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:

===========================================

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:

1. 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.
2. 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.
3. 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.
4. 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).
5. 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.
6. 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.)
7. 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.)
8. 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.

==========================

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?)