GTS - Triple-S Management

[constructive]

Triple-S Salud (BlueCross BlueShield of Puerto Rico) is the dominant Puerto Rican health insurer, covering 46% of the population. They currently trade for 0.68x tangible book and 7.5x earnings. It is abnormal for a profitable, well capitalized health insurer to trade at such a low multiple of tangible book. Since listing in 2007 they have grown book value around 12% annualized, but the share price has gone nowhere.

 

GTS has 5 lines of business: Medicaid / MI Salud (31% of revenues), Medicare (~29%), private health insurance (~29%), life (6%), and P&C (5%). Puerto Rico has undergone a deep depression for the last 7 years and government finances are in bad shape. So, despite additional funds from Obamacare, there is concern about the viability of the Medicare and Medicaid programs. There is also the concern that Obamacare will make the private health insurance market less profitable since it will eliminate pre-existing conditions and other forms of price discrimination.

 

For now, Puerto Rico is still investment grade. And in my opinion the Medicare and Medicaid programs are too critical for Puerto Rico to risk any interruption of service, even in a deteriorating financial situation. I believe the US government would likely step in.

 

Possibly GTS will not trade at a normal valuation until PR's finances improve. But on the other hand, if profitability remains healthy through the implementation of Obamacare over the next few quarters, that could be a positive catalyst. Your thoughts?

 

http://www.ssspr.com/SSSPortal

 

Puerto Rico has incredible public health problems.

http://www.caribbeanbusinesspr.com/cbdirectory/cb_health.php?cat_id=10

"Moreover, that 13% [diabetes rate] is expected to increase to 15% next year and 27% of the local population is currently diagnosed as prediabetic. Also, 31% of the population has hypertension problems and 66% has been diagnosed as obese or overweight."

 

http://www.insurancenetworking.com/news/puerto-rico-insurance-sector-grows-5-8-percent-32021-1.html

"The [private] insurance industry in Puerto Rico had a compound-annual-growth-rate of 5.8 percent between 2007 and 2011, despite a contracting national economy...  However, opportunities for further foreign investment and sustained growth in Puerto Rico are limited, due to the high rate of insurance penetration"

This does not make sense to me since the rate of private insurance penetration is quite low. Once Puerto Rico returns to economic growth, GTS should have the opportunity to move Medicaid recipients and uninsured people to private health insurance. In addition they have the opportunity to increase life and P&C penetration (which is quite low).

 

http://www.piapr.org/clientuploads/5th%20Market%20Access%20Summit%20PP%20(Sept.14,%202012)/Lcda%20Iraelia%20Pernas.pdf

"The mandate for insurance of all individuals is not applicable in Puerto Rico.

This is of great concern to the insurance industry since its counterpart, the prohibition of discrimination of insurance applicants based of health conditions applies in Puerto Rico."

[stahleyp]

I have no position in this one but I know the Oceanstone fund has a nice piece (for a mutual fund) at around 6.5% of assets. The fund has an incredible track record, although, to be fair, it's only be around about 7 years.

[constructive]

3 hedge funds hold 20% of the company.

 

It is Accipiter's largest position at 37%:  http://www.j3sg.com/Reports/Stock-Insider/Generate-Institution-Portfolio.php?institutionid=5619&DV=yes

Oceanstone's 3rd largest position at 6.6%.

North Run's 9th largest position at 4.5%:  http://www.j3sg.com/Reports/Stock-Insider/Generate-Institution-Portfolio.php?DV=yes&institutionid=4688

Lakewood's 21st largest position at 1.7%:  http://www.j3sg.com/Reports/Stock-Insider/Generate-Institution-Portfolio.php?institutionid=10339&DV=yes

 

Insiders own 11%. They have not been buying shares, but have reduced the float slightly over the past few years.

[Spekulatius]

I own this and think it is quite cheap, despite Puerto rico's problems. FWIW, the owners want to sell out and offered some shares recently and GTS used this to buy back some shares, which is positive for the remaining shareholders since it is accreditive to book value:

http://www.sec.gov/Archives/edgar/data/1171662/000119312513227127/d530314d424b4.htm

[David]

Any thoughts on the recent results and price fall of GTS in 2014?

 

The year end 2013 results show a balance sheet of $1.65 billion in current assets and $1.26 billion in total liabilities, leaving a "net" working capital of $0.39 billion. Its current market cap is $0.46 billion. Almost a net-net? Break even net income and positive cash from operations.

 

[constructive]

Any thoughts on the recent results and price fall of GTS in 2014?

 

The year end 2013 results show a balance sheet of $1.65 billion in current assets and $1.26 billion in total liabilities, leaving a "net" working capital of $0.39 billion. Its current market cap is $0.46 billion. Almost a net-net? Break even net income and positive cash from operations.

 

Q4 was lousy, attributed to "high utilization of preventive care services, including vaccinations, an outbreak of dengue fever and influenza, increased costs in specialty drugs, and continued losses in the U.S. Virgin Islands". Also weakness in private healthcare related to the ongoing recession. Their regulator recently stated they were fining them $6.8M for a data breach.

