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 (in $M): | 0 | TEV/EBIT | 0 | 0 | |||
Borrow Cost: | General Collateral |
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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 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.
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.
-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:
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.
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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