What do Resident Stakeholders Need to Know About Actuarial Reports?

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1 What do Resident Stakeholders Need to Know About Actuarial Reports? Are they a tool for confirming financial strength? October 28, 2018 presentation to AV Powell, MAAA, ASA Founder & CSO AV Powell & Associates, LLC phone ext. 287 av@avpowell.com

2 Agenda Topics 1. Range in scope of actuarial reports 2. Content of ASOP#3 actuarial reports 3. Interpretation of information in actuarial reports 4. Critical factors for stakeholder concerns a. Assumptions b. Assumptions c. Assumptions PRIMER ON CCRC ACTUARIAL STUDIES 1

3 Abbreviation Glossary 1. ACR = Actuarial Compilation Report 2. ASC = Accounting Standards Codification 3. ASOP#3 = Actuarial Standards of Practice No CAS = Comprehensive Actuarial Study 5. PV = Present Value with interest discount 6. FSO = GAAP Obligation to provide Future Services 7. GAAP = Generally Accepted Accounting Principles 8. SAB = Satisfactory Actuarial Balance PRIMER ON CCRC ACTUARIAL STUDIES 2

4 ASOP#3 Actuarial Studies 1. Comprehensive actuarial study; every 3 to 5 years 2. Actuarial compilation; annually 3. Statutory in specific states a. AZ, CA, MD, NH, NY, TX; every 3 to 5 years b. NC, PA; one-time c. Not all entry fee contracts covered PRIMER ON CCRC ACTUARIAL STUDIES 3

5 Limited Scope Actuarial Studies 1. Estimating GAAP future service obligation (FSO) 2. Actuarially-based population flows 3. Testing contracts for actuarial equivalence 4. Mortality and morbidity experience study to generate customized life expectancies PRIMER ON CCRC ACTUARIAL STUDIES 4

6 FSO Caveats Results can be Misleading 1. Excludes period costs 10-to-15% of operating budget 2. Excludes all future depreciation 3. Combines present values (PV) and non-pv amounts 4. Ignores time value of money for refunds 5. ASC 606 amortization income does not match expenses 6. Negative FSO value does not necessarily mean in ASOP#3 satisfactory actuarial balance PRIMER ON CCRC ACTUARIAL STUDIES 5

Are fees charged to new entrants sufficient to cover their lifetime

7 ASOP#3 Solvency Criteria 1. Are reserves adequate to meet obligations to current residents? 2. Are fees charged to new entrants sufficient to cover their lifetime costs? 3. Will projected cash flows be positive and meet any bond or statutory covenants? PRIMER ON CCRC ACTUARIAL STUDIES 6

8 Actuarial Dashboard Key Actuarial Measure 12/31/ /31/2016 AVP Median Funded Status 112.2% 114.3% 104.1% New Entrant Pricing Lifecare Contract 50% Refundable Plan Modified Contract Weighted Average 14.9% 12.2% 13.5% 14.9% 17.4% 18.1% 19.6% 17.4% 11.2% 10-Year Reserve Increase Factor Unified Funded Status 121.8% 125.7% 112.8% AVP Seal? Yes Yes Satisfactory Actuarial Balance? Yes Yes Health Care Capacity Adequate? Yes Yes PRIMER ON CCRC ACTUARIAL STUDIES 7

9 Actuarial Opinion Statement PRIMER ON CCRC ACTUARIAL STUDIES 8

10 If Not in SAB, What Does it Mean? 1. Doesn t meet regulation in some states 2. Not likely to deplete liquid assets 3. Solvency dependent upon intergenerational subsidies 4. Legacy passed on to future Boards 5. Not meeting fiduciary responsibility? 6. Limited ability to avoid unforeseen financial crises 7. If not in SAB today, can plan to achieve in future PRIMER ON CCRC ACTUARIAL STUDIES 9

Initial financial feasibility 2. Actuarial compilation report a.

