WELCOME to Chicago Lender Underwriter Training HUD Lean

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WELCOME to Chicago! Lender Underwriter Training: HUD Lean Section 232 Program Day 1: January

WELCOME to Chicago! Lender Underwriter Training: HUD Lean Section 232 Program Day 1: January 26, 2010

Introduction and Briefing on the FHA Commissioner’s Recent Meeting in Seattle

Introduction and Briefing on the FHA Commissioner’s Recent Meeting in Seattle

Chicago: What We Hope to Accomplish-1 �Major Issues: ü Risk Mitigation o Valuation issues

Chicago: What We Hope to Accomplish-1 �Major Issues: ü Risk Mitigation o Valuation issues o Enhanced Underwriting in Economic Problem Areas o Economic Useful Life Guidance o Market Studies/Economic Analysis o Asset Management ü Underwriting Procedures o New Submission Procedures o Underwriting Deficiencies o Lender Monitoring

Chicago: What we hope to Accomplish-2 �Technical Guidance • Professional Liability Insurance • Accounts

Chicago: What we hope to Accomplish-2 �Technical Guidance • Professional Liability Insurance • Accounts Receivable • Master Lease Requirements • New Construction Submissions • Portfolio Transactions • Closings • A(7)’s • Asset Management

232 LEAN Program Update (1/22/10) FY 2009 (4 mo)FY 2010 � Applications � Closings

232 LEAN Program Update (1/22/10) FY 2009 (4 mo)FY 2010 � Applications � Closings � Commitments issued � Commitments rejected � Mkt Acpt/Pre App accepted � Mkt Acpt/Pre App rejected 271 164 88 65 132 54 2 8 32 10 5 16 � Applications in Queue � Assigned to Underwriters 81 60 139 48 � Ave time in queue (1/22/2010) 100 days; A 7’s 28 days � Staffing: 53 Staff on board; Currently, no additional staff allocated

232 LEAN Program Update-2 v. Processing Improvements (from December 2009 Kaizen) § OGC review

232 LEAN Program Update-2 v. Processing Improvements (from December 2009 Kaizen) § OGC review of Closing process § Green Lane for 223 F’s § Separate Lane for A 7’s § Pre. App/market acceptance letter request process terminated and under review

December 14, 2009, Seattle Briefing for FHA Commissioner David Stevens and FHA Risk Manager

December 14, 2009, Seattle Briefing for FHA Commissioner David Stevens and FHA Risk Manager Bob Ryan �Briefed Mr. Stevens, Mr. Ryan, Chris Tawa (MF), John Daly and Damon Smith(OGC) and others on LEAN Improvements for Section 232 Program. �OIHCF Senior Staff, UW and AM AE’s and Lenders and valuation appraisers participated. �Briefing included Lean Concepts, 232 Underwriting Process and Improvements, Risk Profile of Sec. 232 Portfolio, Monitoring and Risk Mitigation Improvements.

Seattle Briefing Takeaways: �FHA HQ leadership group understood and embraced LEAN concept. �OIHCF and

Seattle Briefing Takeaways: �FHA HQ leadership group understood and embraced LEAN concept. �OIHCF and Lenders made a convincing case for actual improvement in risk management under LEAN program, both underwriting and loan servicing. �OIHCF Senior staff made a strong case for need for additional staff/contract resources. �OGC is exploring ways to serve the program more efficiently.

Seattle Briefing : Results �Commissioner and senior staff are more knowledgeable about OIHCF programs

Seattle Briefing : Results �Commissioner and senior staff are more knowledgeable about OIHCF programs and more open to proposals to meet resource needs. �Senior Staff understands that while there are risks inherent in these programs, OIHCF Staff and Lenders are aware of them and are mitigating the risks as effectively as possible. �This session in Chicago should enable OIHCF and Lenders to go the next step in dealing with both operational and market risks. �Momentum is gathering for application of LEAN processing in other areas of Office of Housing.

Appraisals, Valuation, Market and Economic Analysis

Appraisals, Valuation, Market and Economic Analysis

Enhanced Underwriting in Economic Problem Areas 11

Enhanced Underwriting in Economic Problem Areas 11

Appraisal Valuation Issues, Concerns, Experiences �Morning Appraisal Training Highlights �New Appraisal SOW �New Market

Appraisal Valuation Issues, Concerns, Experiences �Morning Appraisal Training Highlights �New Appraisal SOW �New Market Study SOW �Remaining Economic Life �Anatomy of a Sale �Geographic Markets �Appraisal by Section 12

Lender Narrative Template Appraisal Section

Lender Narrative Template Appraisal Section

Using Hypothetical Estimates �Under the Lean 223 f program, it is generally not appropriate

