Dear Friends,
After a year off, it’s time for me to get back in the saddle and blog again.? I’m going to restart in a way similar to the way that I began — writing shorter posts, and being light on graphics.? I’ll go into what I did during my time off bit-by-bit as I go on. But for now, here is today’s post:
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Yesterday there was an article published on Triple-S Management which I found to be poorly done in some ways.? That said, GTS has its share of negatives:
- There are a lot of claims outstanding from Hurricane Maria on GTS, though there may be some good reasons why the claim settlement is slow.? That said, in my own investing on Katrina, I was able to find and short reinsurers that had understated their claim exposure — that happens.? In that case, though, the errors were realized within two months, not two years.
- Triple-S management is not a great management team, but paraphrasing Buffett, I’d rather have a mediocre management team in a great business, than a great management team in a mediocre business.
- That great business is health care insurance in Puerto Rico, where GTS has a leading position.? Cutting against that are their other insurance businesses, which I think they might be better off exiting.? Most insurance management teams don’t do well managing multiple lines of business. Focus is a plus in insurance.
- AM Best did downgrade the P&C sub of GTS?(Triple-S Propiedad) pretty severely after the Maria claims were revealed, which *did* take a long time to surface.? But AM Best is “inside the wall” and has a lot of data that is nonpublic.? They would have asked the questions regarding large claims posed by the article above.? Since that time AM Best has become more positive on the creditworthiness of the entire GTS enterprise, inding Propiedad.? None of GTS’s entities are “under review with negative implications anymore.”
- All of the significant exposure to loss for Propiedad is in Commercial Multiperil.? I confirmed that from the year-end Statutory statements, which are not public documents, but should be.? (NAIC, let the data be free!)
Here are my main difficulties with the article:
- After a major disaster, everything moves slower in insurance, and insurers play hardball to a higher degree.? That’s normal business.? There are reasons why a claim may paid out at lower values or not at all — terms or conditions of the contract were violated, damage happened for reasons not covered in the insurance, negligence of the insured, the cost estimates are wrong, etc.
- The writers say that GTS only has the amount of its market capitalization to play with to make claim payments after its reinsurance is exhausted.? GTS trades at at a price-to-tangible book ratio of 43%.? The net worth of GTS, though not entirely available to pay claims, is around $900 million.
- And, I looked around to see if GTS parent company is on the hook to provide capital support for Propiedad.? They have promised another $10 million, but looking through some of the filings at the SEC, and the 2018 year-end statutory statements for Propiedad, I saw no guarantee listed.? AM Best identified such a guarantee for the Triple-S Blue subsidiary in the most recent press release, but did not say something similar about Propiedad in the November 2018 press release, which would have been a material factor in both the ratings of Propiedad and GTS as a whole if it had existed after the release of the Maria claims.? As such, in a pinch, GTS could send Propiedad into insolvency/runoff, or, play a political game with losses if necessary.
- As it is, the expected remaining losses for P&C in Puerto Rico is in the $2 billion range.? That makes the estimate that Propiedad has $1 billion remaining to pay unlikely, and makes the $309 million seem reasonable compared to its market share (9-21% depending on how you measure it).
- Insurers in setting initial reserves, are supposed to put out their best estimates.? That may be considerably lower than what insureds are asking for — it’s a negotiation, after all.? If claims as they are processed are paid out at higher rates than the estimates, it will show up as an increase in “claims incurred in prior years.”? That hasn’t been happening in the GAAP or Statutory statements so far, but who can tell for sure — maybe the article is right, and there are some big bombs remaining.
- But the three claims mentioned in the article totalling $170 million will likely be settled for less.? The other alleged $900 million of claims are difficult to analyze or verify.? It’s just scuttlebutt, which could be right, but who can tell?? It doesn’t fit with the total likely remaining claims in Puerto Rico of $2 billion, or, maybe the $2 billion estimate is wrong.? (By this point, those estimates should be good.)
- The article briefly questions the retroactive reinsurance cover for Propiedad, but it’s really pretty simple.? After a disaster, getting insurance for claims is tough and expensive.? Typically, the policy names a total claims attachment point for when claims will start being paid that seems unlikely to be hit, and the reinsurer pays proportion of the claims above that point up to a limit.? (Buffett has done a lot of these deals on reinsurance of asbestos claims.)? What it does mean is that another insurance company had to get enough confidence on the total claim level? to write the business.? They probably got to look through all of the claim files, settled and pending.? (The reinsurer in question is a very large and well-known one, one with very high-quality underwriting processes.? I think it would break confidentiality from downloading the documents from the NAIC if I revealed its name. The answer is at the top of? page 14.17 of the annual statutory statement of Propiedad.)