11 Frequency of ASOP#3 Studies 1. Comprehensive actuarial study a. Bond covenants; every 2 to 3 years b. Statutory; every 3 to 5 years or one c. Initial financial feasibility 2. Actuarial compilation report a. Board has adopted actuarial financial management b. Estimate 10% of industry obtain annually c. AVP clients with highest results receive the PRIMER ON CCRC ACTUARIAL STUDIES 10

12 Distribution may be Limited ASOP#41 paragraph 3.7; Responsibility to Other Users An actuarial document may be used in a way that may influence persons who are not the intended users To help prevent misuse, the actuary may include language in the actuarial document that limits its distribution to other users (for example, by stating that it may only be provided to such parties in its entirety or only with the actuary s consent). PRIMER ON CCRC ACTUARIAL STUDIES 11

13 What Should a Resident Ask? 1. Do the Board and management believe that contractual liabilities should be fully funded? 2. Is the CCRC in SAB, and if not, what are the plans to achieve that status? 3. What are the key assumptions to achieve SAB? Future occupancy Fee increases in relation to expenses Real rate-of-return Expansion plans PRIMER ON CCRC ACTUARIAL STUDIES 12

Takeaways 1. Transparency in sharing actuarial status is positive 2. If available, ask for complete actuarial report a. Look for actuarial opinion regarding SAB b.

14 Takeaways 1. Transparency in sharing actuarial status is positive 2. If available, ask for complete actuarial report a. Look for actuarial opinion regarding SAB b. Compare with benchmarks (refer to Appendix) c. Review trends in successive studies 3. GAAP FSO value is not correlated with solvency 4. Board adoption of a liability management policy is more important than current actuarial status 5. Actuarial studies are not a panacea PRIMER ON CCRC ACTUARIAL STUDIES 13

15 APPENDIX Preliminary 2017 Actuarial Statistics Annual updates posted at:

16 Overview 1. Database 2. Actuarial statistics 3. Demographic statistics 4. Operating statistics 5. AVP standards 6. Actuarial report card ACTUARIAL STATISTICS 15

17 140 CCRCs in Database * ACTUARIAL STATISTICS 16

18 Typical CCRC Operating for 31 Years (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 17

19 Actuarial Statistics 1. Unified and traditional funded status 2. New entrant pricing year reserve increase factor 4. Liquid reserve ratio 5. Actuarial ratio 6. Actuarial return on fixed assets ACTUARIAL STATISTICS 18

20 Unified Funded Status (UFS) 1. Combines current and future resident evaluation 2. Reflects actuarial appraisal value of fixed assets 3. Single value to determine whether in satisfactory actuarial balance ( SAB ) 4. If 100%, then CCRC is deemed to be in SAB ACTUARIAL STATISTICS 19

21 Distribution for ASOP#3 Status 100% 90% 80% 70% 22% 19% 12% 13% 14% 16% 15% 16% 16% 11% 60% 50% 40% 30% 25% 33% 37% 30% 39% 20% 10% 42% 35% 33% 38% 35% 0% * AVP Seal SAB Qualified SAB Not in SAB ACTUARIAL STATISTICS 20

22 87% of our Clients are SAB (Same-site '17-'16 up 0.2%) 140% 120% 100% 80% 60% 40% 20% 0% 2013(124) 104.4% 112.8% 112.9% 123.9% 2014(129) 103.9% 113.4% 113.9% 125.0% 2015(134) 104.5% 113.4% 117.0% 124.8% 2016(133) 105.5% 112.8% 112.9% 123.6% 2017*(121) 105.2% 113.4% 114.6% 123.8% ACTUARIAL STATISTICS 21

23 UFS by Years of Operation 140% 120% 100% 96% 97% 115% 113% 115% 114% 80% 60% 40% 20% 0% Developing 0-10 year Maturing years Mature 26+ years Average Median ACTUARIAL STATISTICS 22

24 Actuarial Funding is Marketable (Same-site '17-'16 down 0.5%) 140% 120% 100% 80% 60% 40% 20% 0% 2013(128) 90.8% 105.6% 104.4% 115.0% 2014(133) 93.9% 104.3% 106.4% 116.6% 2015(135) 92.6% 104.4% 106.9% 118.2% 2016(134) 93.2% 104.1% 105.4% 116.1% 2017*(122) 94.9% 104.1% 105.1% 115.4% ACTUARIAL STATISTICS 23

25 13% Surplus for Single Entrants (Same-site '17-'16 up 0.2%) 20% 15% 10% 5% 0% 2013(144) 4.0% 10.8% 11.3% 17.5% 2014(150) 4.8% 10.9% 11.1% 18.1% 2015(153) 5.2% 12.2% 12.4% 19.5% 2016(153) 5.9% 13.2% 12.4% 19.0% 2017*(140) 6.5% 13.2% 12.7% 19.2% ACTUARIAL STATISTICS 24