Using Hypothetical Estimates �Under the Lean 223 f program, it is generally not appropriate to assume stabilized operations if the property is in reality not at stabilized operations. �Appraisal Statement of Work and Lender Narrative Template have been updated accordingly. 18

Using Un-depreciated Replacement Costs as a Benchmark Risk Review 19

Using Un-depreciated Replacement Costs as a Benchmark Risk Review 19

Un-Depreciated Replacement Cost vs. Value Conclusion Replacement Cost New (Equivalent Utility) �Direct Cost –

Un-Depreciated Replacement Cost vs. Value Conclusion Replacement Cost New (Equivalent Utility) �Direct Cost – Buildings �Direct Cost - Site Improvements �Indirect Costs �Land Value �Furniture, Fixtures & Equip. (FF&E) 20

Example � 4 year old, 45 -unit Assisted Living Facility �Three Approaches to Value

Example � 4 year old, 45 -unit Assisted Living Facility �Three Approaches to Value were Developed �Estimated Value: $6, 100, 000 Correlation of Value �Cost Approach �Sales Comparison Approach �Income Capitalization Approach $4, 750, 000 $6, 075, 000 $6, 100, 000 21

Cost Approach Summary �Direct Cost – Buildings $3, 435, 873 �Direct Cost - Site

Cost Approach Summary �Direct Cost – Buildings $3, 435, 873 �Direct Cost - Site Improvements $290, 000 �Indirect Costs $972, 822 �RCN of the Improvements: $4, 698, 695 �Depreciation ($254, 841) �Subtotal $4, 443, 854 �Land Value $130, 000 �Furniture, Fixtures & Equipment (FF&E) $180, 000 �Indicated Value – Replacement Cost $4, 753, 854 �Rounded $4, 750, 000 22

Un-Depreciated Replacement Cost (RCN) �Direct Cost – Buildings �Direct Cost - Site Improvements �Indirect

Un-Depreciated Replacement Cost (RCN) �Direct Cost – Buildings �Direct Cost - Site Improvements �Indirect Costs �RCN of the Improvements: $3, 435, 873 $290, 000 $972, 822 $4, 698, 695 �Depreciation �Land Value $130, 000 �Furniture, Fixtures & Equipment (FF&E) $180, 000 �Replacement Cost New $5, 008, 695 23

Reconsider Income & Comparison Approaches Against RCN of $5, 009, 000 �Sales Comparison Approach

Reconsider Income & Comparison Approaches Against RCN of $5, 009, 000 �Sales Comparison Approach 45 Units x $135, 000/Unit = $6, 075, 000 �Income Approach NOI $550, 000 Capitalization Rate 9. 00% Indicated Value $6, 111 Rounded $6, 100, 000 24

Questions are Raised �Is the RCN correct? �If the RCN is reasonable and indicates

Questions are Raised �Is the RCN correct? �If the RCN is reasonable and indicates that �the cost to build NEW is significantly less than the estimated Value…. . �Is there a problem with the Sales Comps or Adjustments? �…Cap Rate too Low? �Rents too high? �Etc. , etc…. a small change can make a big difference Should the conclusion be revised? 25

Remaining Economic Life

Remaining Economic Life

Definitions v. Economic Life: The period over which improvement to real property contributes to

Definitions v. Economic Life: The period over which improvement to real property contributes to the property value 1. v. Remaining Economic Life: The estimated period during which improvements will continue to represent the highest and best use of the property; an estimate of the number of years remaining in the economic life of the structure or structural components as of the date of the appraisal; used in age-life method of estimating depreciation 2. ______ 1 The Dictionary of Real Estate Appraisal, 5 th Edition 2 ibid

More Definitions v. Effective Age: The age of property that is based on the

More Definitions v. Effective Age: The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age 3. v. Useful Life: The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed 4. ______ ibid 4 ibid 3

Life – Age = Remaining Economic Life (REL) v The economic life may exceed

Life – Age = Remaining Economic Life (REL) v The economic life may exceed the useful life since the building may cease to provide utility for the intended original use, but it may be economically feasible to renovate and/or convert the building to a different use. Economic Life Less Effective Age Approximates Remaining Economic Life v Of course, the remaining economic life can be extended through timely and strategic capital replacements and improvements that reduce the effective age.

