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A loan and a property infusion will not be enough to keep CAP out of the woods.
Last February was the silver anniversary of the College Assurance
Plan’s (CAP). But instead of a grand celebration, officials were busy
raising funds to tide the pre-need company over. They need to raise at
least P800 million by March to ensure they can settle the remaining
tuition of its more than 80,000 plan holders who are in school so they
can take their final exams.
Their next problem is to raise more than P37 billion to ensure the
company can still be viable in the coming years. CAP is looking at two
white knights for its rescue.
Enrique Sobrepeña, CAP chairman, said during a recent Senate hearing that they were working out a loan amounting to US$300 million with the Nevada-based First American Investment Corp. (FAI) to be given over a period of 10 years. About $80 million is scheduled to be released within the year and the rest in tranches. The first drawdown is expected in March.
The other bailout hope comes from businessman Romeo Roxas’s P6-billion property to be used for equity infusion. But that is doubtful.
“All I want to see is the money,” Fe Barin, Securities and Exchange Commission (SEC) chair, tells NEWSBREAK. “They are the ones making the promises and the deadlines. Let’s see if they will make good [those promises].”
Barin says, however, that even if the money comes in March, the SEC will still not grant CAP the license to sell new plans because the company still needs to address its capital and trust fund deficiencies.
The senators are cynical. Sen. Manuel “Mar” Roxas II pointed out that FAI has zero capitalization, thus it could just be a broker who matches lenders and borrowers. Sobrepeña claimed that FAI is a legitimate entity composed of “private bankers managing investment funds under trust accounts in excess of $3 billion.”
Sen. Sergio Osmeña III, in a hearing, pointed out to Barin that SEC should not even be considering a property infusion because corporate laws prohibit this, especially since CAP is not a real estate developer but a company that needs liquid assets.
But even with the loan and a property infusion, these will still not be enough to keep CAP out of the woods. Based on NEWSBREAK estimates, CAP will need around P7 billion to P10 billion to meet tuition obligations and operating and financing expenses this year. Yet, its inflow will just be in the vicinity of P4 billion to P6 billion, considering the loan proceeds and the slowdown in the collections. CAP’s collections of premiums from new plan holders and existing ones used to average about P130 million a month. In 2004, it averaged only P80 million.
What to Do?
Here are the options for CAP.
First, the government bails it out, considering the public interest involved. But this is a long shot, what with the government’s own financial problems.
Second, a court or the SEC assigns a receivership committee in CAP to map out a rehabilitation plan. CAP has been recording more and more losses as operations are prolonged. In 2002, its average losses every quarter were only P100 million. In 2004, they shot up to about P1 billion. Unaudited financials for 2004 showed losses reached P3.81 billion, a 36-percent jump from 2003’s P2.8 billion. To stem the company’s losses, the receivership committee may ask the plan holders, creditors, and suppliers for longer payment terms and accept reduced benefits.
The SEC, however, has delayed putting CAP under receivership, opting instead to give the company more time. “But it does not mean this chance is indefinite,” warns Barin.
She says the SEC’s next move needs careful study. “We would like to protect the plan holders. If we move for receivership, it will take a long time for them to be able to get anything from CAP. The process will be long and tedious because of court cases, etc.”
The last option is liquidation. If the procedure on previously closed pre-need companies is a guide, then CAP—which has most of its trust fund invested in real estate—will either liquidate these properties, or use them to buy out the terminal value of the plans.
Schools that have not been paid prefer cash, not property. Sr. Gertrude Borres, president of the Assumption College, said: “We cannot afford not to be paid in cash. If they pay us with property, we cannot use it to pay our bills.”
The first SEC oversight board noted a “need to take preemptive action before the impending collapse” of CAP. It also cited the need to determine a cut-off date for the equitable plan benefits to be given to existing plan holders. “To delay this process means that those being paid in full now enjoy undue advantage over those whose benefits will mature in the future....”
Barin recommends that plan holders review their contracts which stipulate the terminal value or the equivalent percentage if they decide to cash out, and then weigh their risks. Some contracts specify that if the plan holder has paid less than 20 percent of the contract price, he is not eligible to get anything. If payment is more than 20 percent, the plan holder is entitled to 20 to 50 percent of the contract price. Others are based on the length of time the plan has been with the company. Those who have riders, like a cash-back feature at the end of the tenth year after graduation, will likely not be the priority.
What is happening to CAP is the product of the hubris of the pre-need industry. The industry offers a hybrid product whose nature was being debated as either a form of insurance with an indefinite maturity date, or a security that provides for a date when plan owners can claim their benefits. Thus arose the question of whether it should be regulated by the SEC or the Insurance Commission. It was only when the Revised Securities Code was enacted in 2000 that the issue was put to rest. Pre-need was defined as a security and the SEC became its regulator.