- Finally, the writers of the article allege all manner bad things that will happen to the health business of GTS either from a scandal, or what will happen from lack of full payment of claims on damaged Puerto Rico government buildings.? Puerto Rico does not likely want Propiedad to go insolvent.? They would rather work out some sort of deal that extracts the most it can out of the GTS parent company without leading them to send the company into runoff/insolvency.? The Puerto Rican government could indeed threaten GTS with the loss of some or all healthcare business, but they could not seize the healthcare company.? In the worst case scenario, if Puerto Rico ended up with an insolvent Propiedad, and told GTS that they would never get healthcare business again, GTS would go into runoff, and the dividends paid by the company as it went out of business would exceed the current stock price.? In the meantime, GTS is a large employer in Puerto Rico, and they would have to deal with all of the layoffs.? I don’t think this scenario is likely to happen.? If claims from government entities are too high for Propiedad to deal with, the Puerto Rican government would likely work out some sort of deal.
If you think this is unlikely, remember that in the financial crisis, all sorts of large entities got special treatment when they teetered near bankruptcy.? I am not saying that is the case here.? I think GTS, AM Best and the retroactive reinsurer are correct, and the writers of the article are wrong regarding the claims exposure.
Am I certain of this?? Of course not.? Though I made money speculating on Katrina’s effects on Montpelier and Ren Re, I lost money on Scottish Re.? I am fallible.? I am making considerable surmises in this piece I am writing now, as are the writers of the piece I am criticizing.
Last point: I would be almost certain they have more money on the line for this one than my clients and I do, for whatever that is worth.
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Disclaimer: There are a lot of things that I don’t know here, so I could be wrong.? As with anything I write, do your own due diligence.??
Full disclosure: long GTS for clients and me
(And, oh yeah, this didn’t end up short, now did it?)
Welcome back! Thank you for writing up your thoughts. Do you think the AM Best downgrade of Propiedad will materially change renewal rates for current policyholders? The Friendly Bear suggested as much.
They are right on that, the only question is to what degree, which is affected by the degree of competition entereing and exiting the market. Propiedad’s rate of customers renewing should decline. Average premium rates charged for new P&C business across the industry as a whole should rise.
There is a lot of insurance capital sloshing around globally, but who will make the effort to go to Puerto Rico? It’s not that big, and there is some greater fear of hurricanes, as well as a declining population, which makes almost every economic problem tougher.
Thanks for coming back David! I appreciate your outlook
Good to be back, thanks for the kind words.
Thanks for the informative article David. I have been watching GTS stock crater and trying to find out the reason behind this as it appears to be of very good value at the current price. Your article and link to the short thesis article are very useful and I plan to look at them both again more carefully. It is very unlikely the stock is worth $0, given A.M. Best’s recent review and press release. A.M. Best has very strong experience in reviewing standard P&C insurance companies and dealing with cat situations like this, so it is hard to believe they would be too far off.
Finally! Glad to see you back and blogging again.
Given your expertise on insurers, any way you could do an article on the underwriting standards of insurance companies and their assumptions with potential climate change weather events? I.e., are they assuming more storms and higher payouts or are they using historical data to guide their current underwriting?
I’m trying to figure out which way they’re leaning on the issue.
I’m glad to be back, thanks.
I don’t think this is a very big issue. Weather affects their short-term earnings, not climate. If storms become more severe for a long period of time, insurance pricing will rate higher together with loss trends. Profits will probably not vary much, decade to decade. Interest rates might actually have a bigger impact. If interest rates are higher, underwriting gets loose.
Since this article was published, we provided clear proof of huge volumes of undisclosed litigation against Triple-S. Worse yet, management provided a highly misleading press release on Tuesday morning that down played the significance of the litigation.
https://friendlybearresearch.com/2019/09/26/165-lawsuits-filed-in-3q19-total-claims-approaching-1-billion-while-ryder-hospital-suffered-chairmans-hospital-paid-33-million/
We continue to see litigation coming in since we published the story above. The PR court system is a mess – even finding these suits is difficult (good luck simply searching Triple-S, you will miss many many suits because of a terrible e-filing system). I merely call this out because your article referred to our claims as “scuttlebutt”. The claims are not scuttlebutt and the company is inadequately reserved for legal expenses.
The idea that this company – that proudly advertised the support of its parent company to induce policy sales – can now just walk away from its P&C liabilities is laughable. The fact that the Chairman’s hospital took a huge insurance payout while other policyholders have yet to see a dime speaks to serious governance problems at this company. There is significant risk of clawback litigation and the process of walking away from P&C will be extremely costly and disruptive to the overall business.
I’ll tell you what I am thinking, because I may make another post on this. There are three levels to this. First level, you as a short seller have an incentive to publish whatever you may that is negative — my efforts to verify that what you say is true are by necessity limited… I don’t have the resources for that. I have worked for a hedge fund in my lifetime. I have shorted stock. We had a rule that we never published about our shorting, without a firmwide decision on it. You understand you are not a neutral arbiter; you have an axe to grind. So do I, but for me this is more of an intellectual quest because my position size is small.
I will say, the thing that I find most convincing for your side in anything you have published, is the legal case where TSP mostly gave no response to the claimant for a long time. That said, the situation with PR and Maria is a mess, as many neutral articles have validated. There may be reason for delay, particularly on large claims. It still stinks for claimants.