SNF Life Expectancy According to Marshall Valuation Service, the life expectancies for newly erected

SNF Life Expectancy According to Marshall Valuation Service, the life expectancies for newly erected nursing facilities (“convalescent hospitals”) are as follows. Economic Life Expectancy for Nursing Facilities 5 Building Class A B C D Good - Excellent 50 50 45 40 Low cost to average 45 45 40 35 5 Marshall Valuation Service, Section 97, Page 8

ALF Life Expectancy According to Marshall Valuation Service, the life expectancies for newly erected

ALF Life Expectancy According to Marshall Valuation Service, the life expectancies for newly erected assisted living facilities are as follows. Economic Life Expectancy for Assisted Living Facilities 6 Building Class C D Excellent Average to good Low cost and fair 60 55 50 Marshall Valuation Service, Section 97, Page 5 6 55 50 45

v. Marshall Valuation Service suggests that the economic life will likely be extended based

v. Marshall Valuation Service suggests that the economic life will likely be extended based on good maintenance and the replacement of short-lived building components, which is proven to be true. v. Many facilities that continue to operate, currently exceed the age of the respective property types in the Marshall Valuation Service table, and have reasonably good prospects for remaining in use as a nursing facility indefinitely.

Expected Economic Life Considers Levels of physical deterioration – maintenance, replacements and renovations 2.

Expected Economic Life Considers Levels of physical deterioration – maintenance, replacements and renovations 2. Functional obsolescence 3. External obsolescence 1. More buildings become obsolete before they are physically spent.

Qualitative Analysis -- Functional - Resident Room Bed Mix - SNF Functional Issues Patient

Qualitative Analysis -- Functional - Resident Room Bed Mix - SNF Functional Issues Patient Rooms Effect on Current Market Expected Subject Standard Life Percentage of Beds in Private Rooms Percentage of Beds in Semiprivate Rooms 2% 10% or more 50% 90% or less Percentage of Beds in Threebed Wards Percentage of Beds in Fourbed Wards 0% None 48% None Reduces Net Patient Room Functional Assessment on REL

Qualitative analysis Functional – Patient Room Toilets and Baths - SNF Patient Room Toilets

Qualitative analysis Functional – Patient Room Toilets and Baths - SNF Patient Room Toilets and Shower Subject Percentage of Rooms With Private 38% Toilets Percentage of Rooms With Shared 62% Toilets Percentage of Rooms Without 0% Adjacent Toilets Percentage of Rooms With 0% Adjoining Functional Showers Net Patient Room Toilet/Shower Functional Assessment on REL Current Market Effect on Standard Expected Life 100% None All rooms in rehab unit(s) Reduces

Patient Room Toilet/Shower Room Which One Will The Market Select?

Patient Room Toilet/Shower Room Which One Will The Market Select?

Therapy Areas Functional Obsolescence Impacting REL o Small areas for physical and occupational therapy

Therapy Areas Functional Obsolescence Impacting REL o Small areas for physical and occupational therapy prove to be clinical and marketing disadvantages o Functional deficiency may be curable or incurable. o Many nursing facilities have attempted to cure the deficiency by decommissioning several patient rooms or other functional space and renovated that area for therapy services. o Best to have purpose-designed and built therapy areas

Purpose-built vs. Adapted Therapy Areas Which One Will The Market Select?

Purpose-built vs. Adapted Therapy Areas Which One Will The Market Select?

Eight-foot Corridor Standard �Corridors less than 8’ 0” are no longer allowed in new

Eight-foot Corridor Standard �Corridors less than 8’ 0” are no longer allowed in new construction. Rooms along narrow corridor may eventually be delicensed.

Other Functional Issues Ø Absence of fire-protection sprinklers throughout the building is a functional

Other Functional Issues Ø Absence of fire-protection sprinklers throughout the building is a functional deficiency that should be curable in most buildings. Federal law now requires that all nursing homes become fully sprinklered by 2013, or they lose their Medicare and Medicaid certification. Ø Other life-safety features – emergency electrical generation, fire alarms, secured doors Ø Lack of common areas and program space for patient, staff and visitors Ø Separated laundry and drying rooms Ø Well ventilated and cooled building

External Obsolescence And Economic Issues Ø Changes in supply and demand Ø Changing highest

External Obsolescence And Economic Issues Ø Changes in supply and demand Ø Changing highest and best use – land value Ø Medicaid reimbursement limits Ø Life stage and future of the subject neighborhood

Changes In Supply And Demand v Changes in supply and demand v Baby boomers

Changes In Supply And Demand v Changes in supply and demand v Baby boomers will cause demand surges, extended useful life v Certificate of need (CON) or other barriers may regulate and extend life, but only if state history is demonstrated v Absence of CON or loose CON practices encourages more competition, older facilities have less regulatory protection v Assisted living competition/alternatives – unsaturated assisted living markets could see further demand, siphoning off low-acuity SNF demand v Will other competition be replace or substantially renovated, and thus re-arranging market positioning? v How will the subject facility withstand these changes in relationship or in context to the competitive market long term?