This was the time when the SEC was still lax on the industry. For example, instead of what should have been arms-length transactions between CAP and its trustee banks, CAP used to invest the trust fund in the projects of its affiliate companies, then transferred the latter as assets under the trust fund.
It was also the time when one contentious number, the actuarial reserve liability (ARL), was not yet reflected in the financial statements, but was buried in the footnotes of what the pre-need companies submitted to the SEC. ARL represents the current value of the existing and future tuition payables. It is also a check on the health of the trust fund. If the actual funds are less than the ARL, then the company has about a year to correct it.
According to an actuary, a big deficiency now means the trust funds will have to earn higher yields as the maturity date nears. For example, if the performance of the trust fund is only at 3 percent now when it should be doing 12 percent, this will mean that as the plan holders nears age 17, the typical age for first year college, the trust fund has to be invested in higher yielding instruments and should start earning incredible rates of anywhere between 20 and 50 percent per year.
When Lilia Bautista became the SEC chair, replacing Perfecto Yasay Jr., she enforced stricter administrative rules to discipline the pre-need companies. It was also during Bautista’s time that the whole world was learning to present an accurate picture of a company’s finances from the Enron lesson. Thus, in 2002, SEC ruled that the ARL be reflected in the financial statements of all pre-need companies. That was when trust fund deficiencies emerged in the financial statements of the industry players.
The biggest deficiency at that time was CAP’s, which stood at P2.5 billion. The figure skyrocketed to P17 billion in 2003, creating a ripple effect on its capital position.
A former actuary of CAP tells NEWSBREAK the computation of the ARL is based on various assumptions given by CAP itself. The actuary also points out that in 2003, the ARL was already reflected in the financial statements, meaning the board of CAP had already approved the computation of the ARL.
Flawed Business Model
In the business of educational plans, 51 percent of the premiums that the plan holder pays regularly for about five years should be set aside and entrusted to a trustee bank, which is supposed to make independent investment decisions. The remaining 49 percent should be retained with the company for operating expenses and commissions to agents.
According to SEC rules for the pre-need industry, 10 percent of the trust fund should be invested in easily cashable instruments, like government securities. This requirement ensures that the company has something to dip into when the plan holders start enrolling in college. Maximum investment in real estate is only up to 25 percent of the total fund. Equity in other companies is also allowed but only in listed companies.
All these are supposed to ensure that the pre-need companies are prudent in handling other people’s money.
But there is a basic flaw in this business model. Tuition started to skyrocket in 1992 when the 10-to-15-percent CAP on yearly increases was lifted. There was a time that tuition grew by more than 25 percent each year.
CAP’s actuaries, the professionals who evaluate and compute the financial impact of various trends, packaged products that they assumed would bear only 10 to 14 percent yields. From these numbers alone, it is obvious that CAP’s educational plans cannot catch up with the increases in tuition.
Add to this the fact that the performance of the trust fund in the past years ranged from a measly 1 percent to 5 percent. The trust fund investments did not follow the prescribed ceilings. For example, up to 65 percent was invested in real estate projects owned by CAP’s sister companies, including the Fil-Estate group, which was into golf courses, high-end residential buildings, and other leisure projects that in the past years moved slowly.
Based on the 2003 financials, the trust fund is short of P17 billion because it only had P8.5 billion. The actuaries computed that for CAP to meet its present and future obligations, the trust fund should have been at P25.7 billion already in that year.
The company’s own coffers should have been used as a buffer so it could meet the maturing obligations to plan holders. The problem is, CAP the company has a capital deficiency of up to P20 billion, according to its own external accountant. In other words, CAP is insolvent, or has more liabilities than assets.
But others are in denial.
Yasay asserted that Senator Roxas is working for the entry of Philamlife Insurance, the biggest pre-need company in the Philippines, into CAP. A former company officer said that when CAP failed to contain its deficits, various options were looked into, including a buy-out from Philamlife. The source said emissaries were sent to discuss this with Philamlife’s president, Jose Cuisia, who was described as not too keen on the transaction because some of his conditions were not met. “They were the ones who approached us. We did not go to them,” Cuisia said in a television interview. Eventually, nothing came out of the talks.
Roxas recalled that when he was still trade secretary, he initiated a study on the pre-need industry funded by US Agency for International Development. At that time, the Department of Trade and Industry had a consumer desk that was receiving hundreds of complaints from disgruntled holders of plans from pre-need firms that had closed shop.
Educational plans have made the pre-need industry the most successful retail financial instrument in the country—a total of almost six million plans sold with a value of about P250 billion. It provided a product that is close to the hearts of Filipinos.
Thus, Miguel Vasques, president of the Philippine Federation of Pre-Need Companies, is still optimistic about future of the pre-need industry. “CAP is not the industry. People still need our services.”
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