26 12% Surplus for Coupled Entrants (Same-site '17-'16 up 0.5%) 20% 15% 10% 5% 0% 2013(144) 4.1% 10.0% 10.2% 16.2% 2014(150) 5.3% 9.9% 10.2% 16.0% 2015(153) 4.9% 10.5% 10.8% 16.3% 2016(153) 5.9% 10.9% 10.3% 15.9% 2017*(140) 5.7% 11.8% 11.6% 16.9% ACTUARIAL STATISTICS 25

27 Typical Fees Show 12% Surplus (Same-site '17-'16 up 0.9%) 20% 15% 10% 5% 0% 2013(144) 4.3% 10.3% 10.5% 16.5% 2014(150) 5.1% 10.5% 10.3% 16.5% 2015(153) 5.3% 10.3% 11.3% 17.4% 2016(153) 6.3% 11.2% 10.8% 16.9% 2017*(140) 6.4% 12.3% 11.9% 17.6% ACTUARIAL STATISTICS 26

28 Liquid Reserves More Than Double in 10 Years (121) (129) (127) (129) *(120) ACTUARIAL STATISTICS 27

29 Liquid Assets Fund Nearly 50% of Liabilities 100% 80% 60% 40% 20% 0% 2013(126) 27.5% 44.5% 56.5% 77.3% 2014(133) 25.2% 47.1% 57.0% 78.1% 2015(133) 25.7% 47.3% 54.2% 69.1% 2016(134) 24.8% 48.0% 59.0% 71.2% 2017*(122) 27.9% 49.8% 57.7% 78.6% ACTUARIAL STATISTICS 28

30 Monthly Fees Cover >70% of Future Liabilities 100% 80% 60% 40% 20% 0% 2013(127) 67.1% 71.8% 73.3% 79.5% 2014(132) 68.2% 72.8% 73.4% 79.8% 2015(135) 69.0% 74.0% 74.3% 79.3% 2016(134) 67.8% 72.7% 73.8% 78.4% 2017*(122) 68.0% 73.5% 74.3% 79.4% ACTUARIAL STATISTICS 29

31 Actuarial Return on Fixed Assets is 9% 12% 8% 4% 0% 2013(124) 7.1% 8.8% 9.1% 11.0% 2014(129) 7.7% 8.9% 9.2% 10.7% 2015(135) 7.3% 8.9% 9.4% 11.0% 2016(133) 7.5% 9.0% 9.3% 11.4% 2017*(121) 7.4% 8.7% 9.4% 11.6% ACTUARIAL STATISTICS 30

32 Demographic Statistics 1. Average age at entry 2. Average attained age 3. Life expectancy 4. Health care ratio 5. IL attrition ACTUARIAL STATISTICS 31

33 Female Entry Age Stays Constant at 80 Years (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 32

34 Male Entry Age is 1 Year > than Females (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 33

35 Female Attained Age is (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 34

36 Male Attained Age is the same as Females (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 35

37 Females Live 1.5 Years Longer than US Pop (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 36

38 Males Live 6 Months Longer than US Pop (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 37

39 11 Assisted Living per 100 ILU Residents (142) (149) (152) (153) *(138) ACTUARIAL STATISTICS 38

40 Nursing Utilization Shows Slight Decrease (142) (148) (152) (151) *(139) ACTUARIAL STATISTICS 39

41 22 Healthcare per 100 ILU Residents (144) (150) (153) (153) *(140) ACTUARIAL STATISTICS 40

42 ILU Attrition approximately 12% 15% 10% 5% 0% 2013(143) 9.3% 11.2% 11.8% 13.8% 2014(148) 9.4% 11.7% 12.1% 13.9% 2015(153) 9.5% 11.6% 12.1% 14.2% 2016(153) 9.5% 11.9% 12.4% 14.8% 2017*(140) 9.5% 11.9% 12.4% 14.8% Moving Avg 9.5% 11.6% 12.1% 14.2% ACTUARIAL STATISTICS 41

43 Operating Statistics 1. Average occupancy 2. Per capita expense per day 3. Average monthly fee increase 4. Average entry fee increase ACTUARIAL STATISTICS 42

44 Benchmark ILU Occupancy: 95% (Same-site '17-'16 level) 100% 95% 90% 85% 80% 75% 70% 2013(144) 81.6% 89.4% 86.7% 93.9% 2014(150) 83.5% 90.8% 88.4% 94.8% 2015(153) 85.1% 91.2% 89.3% 95.0% 2016(153) 86.6% 92.4% 90.1% 95.5% 2017*(140) 88.3% 93.0% 91.1% 95.5% ACTUARIAL STATISTICS 43