Changing Highest And Best Use – Land Value Ø When will the building be

Changing Highest And Best Use – Land Value Ø When will the building be worth more dead than alive? Ø Older SNF or ALF buildings on expensive land, where highest and best use has changed since the facility opened, may no longer represent highest and best use. Ø A 45 -year-old , single-story SNF with a 3: 1 land-tobuilding ratio on $75/SF land in Los Angeles or Orange County, California probably has a highest and best use issue. Collateral value may be excellent, but the remaining economic life is probably short lived.

Impact Of Medicaid Reimbursement On Remaining Economic Life Medicaid Capital Cliff v. Capital reimbursement

Impact Of Medicaid Reimbursement On Remaining Economic Life Medicaid Capital Cliff v. Capital reimbursement in many states is tied to original asset costs, and interest and depreciation are based on those costs. Once the interest and depreciation are amortized, those assets receive no further reimbursement. v. Appraiser must address these risks in states with capital cliffs. v. No national publications adequately address this issue – the appraiser will need to verify this issue with state experts or state reimbursement staff members.

An Argument For Extended Life v. Economic life may be extended by bed shortages

An Argument For Extended Life v. Economic life may be extended by bed shortages created by tight certificate of need policies v. Economic life may be extended by inadequate reimbursements for new buildings that undermine the economic feasibility of new construction. v. Baby Boomer demand surge, coupled with the prospects that the U. S. society may be unable to maintain the support currently afforded to long-term care may necessitate the extension of the usefulness of older nursing facilities.

Neighborhood Life Cycle And Stage Ø The life of any building rises and falls

Neighborhood Life Cycle And Stage Ø The life of any building rises and falls on the level of economic health of a neighborhood Ø A property developed a decade or two ahead of the arrival of most of the residential, commercial and institutional was developed in the market could experience an extended life. Ø Properties in deteriorating urban, inner-ring suburbs and declining rural communities have and/or will continue to experience declining census, quality mix and staff recruitment.

Ownership-specific Issues v. Management and financial strength of the ownership can affect the useful

Ownership-specific Issues v. Management and financial strength of the ownership can affect the useful life of similar nursing facilities differently. v. Appraisers are unable to make owner-specific assessments regarding their management and financial conditions. v. While HUD cap-ex reserve requirements might require higher maintenance, the financing might represent an obstacle and incentive for future, major renovations.

Qualitative Assessment Demographic Issues

Qualitative Assessment Demographic Issues

Qualitative Assessment Economic Issues

Qualitative Assessment Economic Issues

Reconciliation Of Qualitative Assessments

Reconciliation Of Qualitative Assessments

Summary of Remaining Economic Life Ø Let common sense prevail in estimating REL Ø

Summary of Remaining Economic Life Ø Let common sense prevail in estimating REL Ø REL is affected by physical, functional and external issues Ø Functional and external obsolescence can be substantial and difficult to assess. Ø Will the building remain a healthy and desirable place for very sick people to reside in 10, 20, 30, 40 years from now? (wards, toilets, ventilation, life safety, therapy areas) Ø Will competitive market conditions (supply and demand) support or undermine the subject? Ø What is the neighborhood trend (patient and staff interest in living and working there)? Ø Are capital reimbursements time restricted? Ø Highest and best use issues – land value changes? Ø Other factors that may extend or reduce life?

Market Studies �Format – simply taking the SOW and answering the questions without COMPLETE

Market Studies �Format – simply taking the SOW and answering the questions without COMPLETE and DETAILED analysis contained within the body of the report is unacceptable �Some have the appearance of advocating the project �Prepare the report as you would prepare an appraisal – SOW states that the report must be a COMPLETE report – no deviation 52

Market Studies �Market study assumptions and conclusions MUST be supported with actual market data

Market Studies �Market study assumptions and conclusions MUST be supported with actual market data and or COMPLETE and DETAILED narrative explanations – must lead the reader to the same conclusion as the analyst �Data utilized is too old and meaningless in today’s rapidly changing economy 53

Market Studies �Market studies are not giving the full economic picture of the prospects

Market Studies �Market studies are not giving the full economic picture of the prospects for the project – analysts are not going far enough into the ramifications that a deteriorating economy poses for a new project �If units/beds within the PMA (or SMA) are excluded as non-competitive – OIHCF wants to see a separate analysis on the effects of the inclusion of all beds and detailed analysis of why they would not be competitive and why they do not pose a risk to the success of the project 54

Market Studies �Areas of concern to OIHCF �Supply / Demand estimates using older data