Second level, I have read through the statutory statements, SEC statements, etc. There are guarantees that TSM has provided to the health entities. That’s all. The statement from the marketing materials is arguable — it is common among many insurers to make statements like that based on the potential for capital contributions without an outright guarantee. Support does not mean guarantee. The statement would not hold up in court as a full and complete parental guarantee. I know what language like that looks like, because when you have that, you trumpet it loudly, together with the higher credit rating it brings.
That TSP was slow to remove higher ratings from their materials could prove problematic, particularly to smaller customers who could claim that they were duped. Larger institutional customers are often considered “peers” and must do their own due diligence. “Little guy” vs “Big Insurance Company” protections may not exist for a commercial account. That said, I’m not a lawyer, and PR has their own idiosyncrasies.
I don’t find it likely that TSM can be tagged for TSP claims.
Third, others have looked over the reserves… AM Best, Deloitte, the retro reinsurer — I would be relatively certain that in the discussions with the PR regulators over solvency that they had to look at it as well and get comfortable with it.
When my boss at the hedge fund would ask me to opine on the reserving of P&C insurers, there was not a lot an external actuary could aside from looking at the general conservatism of the management team, and reviewing how often they incurred claims in the current year from prior year accidents. As such I can’t make any grand statements on the honesty of reserves at TSP.
That said, it is almost unheard of in the US on short-tail P&C lines for material large claims to appear after two years. It would involve fraud of the highest sort, and that is what you are alleging. But if so, in this case, the PR regulators might be complicit. And, they might be so because they have to figure out what they would do with TSP in receivership. That is not a small problem for them.
Don’t know what to say about payments to the chairman’s hospital. You may be comparing apples and oranges though. Ryder is a P&C claimant, and the Chairman’s hospital could be reimbursed for medical claims. Was St Jorge damaged? They lost power, yes, but if they weren’t damaged, the P&C claim would be small. In non-hurricane years, health claim payments are huge relative to all other claims at GTS.
I not saying that I know everything or anything here. I am saying that I don’t think you have an airtight case, particularly on the ability of TSM to walk away from TSP. I would encourage you to find a disinterested lawyer who will tell you the truth on when insurance holding companies have been able to walk away from their subsidiaries in a US-state designed legal structure. (If there is PR-specific case law, that would be even better.) Why else do so many companies segment subsidiaries and have a holding company structure, if not for limited liability?
Anyway, that’s what I am thinking. I find it amusing that you would care about the opinion of a blogger who runs a very small RIA. I would be surprised if my position in this were more than 5% of yours.
Full disclosure: long GTS
Disclaimer: many of the things I write above are guesses. I could be wrong on all of this, though I have tried to apply my general knowledge fairly.
You are a respected insurance investor and you made the decision to publicly rebut my article alleging that it was poorly done. I received questions about your analysis from readers. I therefore believe it is worth debating your claims versus mine – publicly. Consider it a sign of respect that I cared to reply to your post.
I personally would have a hard time investing any of my client money in a company that so brazenly misrepresented facts in the public domain and to the SEC, particularly if my long position was tied to ‘intellectual’ interest.
You also clearly have not read the SEC filings in any detail – a step which requires no resources. For example, Triple-S reports a separate proxy related party item for healthcare claims to San Jorge PSC and the figures are under $500,000 per year. So the San Jorge situation I identified is in fact apples to apples against Ryder – they are P&C claims. You can challenge my statements but do not challenge clearly stated facts from SEC filings. Given you have shorted stocks, you are likely aware that related party shenanigans are a tell tale sign of corporate malfeasance. It will also open the door to pierce the corporate veil.
I have thus far provided more transparency on my position than management has on their own company. More power to you if you’re comfortable holding your client wealth with a deceptive management team rather than assessing the accuracy of their public statements.
When I say I have read the documents, I mean that I have read what I think is material, given what else I know. You speak of resources — I’m a one-man shop. My limited resource is time.
Regarding San Jorge, I will have to look again. The Statutory statements should have more than the SEC statements, but I haven’t read the one for the health sub. You may be right regarding the Chairman — you will note that I am writing about this on a comment stream, not in a main article that gets published, and I did not phrase it as something that was, but might be.
There were two main reasons why I thought your analysis was poor. Rationale on whether TSM can walk away from TSP, and if they can’t what claim-paying resources exist, which is based on tangible book value, not market capitalization. Reading you piece, I admitted that I could not vet out your claim data — you could be right there, and yet wrong if TSM and walk away from TSP. If you are right on claims, and TSM can walk away from TSP, GTS is worth over $30/sh in runoff, or as a going concern stripped back to its one strong business, PR health insurance.
Thanks for commenting… but if you are right on claims, it seems this will come down to a legal issue of the guarantee. That is what you should be spending your ink on. Remember, promising support is not the same as a guarantee.
PS: I obviously care about money, and I think this will work out with either the claim level being lower than you say, or TSP in insolvency, with no claim on TSM. But this isn’t a large position at all for me or my clients… so I dedicate time appropriately… at this point, more than the position deserves… thus the comment about “intellectual interest.”