45 Benchmark ALU Occupancy: 90% 100% 95% 90% 85% 80% 75% 70% 2013(140) 85.9% 91.4% 88.9% 95.0% 2014(147) 84.1% 90.0% 87.1% 94.2% 2015(149) 83.7% 90.9% 88.6% 94.4% 2016(150) 86.7% 91.2% 88.5% 94.6% 2017*(135) 86.3% 91.0% 88.8% 94.6% ACTUARIAL STATISTICS 44

46 Benchmark NUR Occupancy: 90% 100% 95% 90% 85% 80% 75% ` 70% 2013(140) 84.6% 90.9% 87.9% 93.7% 2014(145) 83.5% 89.3% 86.5% 93.3% 2015(148) 82.0% 88.5% 86.0% 92.9% 2016(149) 82.9% 88.0% 85.6% 92.0% 2017*(134) 80.1% 88.1% 84.9% 93.0% ACTUARIAL STATISTICS 45

47 ILU Expenses up 1.2% (Same-site '17-'16 up 2.4%) $100 $75 $50 $25 $0 2013(144) $63.50 $73.97 $78.54 $ (150) $66.81 $77.50 $80.53 $ (153) $66.59 $78.23 $80.59 $ (153) $70.02 $82.60 $85.80 $ *(140) $71.42 $83.62 $86.30 $97.08 ACTUARIAL STATISTICS 46

48 ALU Expenses up 4.5% (Same-site '17-'16 up 4.8%) $250 $200 $150 $100 $50 $0 2013(139) $ $ $ $ (148) $ $ $ $ (151) $ $ $ $ (151) $ $ $ $ *(137) $ $ $ $ ACTUARIAL STATISTICS 47

49 NUR Expenses up 0.9% (Same-site '17-'16 up 2.6%) $400 $300 $200 $100 $0 2013(141) $ $ $ $ (149) $ $ $ $ (150) $ $ $ $ (152) $ $ $ $ *(139) $ $ $ $ ACTUARIAL STATISTICS 48

50 Monthly Fees Increased 2.9% to 3.5% 5% 4% 3% 2% 1% 0% 2013(139) 3.0% 3.3% 3.3% 3.8% 2014(148) 3.0% 3.3% 3.4% 4.0% 2015(153) 2.5% 3.0% 3.2% 3.6% 2016(152) 2.9% 3.0% 3.3% 3.5% 2017*(139) 2.9% 3.2% 3.1% 3.5% ACTUARIAL STATISTICS 49

51 Entry Fees Increased 1.5% to 4.0% 4% 3% 2% 1% 0% -1% 2013(140) 0.3% 2.8% 2.4% 3.5% 2014(148) 0.0% 2.0% 2.3% 3.5% 2015(151) 2.0% 3.0% 3.1% 4.0% 2016(152) 2.0% 3.0% 3.3% 4.1% 2017*(139) 1.5% 3.0% 2.9% 4.0% ACTUARIAL STATISTICS 50

52 AVP Standards and Benchmarks Unified funded status 115% Funded status 105% New entrant surplus 10% 10-year reserve increase 2 times Liquid reserve ratio 50% Actuarial ratio 70% Return on fixed assets 10% ACTUARIAL STATISTICS 51

53 How are Results Presented? 1. Actuarial report card a. Actuarial valuation b. New entrant pricing analysis c. Projected cash flows d. Adequacy of health care beds 2. Graded on a curve objectively using database ACTUARIAL STATISTICS 52

54 Grading System for Actuarial Report Card 1. Grade based on quartile ranking a. {up to B} first quartile (0 to 25 th percentile) b. {B to A-} second quartile (25 th to 50 th percentile) c. {A- to A} third quartile (50 th to 75 th percentile) d. {A to A+} fourth quartile (75 th to 100 th percentile) 2. CCRCs should target grades of A or higher ACTUARIAL STATISTICS 53

55 Grading System for Heath Care Adequacy 1. Projecting total health care usage is more credible than individual levels of care 2. Grade based on expected and highest usage compared to capacity a. {up to B} capacity < expected b. {B to A-} expected < capacity < 90th percentile c. {A- to A+} expected < 90th percentile < capacity ACTUARIAL STATISTICS 54

Evaluating CCRC Solvency

Evaluating CCRC Solvency AV Powell & Associates LLC Atlanta, GA 404.845.0360 fax 404.845.0366 AV@avpowell.com Chesterfield, MO 636.530.1072 fax 636.530.1073 Kathie.Harris@avpowell.com Helping you solve