Market Studies �Areas of concern to OIHCF �Supply / Demand estimates using older data �No follow through with COMPLETE analysis of current economic climate and its effect on proposed project �No or minimal analysis of optimal use / mix �Discounting units / beds within PMA without COMPLETE analysis of total unit / bed effect on demand 55

Economic Analysis Reports �The current economic crisis has devastated large portions of the country

Economic Analysis Reports �The current economic crisis has devastated large portions of the country �Virtually no area has been untouched although some areas have fared somewhat better than others �Economic distress has a marked effect on the success or failure of a project – more non-need based projects and to a lesser extent need based 56

Economic Analysis Reports �Both the elderly and decision making cohorts are equally affected �Decision

Economic Analysis Reports �Both the elderly and decision making cohorts are equally affected �Decision makers are going to put off placement if employment fears are prominent; if housing equity has or is disappearing – both with the decision maker and the elderly charge �Daily deluge of negative economic news – real or perceived 57

Economic Analysis Reports �OIHCF completed economic analyses of areas in FL and AZ -

Economic Analysis Reports �OIHCF completed economic analyses of areas in FL and AZ - two of the hardest hit areas of the country �The Tampa MSA and some of the surrounding areas were the focus of the Florida analysis �The Phoenix MSA and some of the surrounding areas were the focus of the AZ analysis 58

Economic Analysis Reports �Focus of analysis was on economic indicators that could affect lease-up,

Economic Analysis Reports �Focus of analysis was on economic indicators that could affect lease-up, occupancy and rent levels, decision to hold off on placement and included: �Unemployment �Bankruptcies �Foreclosures – actual numbers are much higher than reported �Apartment, commercial, industrial vacancies �Development projects – stalled, on hold, scrapped etc. 59

Economic Analysis Reports �These studies were conducted “on the ground” and not only included

Economic Analysis Reports �These studies were conducted “on the ground” and not only included data research but also interviews with city and county planning and development staff; developers; real estate practitioners; homeowners; business professionals; and others that worked and lived in the areas studied �The bottom has yet to be reached and will more than likely get worse during the coming year and possibly beyond 60

Q&A 61

Q&A 61

BREAK

BREAK

Professional Liability (PLI) & Property Insurance

Professional Liability (PLI) & Property Insurance

Professional Liability Insurance Notice H 04 -15 64

Professional Liability Insurance Notice H 04 -15 64

Introduction �Overview of Presentation �Introduction of Panelists �Discussion of Changes �Presentation of Industry Professionals

Introduction �Overview of Presentation �Introduction of Panelists �Discussion of Changes �Presentation of Industry Professionals �Question and Answer Session 65

Rating Providers of Insurance �Liability Insurance must be Rated by AM Best with a

Rating Providers of Insurance �Liability Insurance must be Rated by AM Best with a B++ or Demotech with an “A” Rating �Rating Captives & Risk Retention Groups �Offshore Insurance Prohibited as Insurance Front, but may be Used behind Front 66

Joint Underwriting Associations �What are JUAs and State Patients Compensation Funds Programs �HUD Approval

Joint Underwriting Associations �What are JUAs and State Patients Compensation Funds Programs �HUD Approval of JUA or Other State Providers of Professional Liability Insurance �OIHCF Recognizes the Need for Flexibility with State Providers if they are Financially Strong �Disqualification of JUAs or State Providers 67

Operator/Manager of Healthcare Facilities �Definition of Operator/Manager �The Operator is the entity that holds

Operator/Manager of Healthcare Facilities �Definition of Operator/Manager �The Operator is the entity that holds the license and operates the facility on a day to day basis and provides patient services �Occasionally, there are complicated issues with who is the operator, and OIHCF will deal with them on a case by case basis. �Corporate Operator Parents within a Master Lease Structure 68

Financial Statements �HUD Needs Audited Financial Statements for Corporate Operator/Manager. �HUD will Accept Operator/Manager

Financial Statements �HUD Needs Audited Financial Statements for Corporate Operator/Manager. �HUD will Accept Operator/Manager Certified Financial Statements in lieu of Audited Financial Statements for Facility Operators. �This issue has been the subject to much internal discussion between the Office of Housing and the HUD OIG. �Financial Statements are now reviewed as Part of Standard Underwriting and are Required. 69

Submission of Claims Information �OIHCF wants a Summary and Inventory of all Claims Expenses

Submission of Claims Information �OIHCF wants a Summary and Inventory of all Claims Expenses and Projected Expenses for both Claims and Legal Costs by year for at Least Six Years for PLI Reviews �Incident Reports for Very Serious Injuries or Claims & Insurance Loss Reports must be Submitted �State Licensing Surveys must be Provided for all G Rated or Higher Deficiencies N NOT Resolved. �This Information is Extremely Important! 70

