187.5%

EBIT

96.9

89.4

77.0

67.3

75.3

65.3

18.7

85.8

61.0

-198.1%

Net Income

66.8

58.0

54.0

55.9

65.7

52.1

17.4

54.5

63.3

-202.5%

EPS (Diluted)

2.17

1.91

1.81

1.91

2.29

1.92

0.68

2.15

-2.63

-206.5%

Dividends per Share

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

-

Shares for Fully Diluted EPS

30.7

30.3

29.9

29.2

28.6

27.1

25.8

25.3

24.1

-3.7%

Book Value per Share

20.38

22.71

25.56

27.20

30.22

32.25

33.83

36.85

34.10

4.6%

Cash & Near Cash

45.0

71.8

89.6

74.4

110.0

197.8

103.4

198.9

117.5

9.6%

Total Assets

1,759.4

1,880.6

2,059.3

2,047.6

2,145.7

2,206.1

2,219.0

3,116.8

2,760.2

6.2%

Working Cap

534.4

588.0

698.9

713.8

798.7

790.4

800.1

256.3

387.1

-11.5%

LT Debt

166.0

114.4

101.3

89.3

74.5

36.8

35.1

32.1

28.9

-20.2%

Cash Flow-Oper Activities

37.7

162.5

109.7

112.9

38.0

229.1

6.5

288.9

7.5

-41.9%

Capital Expenditures

19.2

16.3

12.1

11.8

4.8

9.1

4.8

21.4

19.8

10.9%

Free Cash Flow

18.4

146.2

97.6

101.1

33.2

220.0

1.7

267.6

12.4

-165.7%

Ratios

12/10 Y

12/11 Y

12/12 Y

12/13 Y

12/14 Y

12/15 Y

12/16 Y

12/17 Y

12/18 Y

5 Yr Avg

Gross Margin

20.1%

20.3%

20.7%

22.9%

24.7%

20.1%

17.2%

19.3%

16.3%

19.5%

EBITDA Margin

5.6%

5.2%

4.2%

3.9%

4.3%

2.8%

1.1%

3.4%

-1.6%

2.0%

EBIT Margin

4.8%

4.1%

3.2%

2.8%

3.2%

2.2%

0.6%

2.9%

-2.0%

1.4%

Profit Margin

3.3%

2.7%

2.2%

2.3%

2.8%

1.8%

0.6%

1.9%

-2.1%

1.0%

Return on Assets

3.9

3.2

2.7

2.7

3.1

2.4

0.8

2.0

-2.2

1.2

Return on Com Eqty

11.6

9.0

7.5

7.2

8.0

6.1

2.0

6.1

-7.3

3.0

Asset Turnover

1.2

1.2

1.2

1.2

1.1

1.3

1.3

1.1

1.0

1.2

Assets/Equity

2.9

2.8

2.7

2.6

2.5

2.6

2.6

3.4

3.4

2.9

Net Inc per 1000 Employees

30.4

20.0

16.3

15.7

19.5

16.0

-

-

-

17.8

Days Sales Out (DSO)

-

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Acc Pay Turn Days (DPO)

-

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current Ratio

1.9

1.9

2.0

2.1

2.3

2.1

2.1

1.2

1.3

1.8

Quick Ratio

0.3

1.9

2.0

2.1

2.3

2.1

2.1

1.2

0.4

1.6

Total Debts/Total Capital

22.7

14.5

14.7

10.2

8.0

4.2

3.9

3.4

3.4

4.6

Total Debt/Total Equity

29.4

16.9

17.2

11.4

8.7

4.3

4.1

3.5

3.5

4.8

 

GTS US - Balance Sheet

 

 

     

 

September 30, 2019

December 31, 2018

Assets

 

 

Investments and cash:

 

 

Fixed maturities available for sale, at fair value

$ 1,268,910

$ 1,199,402

Fixed maturities held to maturity, at amortized cost

1,860

2,492

Equity investments, at fair value

267,283

279,164

Other invested assets, at net asset value

97,084

74,015

Policy loans

10,566

9,469

Cash and cash equivalents

98,932

117,544

Total investments and cash

1,744,635

1,682,086

Premiums and other receivables, net

608,305

628,444

Deferred policy acquisition costs and value of business acquired

232,948

215,159

Property and equipment, net

86,299

81,923

Deferred tax asset

61,680

79,010

Goodwill

28,970

25,397

Other assets

67,529

48,229

Total assets

$ 2,830,366

$ 2,760,248

Liabilities and Stockholders' Equity

 

 

Claim liabilities

$ 801,991

$ 936,789

Liability for future policy benefits

381,264

361,495

Unearned premiums

88,281

82,990

Policyholder deposits

177,129

174,110

Liability to Federal Employees' Health Benefits and Federal Employees' Programs

44,947

44,926

Accounts payable and accrued liabilities

322,207

275,228

Deferred tax liability

10,283

3,245

Long-term borrowings

26,492

28,883

Liability for pension benefits

29,081

31,274

Total liabilities

1,881,675

1,938,940

Stockholders' equity:

 

 

Triple-S Management Corporation stockholders' equity

 

 

Common stock Class A, $ 1 par value. Authorized 100,000,000 shares; issued and outstanding 950,968 at December 31, 2018

-

951

Common stock Class B, $ 1 par value. Authorized 100,000,000 shares; issued and outstanding 24,333,036 and 21,980,492 shares at September 30, 2019 and December 31, 2018, respectively

24,333

21,980

Additional paid-in capital

67,180

34,021

Retained earnings

816,969

761,970

Accumulated other comprehensive income

40,895

3,062

Total Triple-S Management Corporation stockholders' equity

949,377

821,984

Non-controlling interest in consolidated subsidiary

(686)

(676)

Total stockholders' equity

948,691

821,308

Total liabilities and stockholders' equity

$ 2,830,366

$ 2,760,248

Source: Company Report

 

 

 

Entry Catalyst and Potential for Event Path Negative Domino Effect:

GTS is expected to report earnings on February 27th and I expect the “headline EPS” figure to be very strong (source Bloomberg: GTS has beat on Adjusted EPS 5 of the last 8 quarters), as well as to be the last good news the company provides to the market for some time. Based on the aggressive share repurchase program the company has in place, and analyzing the average daily volume and broker activity, the company has been aggressively buying the shares back likely leading to a large headline EPS beat (similar to the prior 2019 prints). I expect the reported EPS figure to be materially higher than sell side estimates (Wells Fargo) due to the aggressive nature of the buyback, attempting to cloud a weakening business with numerous headlines.

Wells Fargo analyst coverage history:

GTS will attempt to promote this earnings print as the normalized earnings power of their business prior to a series of negative catalysts that could send the shares lower.

These catalysts include: 

Earnings and supplemental reports: As I said I expect EPS to materially beat expectations, however the year over year net income and other KPIs will show signs of a business likely inflecting lower over the coming year, making comps difficult and marking this print as peak.

10K filing: I expect new risk factors will be added that illustrate the materially weakened earnings power of the business, and potentially illustrate that the credit and equity profile of the business may be impaired. I wouldn’t be surprised to see going concern language added to this filing or the 10Q filing in May 2020.

Key 10K Sections that may include material updates (redline should be available in early March 2020):

  • Page 18-20 discusses various regulatory capital requirements and restrictions.
  • Potential for regulatory disclosures that illustrate a culture of dishonesty Page 24 discusses anti-kickback laws.
  • Whistleblower complaint(s) updates: claims filed in 2019: Page 24 and 48
  • Puerto Rico corruption exposed: Puerto Rico Insurance Commissioner recent resignation. https://www.telemundopr.com/noticias/puerto-rico/comisionado-de-seguros-presenta-su-renuncia-a-la-gobernadora/2038715/. Translated version: https://www.telemundopr.com/noticias/puerto-rico/comisionado-de-seguros-presenta-su-renuncia-a-la-gobernadora/2038715/ Page 33: depended on small number government contracts to generate significant revenue. From November 10Q: The indictment of two former senior Puerto Rico government officials on fraud and related charges in July 2019, as well as other scandals involving former Puerto Rico Governor, Ricardo Rosselló Nevares, and other senior government officials led to massive protests and, ultimately, Rosselló’s resignation. 
  • Page 34: Our failure to accurately estimate incurred but not reported claims would affect our reported financial results
  • Rating Agency updates: Potential for further AM Best updates and downgrades including updates to risk language leading to higher legal charges and higher loss adjustment expense

Page 36: Ratings assigned by A.M. Best are an important factor influencing the competitive position of the property and casualty insurance companies in Puerto Rico. In November 2018, A.M. Best downgraded the rating of our Property and Casualty subsidiary from an “A-” (Excellent) to a “B+”(Good) with negative implications. The rating revision follows the unfavorable reserve development of Hurricane Maria losses experienced by this subsidiary during the second and third quarters of 2018. This rating will remain under review until A.M. Best completes its next annual evaluation of the Company. A.M. Best ratings represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Financial strength ratings are used by brokers and customers as a means of assessing the financial strength and quality of insurers. A.M. Best reviews its ratings periodically and we may be further downgraded following their annual evaluation. 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.

  • Page 39: Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely impacted and may continue to adversely impact us:

Our principal lines of business are concentrated in Puerto Rico, which is currently in the midst of a severe fiscal and economic crisis. Puerto Rico’s gross national product (“GNP”) has contracted in real terms since fiscal year 2006. According to the latest Puerto Rico Planning Board estimates, released in April 2017, Puerto Rico’s GNP was projected to decrease by 1.7% and 1.5% in constant dollars for fiscal years 2017 and 2018, respectively. In each case, such analysis does not account for the impact of Hurricanes Irma or Maria in September 2017. The government of Puerto Rico’s Fiscal Plan (as hereinafter defined), which accounts for the impact of the hurricanes, estimates an 8% contraction in real GNP during fiscal year 2018. It also projects that disaster relief funding will have a short-term stimulative effect on Puerto Rico’s economy, which, combined with the estimated effects of the proposed measures and reforms, the plan estimates will result in variable GNP growth from fiscal year 2019 through 2022, followed by GNP contraction in fiscal year 2023 as disaster relief funding decreases.