 

PR debt has finally been downgraded to junk. Not good, but at least that shoe isn't going to drop again. According to their latest 10Q, GTS holds $42M of PR debt.

 

Last year PR increased the corporate excise tax rate which is keeping them solvent. http://www.reuters.com/article/2014/02/10/usa-puertorico-tax-idUSL2N0LF1BE20140210

 

I haven't started a position yet.

[KennyPowers]

Triple S Management is the exclusive Blue Cross/Blue Shield healthcare provider in Puerto Rico, covering 59.5% of their population.  They are also involved in Life and P&C insurance.

 

Market Cap: 471m      Tangible Book Value: 787m

 

From my own research they are selling at .6x Book and 8.5x last year's earnings.  Earnings have not fluctuated significantly over the last 5 years.

 

Book Value has grown 30% over the last 4 years.

 

I think the reason why they are cheap is because of their incredibly high commercial MLR (Medical Loss Ratio) that is close to 90%.  MLR is basically like a healthcare COGS as a % of revenue.  Healthcare MLR rates in-line with industry averages are in the low 80%'s. 

 

GTS used to be a nonprofit and it seems to still be run by a management that has not changed much from their initial management style.  They have stated goals (many years back) about consistently trying to decrease their MLR, but have failed at their long-term goals as their MLR is still close to 90%.

 

Wellpoint has acquired many Blue Cross/Blue Shield providers in the past at much higher valuations (18x Forward Year Earnings) and there are other possible acquirers such as Cigna, United Health etc. 

 

Heartland Advisors owns 1,347,359 shares.

 

Does Triple S Management have the potential to be rolled up?  Or is their something so flawed that it deserves this price?

 

[krazeenyc]

there is another thread on GTS, maybe someone can merge them ?

[cubsfan]

Kenny - since it's your first post - here's the other thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/gts-triple-s-management/msg160822/#msg160822

 

Or if you go to the upper right hand corner of this thread - you will see a search box - put in GTS and search for the thread.

That will work. There are a 1/2 dozen or so posts - and you will find some good comments by some investors that own Triple-S Management.

 

And Welcome to you!

[KennyPowers]

Whoops, sorry guys.  Should have done a search first.

Will delete this.

 

Thank you.

[Stuart D]

Is anyone still holding GTS? I like the consistent buybacks they have been doing over the years.

 

I got excited seeing it was trading at 0.35 price / book. Then I did some more digging and found they are having to pay out $687.8m in claims related to Hurricane Maria :/

 

Is that enough to wipe a company this size out?

 

[Spekulatius]

Is anyone still holding GTS? I like the consistent buybacks they have been doing over the years.

 

I got excited seeing it was trading at 0.35 price / book. Then I did some more digging and found they are having to pay out $687.8m in claims related to Hurricane Maria :/

 

Is that enough to wipe a company this size out?

 

Well, David Merkel (Aleph Blog and he knows insurance very well) has bought some and apparently thinks it’s not.

https://seekingalpha.com/article/4292851-dissent-triple-s-management

 

Their property insurance probably could be wiped out, but it’s only a small part of the whole company (health care insurance is the largest) and there don’t seem to be an Cross Company guarantees.  So it’s possible that their property insurance goes into default.

 

“ Russianbear” or whoever hides behind that handle is short and has written it up. I initially bought some too and then sold (for a small profit) as it’s too tough for me to get a handle on.

 

The company isn’t well managed and hasn’t been as long as I followed it.  They did make some changes in the health insurance business and ceded market share for better profitability. In addition, this is a Puerto Rico business....

[Stuart D]

Well, David Merkel (Aleph Blog and he knows insurance very well) has bought some and apparently thinks it’s not.

https://seekingalpha.com/article/4292851-dissent-triple-s-management

 

^Thanks for posting @Spekulatius. Gee, there are a lot of moving parts to this company. After Merkel's 8th point discussing the article my mind started to drift. I think I'll take a pass on this one. Nice work on buying & selling for a profit.

[Spekulatius]

Well, David Merkel (Aleph Blog and he knows insurance very well) has bought some and apparently thinks it’s not.

https://seekingalpha.com/article/4292851-dissent-triple-s-management

 

^Thanks for posting @Spekulatius. Gee, there are a lot of moving parts to this company. After Merkel's 8th point discussing the article my mind started to drift. I think I'll take a pass on this one. Nice work on buying & selling for a profit.

 

I change my opinion rather quickly, if I feel that like I overlooked something or new information comes up. I typically avoid battleground stocks between bears and bulls, especially when I think the the bears have done their homework better than the bulls. The small gain was pure luck,mit could have gone just as well the other way. David Merkel knows insurance, he has worked as an actuary  for an insurance corporation before and goes into the regulatory filings . However, the key question is if GTS holding co has guaranteed the debt of the property insurance sub and there is no clear answer. If not, then I believe GTS is a buy.