HUD Review of Insurance Needs �HUD will Review Information Prior to Submission of Application

HUD Review of Insurance Needs �HUD will Review Information Prior to Submission of Application �HUD will Provide Guidance of Insurance Needs 71

Underwriter Responsibilities �Lender Must Prepare Information �USE LEAN Checklist for PLI Information �Policy Must

Underwriter Responsibilities �Lender Must Prepare Information �USE LEAN Checklist for PLI Information �Policy Must be Attached for Refinance Transactions �Evidence of Insurability Must be Proved for New Construction �Operator Financial Statements for both the Facility and Parent Must be in LEAN Application �Underwriter Must Include Summary of CLAIMS 72

Surplus Lines Carriers �Licensed Carriers Acceptable �Surplus Lines Carriers also Acceptable from HUD as

Surplus Lines Carriers �Licensed Carriers Acceptable �Surplus Lines Carriers also Acceptable from HUD as Long as they have Authorization to Conduct Business in the State �For Large and Medium Sized Operators, Insurance is Procured for the Entire Operation 73

Insurance Tail Coverage �Tail Coverage is Required if Claims are the Responsibility of the

Insurance Tail Coverage �Tail Coverage is Required if Claims are the Responsibility of the Operator/Manager �No Tail Coverage if Property is being Purchased and Prior Claims are not the Responsibility of the New Operator/Manager 74

223 A(7) Refinancing �If Applicant has Adequate Professional Liability Insurance, Requirements of Notice H

223 A(7) Refinancing �If Applicant has Adequate Professional Liability Insurance, Requirements of Notice H 04 -15 will NOT Apply 75

Troubled State Designation �Troubled State Designation was Eliminated �HUD will Review Each Applicant Where

Troubled State Designation �Troubled State Designation was Eliminated �HUD will Review Each Applicant Where High Insurance Costs Impacts the Feasibility of the Project �HUD will consider Waivers in Troubled Stated where the Operator Demonstrates a Good Record and where the Cost of the Policy Makes the Transaction Infeasible 76

Minimum Coverage and Deductibles �Minimum Insurance coverage is $1, 000/$3, 000 �HUD may Lower

Minimum Coverage and Deductibles �Minimum Insurance coverage is $1, 000/$3, 000 �HUD may Lower Minimum Coverage is Application is Infeasible Due to Insurance Cost �Deductible Raised to $100, 000 �Maximum Deductible is $1, 000 for Operator/Managers with 50+ Facilities �Many Policies have an Coverage with Three Levels— $1, 000/$3, 000/$15, 000—This means that the Coverage per Facility is $1. 0 MM per Incident, $3. 0 - MM per Facility and $15 MM Overall 77

Successor to H 04 -15 �Now that Multifamily Forms is Approved by OMB, OIHCF

Successor to H 04 -15 �Now that Multifamily Forms is Approved by OMB, OIHCF Can Go forward to Renew Notice H 04 -15. �Revised Notice will Require Less Paperwork �OIHCF is Interested in Reviewing Information Regarding Risk. The More Information that is Presented in an Easy to Understand Format, the Faster the Application will be Processed. 78

Hamilton Insurance Agency �Presentation of Alan Zuccari and Staff of Hamilton Insurance Company on

Hamilton Insurance Agency �Presentation of Alan Zuccari and Staff of Hamilton Insurance Company on Industry Perspectives, Risk Management and Other Insurance Issues �Review of Issues that Insurance Underwriters Focus on When Conducting Due Diligence of Healthcare Facilities 79

Helping Facilities Manage & Reduce Risk Through Electronic Reporting Ser. Varus: Redefining Risk Management

Helping Facilities Manage & Reduce Risk Through Electronic Reporting Ser. Varus: Redefining Risk Management in the Long Term Care Setting

Effective event reporting reveals opportunities to prevent potential losses and future claims, decreases liability

Effective event reporting reveals opportunities to prevent potential losses and future claims, decreases liability exposure, and increases the overall quality of care.

Without the use of effective event reporting, facilities are unable to effectively track &

Without the use of effective event reporting, facilities are unable to effectively track & trend which decreases a corporation’s ability to implement an effective loss prevention & loss reduction plan.