Puerto Rico: the state of the territory is not only in disarray, but various natural disasters that have occurred over the last year, have not been accurately accounted for from a loss perspective by GTS Page 42: Puerto Rico has historically been at a relatively high risk of natural disasters (Multiple Natural Disasters: https://www.elnuevodia.com/negocios/economia/nota/aseguradorasdicenqueesprematurocalculardanos-2540619/ such as hurricanes and earthquakes. If Puerto Rico were to experience a large-scale natural disaster, claims incurred by our Managed Care, Life, and Property and Casualty segments would likely increase and our properties may incur substantial damage, which could have a material adverse effect on our business, financial condition and results of operations.

  • Potential to put P&C business into receivership due to inadequate reserves: RBC Scores: As of December 31, 2018, TSP’s RBC score was lower than the 200% minimum requirement. Page 19

-Psropiedad bankruptcy: from 2019 10k - In 2018, our subsidiary Triple-S Propiedad (“TSP”) experienced a reinsurance spillover for the first time since its incorporation 30 years ago. This spillover was related to the losses caused by Hurricane Maria, a strong Category 4 hurricane that impacted Puerto Rico in September 2017. Following the impact of Hurricane Maria, TSP increased its catastrophe protection to maximum losses per event by $200 million, from $715 million in 2017 to $915 million in 2018. If the severity of any such natural disaster exceeds what our catastrophe reinsurance protection, as in the case of Hurricane Maria in September 2017, we may potentially incur material losses. Furthermore, unforeseen major public health issues following these catastrophic events, such as pandemics and epidemics, like mosquito-borne epidemics (Dengue, Zika, etc.), conditions for which vaccines

may not exist, are not effective, or have not been widely administered, could have a material adverse effect on our business, financial condition, and results of operations.

Claims in our Property and Casualty segment increased in 2017 and 2018 as the result of the losses caused by Hurricanes Irma and Maria in Puerto Rico. The Puerto Rico

Insurance Code requires the Company to resolve claims within a period of 90 days. -Litigation / reserves profile: various. “avalanche of claims” – See late September press release is carefully worded, and limited public updates since. Due to the substantial increase in the volume of claims following a catastrophic event,

there is a business risk that not all claims will be resolved within the timeframe stipulated in the Puerto Rico Insurance Code, which may result in penalties imposed by the

Commissioner of Insurance of Puerto Rico. Furthermore, there is a risk of an increase in the volume of litigations by insureds who are not satisfied with the insurance.

                 https://www.nytimes.com/2020/02/06/us/puerto-rico-insurance-tsunami.html?partner=msn

Further disclosures in upcoming proxy filing and Annual Meeting March 16th and April 27th that illustrate incentive structure for utilization of share repurchase plan vs loss mitigation - EPS sets the expectation of the Company’s success for our shareholders. We use EPS as the key accounting measure and evaluation of how the Company is performing. Rather than fund its P&C business with claims and missing out on incentive compensation, GTS has been repurchasing shares to boost EPS.

OCS data: Spikes in claims, but reserves unchanged over the last 2 years. Rather than pay claims from municipalities and hospitals, the company is forcing these claims victims to bring expensive lawsuits.

Where could we be wrong:

  • 10K: GTS updates customary language for a business of this nature and no new material updates from prior periods regarding any of the above concerns expressed
  • Deloitte doesn’t update risk language and signs off on company and subsidiary financials (AM Best likely doesn’t update negative outlook as well)
  • Propiedad (P&C) remains 'solvent' (~$60mm of book value) and therefore burn down book value vs sell-side (Wells Fargo) is incorrect
  • Proof that GTS relationships with PR officials didn’t lead to new business contracts or ability to delay paying claims, therefore is no evidence of political corruption
  • Downside valuation: stock is cheap on future reduced tangible book value (“already in the price”) after future write downs versus inadequate reserves doesn’t lead to negative investor sentiment and company continues to repurchase shares rather than issue new equity “instruments” to create adequate capital cushion
  • Takeover by industry participant that wants to expand into Puerto Rico
  • Shorting stocks with value factor (inflection in growth vs value)
  • Puerto Rico turnaround leads to a sustained business inflection lifting all boats
  • GTS is not responsible for paying any of the outstanding claims and legal settlements and it amounts to minimal losses
  • Not part of above write up: fraudulent conveyance issues / pierce corporate veil
  • Short interest trends to monitor:

Summary: GTS business is under material fundamental pressure, and various negative near term catalysts are likely to send the shares lower.

Disclaimer: This note is my opinion. Don’t rely on any of it.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Domino Catalyst Path: earnings power (ex share repo); subsidiary bankruptcy; claims update; 10K filing (redline); Proxy filing; credit rating update, et al.

Update situation analysis post earnings print and 10K Filing

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