Advanced Actuarial Issues for CCRCs

Transcription

1 Advanced Actuarial Issues for CCRCs Actuarial appraisals, opengroup valuations, and future research by A.V. Powell & Associates LLC Atlanta: x1, fax St. Louis: x1, fax Helping you solve your management challenges

2 Our Presentation Process Review learning objectives CCRC appraisals Open-group valuations Predictions for the future an interactive discussion 2

3 Learning Objectives How does one determine the economic value (net worth) of a CCRC? How does one reconcile a low funded status with high new entrant fee surplus and favorable cash flow projections What s on the radar scope for future changes in CCRC operating procedures 3

4 CCRC Appraisals CCRCs are appraised for: Merger or acquisition Major expansion Credit-worthiness Traditional approaches value fixed assets Income or cash flows Market or comparable values Highest and best use 4

5 CCRC Appraisals (Con t) Financially sophisticated methods Internal rate of return calculations Actuarial valuations Actuarial appraisals reflect the economic value of continuing contracts the fixed assets because difficult to provide services in another location, and even so, would have to pay actuarial value anyway 5

6 Case Example A How do we evaluate (justify) use of 50% of credit-line for improving CCRC Description of alternatives $9.0 million expansion $3.5 million expansion $3.5 million expansion with pent-up demand $10.0 million expansion $10.0 million expansion with sheltered beds 6

7 Baseline Net Cash Flows versus Scenario I = 14.1% $2,000 $1,500 $1,000 $500 $0 -$500 -$1, Baseline Scenario I 7

8 Comparison of IRR Results 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% 8 Scenario I Scenario II Scenario III Scenario IV Scenario V

9 Case Example B How do we determine purchase price for acquiring an existing CCRC? Description of alternatives Commission traditional appraisal Minimum cash payback period Goals for investment returns 9

10 IRR Calculations for Various Timeframes 20% 10% 0% -10% -20% -30% 5-year 10-year 15-year 20-year Facility A Facility B 10

11 Open-Group Valuation Traditional actuarial report uses threelegged stool for measuring solvency Actuarial valuation of reserves that are held on behalf of current residents Test of adequacy of the combination of monthly and entry fees to new entrants Ten-year plus cash flow projections 11

12 Open-Group Valuation (con t) Rationale (need for) open-group approach Possible for current valuation to show material unfunded liability while new entrants fees show significant surplus and good cash flows because existing fixed assets (and their corresponding depreciation) are under-valued This means that facility appears to be actuarially insolvent, yet cash flow rich 12

13 Open-Group Valuation (con t) Possible solution is to recognize surplus associated with new entrants fees in the current resident actuarial valuation by: Revaluing current and future fixed assets Solve for this value by determining maximum increase such that new entrant surplus = 0% Typically reserve increase is a 0.4 to 0.5 multiplier for every $1 in fixed asset increase 13

14 Case Study Funded New Entrant Actuarial Status Ratio Closed Open 14

15 Future Trends Meaningful financial criteria Resident assessments and third generation actuarial models Individual choice in selecting continuing care services and how they are funded 15

16 Financial Criteria Traditional approach: ratio analysis Liquidity--days cash on hand Profitability--operating margin Capital structure--debt service coverage Occupancy Waiting list 16

17 Financial Criteria (con t) Alternative approach: actuarial statistics Liquidity Liquid reserve ratio Actuarial ratio Profitability Funded status New entrant contract surplus Capital Structure 10-year projected reserve increase 17

18 Liquid Reserve Ratio (new) Definition: Cash and other unrestricted liquid assets divided by the present value of future operating and capital costs and entry fee refunds Meaning: Portion of future obligations that are funded by cash instead of bricks and mortar Use:? 18

19 Actuarial Ratio Distribution th 50th Average 75th 1998 n= n=23 19

20 Funded Status Distribution th 50th Average 75th 1998 n= n=23 20

21 New Entrant Contract Surplus Distribution th 50th Average 75th 1998 n= n=23 21

22 Relationship between Fees, Expenses, and Reserves Fees Expenses Reserves

23 Resident Assessments HLR: Health & Lifestyle Review MAP: Moorings Assessment Protocol SF-36: Short Form 36 23

24 Individual Choices Residents want to select services Continuing care contracts are really funding options Next generation CCRCs will allow residents to define funding to meet their needs and still be financially adequate Marketing is 24