A more effective way of reducing this risk is through the use of an

A more effective way of reducing this risk is through the use of an electronic incident tracking tool that seamlessly integrates incidents/events medication variances, record request tracking and maintenance, survey tracking and claims management

Qualities of an effective electronic tracking tool �Customizable reports �Instant notification to key personnel

Qualities of an effective electronic tracking tool �Customizable reports �Instant notification to key personnel �Daily, weekly, monthly, and quarterly tracking and trending

System Highlights

System Highlights

System Highlights 86

System Highlights 86

System Highlights

System Highlights

 Alerts Immediate E-Mail Notification of High Risk and State Reportable Events to Corporate/Legal

Alerts Immediate E-Mail Notification of High Risk and State Reportable Events to Corporate/Legal Risk Management: This e-mail message is to alert you of a serious incident which may require further investigation. The Risk Management Department has received a copy of this alert. If you feel you need assistance from the Risk Management or the Legal Departments please contact (Any Name). Incident ID: Alert Type: Facility: Date: Time: Edit/View: 100167666 Resident Abuse Any Facility, USA 02/29/2009 11: 00 http: //ermaonline. com/Login 2. asp? Incident_ID=1 CONFIDENTIAL: This e-mail and any attachments are confidential and may also be privileged. If you are not the named recipient, or have otherwise received this communication in error, please notify the sender immediately and do not disclose its contents to any other person, use it for any purpose, or store or copy it in any medium. Please delete it from your inbox. Thank you.

Why ERMA is Effective • Helps protect against adverse financial losses i. e. ,

Why ERMA is Effective • Helps protect against adverse financial losses i. e. , lawsuits and bankruptcies • Keeps facilities in regulatory compliance i. e. , “G” level deficiencies, admissions bans & monetary fines • Prevents & eliminates negative publicity which results in lower occupancies Bottom line: ERMA provides opportunity for early interventions, which ultimately keeps facilities out of claims

Foremost and most importantly …. . Effective risk management improves the quality of patient

Foremost and most importantly …. . Effective risk management improves the quality of patient care

“ We strive to ensure our clients have the best possible outcome for their

“ We strive to ensure our clients have the best possible outcome for their individual business needs. " Alan J. Zuccari, President & CEO

Special Cause of Loss Coverage Form Broadest insuring agreement that covers losses from all

Special Cause of Loss Coverage Form Broadest insuring agreement that covers losses from all causes not specifically excluded in the policy. Building and contents insured to total replacement value. Building - Contents

 Business Income with Loss of Rents and Extra Expense Coverage for loss of

Business Income with Loss of Rents and Extra Expense Coverage for loss of income including rents and extra expenses. Business Income -Extended Period of Indemnity Provides extended period after the damage is repaired while the facility is regaining occupancy. Typically 180 – 365 days.

 Agreed Value Insurer agrees to pay a stated amount without any adjustment for

Agreed Value Insurer agrees to pay a stated amount without any adjustment for depreciation. Replacement Cost Coinsurance The cost to replace the building or contents. Mold Coverage Often excluded in property policies and offered as optional coverage. Wind Coverage for hurricanes, tropical cyclones, Named storms, tornadoes and other wind exposures. Law and Ordinance Coverage (A, B & C) A) B) C) A penalty associated with not insuring to full value. Agreed value waives coinsurance. Coverage for Loss to the undamaged portion of the Building. Demolition Cost Increased Cost of Construction

Flood Flood Coverage – Critical Zone Deductible NFIP Flood Zones A and V. NFIP

Flood Flood Coverage – Critical Zone Deductible NFIP Flood Zones A and V. NFIP Purchased with Maximum Limits Flood Coverage – Non Critical Zones NFIP offers maximum limits of $500, 000 building and $500, 000 contents. ($500, 000 building, $500, 000 contents, $100, 000 BI or less) Earthquake Annual Aggregate Deductible Critical zone flood deductibles are typically the maximum limits offered by NFIP plus a $100, 000 BI deductible. All other flood zones; non-critical; should be a reasonable deductible, less than $100, 000 Coverage is for direct damage resulting from earthquake or volcanic eruption. The maximum dollar amount that can be paid under a policy during a one-year period. $100, 000 or less.

Insurance Company Rating and Monitoring Process Joseph L. Petrelli, ACAS, MAAA, FCA President, Demotech,

Insurance Company Rating and Monitoring Process Joseph L. Petrelli, ACAS, MAAA, FCA President, Demotech, Inc.

�Incorporated in 1985, Demotech, Inc. is a financial analysis and actuarial services firm serving

�Incorporated in 1985, Demotech, Inc. is a financial analysis and actuarial services firm serving the P&C and Title insurance industries. In 1989, we became the first company to review and rate regional and specialty insurance companies.

�Since 1989, we have assisted insurers whose property insurance policies were previously unacceptable to

�Since 1989, we have assisted insurers whose property insurance policies were previously unacceptable to the secondary mortgage marketplace because the insurer did not have a rating assigned by another rating service that was acceptable to Fannie Mae, Freddie Mac or the United States Department of Housing and Urban Development.

�Reporting to National Association of Insurance Commissioners at year-end 2008: � 2, 809 P&C

�Reporting to National Association of Insurance Commissioners at year-end 2008: � 2, 809 P&C insurance companies with �$1. 4 trillion of admitted assets and �$462 B of net worth (surplus) writing �$498 B of direct premium written �Inference is that liabilities are $944 B.

�Regulatory requirements imposed on carriers reporting to NAIC 1. Annual independent audit 2. Statement

�Regulatory requirements imposed on carriers reporting to NAIC 1. Annual independent audit 2. Statement of actuarial opinion as regards loss and loss adjustment expense reserves

�Regulatory requirements imposed on carriers reporting to NAIC (continued) 3. Insurance Regulatory Information Ratios

�Regulatory requirements imposed on carriers reporting to NAIC (continued) 3. Insurance Regulatory Information Ratios applied to consistent accounting information 4. Risk-based capital – a quantitative evaluation

�Regulatory requirements imposed on carriers reporting to NAIC (continued) 5. Management’s Discussion and Analysis

�Regulatory requirements imposed on carriers reporting to NAIC (continued) 5. Management’s Discussion and Analysis – a qualitative perspective 6. Periodic examinations by state of domicile department of insurance

�Regulatory requirements imposed on carriers reporting to NAIC (continued) 7. Most states have guaranty

�Regulatory requirements imposed on carriers reporting to NAIC (continued) 7. Most states have guaranty funds for carriers that are admitted to do business in the state. 8. Other requirements that are state specific or company specific.

�Rating agencies review and analyze statutory insurance accounting information as well as financial information

�Rating agencies review and analyze statutory insurance accounting information as well as financial information prepared utilizing generally accepted accounting principles. �Procedures and practices vary so the discussion will center on those utilized at Demotech, Inc.

Comprehensive Focus �Quality and quantity of liquid, readily realizable assets, �Adequacy of loss and

Comprehensive Focus �Quality and quantity of liquid, readily realizable assets, �Adequacy of loss and loss adjustment expense reserves �Rate adequacy and consistency of pricing �Quality and applicability of reinsurance

�Each quarter’s financial statement is analyzed to ensure that the investment portfolio remains liquid,

�Each quarter’s financial statement is analyzed to ensure that the investment portfolio remains liquid, high quality, loss and loss adjustment expense reserves remain consistent with the estimate underlying the opinion of the actuary, financial leverage remains within reasonable tolerance.

�On a quarterly basis, management also affirms that key personnel or service providers, whom

�On a quarterly basis, management also affirms that key personnel or service providers, whom we met with during our semi-annual reviews, remain in place in each functional area.

�The major functional areas include Marketing, Sales, Underwriting, Risk Management, Claims, Pricing, Financial Reporting,

�The major functional areas include Marketing, Sales, Underwriting, Risk Management, Claims, Pricing, Financial Reporting, Information Technology and Reinsurance. �Important to note that the quality and quantity of reinsurance purchased by a small, regional insurer can enhance its financial stability.

�Semi-annually, Demotech meets on-site to review the latest available financial information, statement of actuarial

�Semi-annually, Demotech meets on-site to review the latest available financial information, statement of actuarial opinion as regards loss and loss adjustment expense reserves, the year-end audit, the composition of the investment portfolio, changes in personnel, if any, in critical functions.

�We also discuss whether or not there are changes in the business plan, operating

�We also discuss whether or not there are changes in the business plan, operating philosophy, reinsurance treaties or marketing philosophy, changes in pricing or rate levels, or claim philosophy.

�Annually, we review or discuss the independent audit, statement of actuarial opinion and other

�Annually, we review or discuss the independent audit, statement of actuarial opinion and other regulatory requirements with the professional who authored the material and document. �Frequent teleconferences and on-site meetings with each entity that is HUD accepted.

�It is our opinion that the domestic, United States insurance marketplace is financially strong,

�It is our opinion that the domestic, United States insurance marketplace is financially strong, heavily regulated as well as reviewed by third party rating agencies and services and provides access to any coverage that might be requested by HUD or any other informed consumer of insurance. �Several alternatives to the A. M. Best Company including Demotech, Inc.

Questions and Answers Panel: C. Mark Williams (OIHCF) Alan Zuccari and Staff (Hamilton Insurance)

Questions and Answers Panel: C. Mark Williams (OIHCF) Alan Zuccari and Staff (Hamilton Insurance) Joseph Petrelli (Demotech Inc. ) 114