The statements in this discussion and analysis concerning expectations regarding the Position Holder Trust’s and the IRA Partnership's future performance, liquidity and capital resources, as well as other non-historical statements are forward-looking statements that involve substantial risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements; although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and are difficult to predict, that could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including the factors set forth below and elsewhere in this report:
uncertainties and estimates related to the valuation of life insurance policy assets reflected on our financial statements;
risks relating to the validity and enforceability of the life insurance policies in our portfolio;
Interest expense for the year ended December 31, 2017 primarily consisted of $5.8 million on the Vida loan and $1.1 million on the NIRAN note payable.
As of December 31, 2016, the Portfolio held 3,252 Policies with an estimated fair value of $470.7 million compared to 3,258 Policies with a fair value of $478.0 million at December 9, 2016, a decrease of $7.3 million or 1.5%. Of the Portfolio’s fair value, $263.6 million is attributable to the Position Holder Trust and $207.1 million to the Continuing Fractional Holders. As of December 31, 2016, the Policies’ aggregate death benefit was approximately $2.2 billion, which was comprised of $1.9 billion in life settlement contracts and $260.7 million in viatical contracts.
As of December 31, 2017, and 2016, the Position Holder Trust and IRA Partnership had no off-balance sheet arrangements.
At December 31, 2016, the Trust had $110.3 million of cash primarily consisting of $27.5 million held to pay Policy premiums, $25.8 million held to pay for premiums collected and due on behalf of the Continuing Fractional Holders, $26.2 million held to pay the outstanding pre-effective date maturities collected and owed to Continuing Fractional Holders, and $24.0 million was available to pay for operating expenses of the Trust. The Trust’s total outstanding liabilities decreased by $97.3 million from $275.7 million at the Effective Date, to $178.4 million at December 31, 2016. The decrease was mainly attributable to the expenditure of cash to pay outstanding liabilities associated with the payout of funds related to Pre-Effective Date Maturities of $104.7 million, Maturity Funds Facility of $27.5 million, including interest, and certain other obligations associated with the bankruptcy and organization of the Trust and IRA Partnership.
Outstanding debt for the year ended December 31, 2017, included $35.0 million of outstanding principal on the Exit Loan Facility, $36.5 million of New IRA Notes, and $2.6 million to Thomas Moran. Outstanding debt as of December 31, 2016, included $55.0 million of outstanding principal on the Exit Loan Facility and $36.5 million of New IRA Notes, and $2.6 million to Thomas Moran.
The preparation of these financial statements, in conformity with GAAP, requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from these estimates and such differences could be material. The estimates related to the valuation of the life insurance policies represent significant estimates made by the Trust.
As of December 31, 2017, and 2016, the Trust holds $30.2 million and $25.8 million, respectively, in escrow for future payment of the continuing fractional holders’ premium obligations. To the extent that these funds are not used for premium payments, they are refundable to the respective continuing fractional holder.
The Partnership, due to the nature of its assets and operations, is subject to significant risks and uncertainties affecting the Trust which encounters economic risk. The two main components of economic risk potentially impacting the Partnership’s interest in the Trust are market risk and concentration of credit risk. The Market risks include interest rate risk and the risk of declines in valuation of the Trust’s life insurance policies, including declines caused by the selection of increased discount rates associated with the Trust’s fair value model. Concentration of credit risk is the risk that an insurance carrier who has issued life insurance policies held by the Trust, does not remit the amount due under those policies due to the deteriorating financial condition of the carrier or otherwise. It is reasonably possible that future changes to estimates involved in valuing life insurance policies could change and result in material effects to on the Partnership’s financial position and results of operations.
We have audited the accompanying balance sheets of Life Partners Position Holder Trust (the "Trust") as of December 31, 2017 and 2016, the related statements of operations, changes in net assets, and cash flows for the year ended December 31, 2017 and the period from December 9, 2016 (inception) to December 31, 2016 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Trust as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the year ended December 31, 2017 and the period from December 9, 2016 to December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
In connection with its formation and the inception of its activities on December 9, 2016, the Trust issued a total of 1,012,355,948 units of beneficial interest (the “Units”) to the fractional interest holders having claims in the Debtors bankruptcy, pursuant to the Plan. Each fractional interest holder received a Unit for each dollar of expected death benefit such holder contributed to the Trust. As of December 31, 2017, there were 10,187 holders of the 1,162,059,511 Units outstanding. As of December 31, 2016, there were 12,243 holders of the 1,012,364,792 Units outstanding. The Trust owns a portfolio of life insurance policies; a portion of the policies is encumbered by the economic interest of continuing fractional interest holders. As of December 31, 2017, the Trust’s portion of the portfolio consists of 3,140 life insurance policies, with a fair value of $272.1 million and an aggregate face value of approximately $1.3 billion. As of December 31, 2016, the Trust’s portion of the portfolio consists of 3,252 life insurance policies, with a fair value of $263.6 million and an aggregate face value of approximately $1.3 billion. The fair value of the interests in the life insurance policies owned by continuing fractional interest holders are not reflected in the financial statements of the Trust.
A summary of contributed assets and liabilities assumed by the Trust on December 9, 2016 were as follows:
The Trust’s primary purpose is the liquidation of the Trust’s assets and the distribution of proceeds to its beneficial interest holders. The Trust expects that fulfilling its purpose requires a significant amount of time, and that the Trust will have significant ongoing operations during that period due to the nature of its assets and its plan to maximize the proceeds to its beneficiaries by maintaining the majority of its life insurance policies until maturity. As a result, the Trust has concluded that its liquidation is not imminent, in accordance with the definitions under accounting principles generally accepted in the United States of America, and has not applied the liquidation basis of accounting in presenting its financial statements. The Trust will continue to evaluate its operations to determine when its liquidation becomes imminent and the liquidation basis of accounting is required.
The Trust maintains an allowance for doubtful accounts for estimated losses resulting from the inability to collect premiums and service fees receivable. Such estimates are based on the position holder’s payment history and other indications of potential uncollectability. After all attempts to collect a receivable have failed, receivables are written off against the allowance. At December 31, 2017 and 2016, the allowance for doubtful accounts was $5.0 million, all of which was for receivables assumed from the Debtors on the effective date. Outstanding receivable balances may be recoverable pursuant to the Trustee’s set-off rights under the Plan.
The FASB has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Trust’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Trust has no material uncertain income tax positions as of December 31, 2017 and 2016.
The Trust also assumed income tax liabilities of the Debtors at its inception which total approximately $2.0 and $2.9 million as of December 31, 2017 and 2016, respectively, related to taxes, penalties, and interest from the Debtors’ 2008, 2009 and 2010 income tax returns. These obligations bear interest at 4% annually and are due in full by January 2020.
Life expectancy reflects the probable number of years remaining in the life of a class of persons determined statistically, affected by such factors as heredity, physical condition, nutrition, and occupation. It is not an estimate or an indication of the actual expected maturity date or indication of the timing of expected cash flows from death benefits. See “Life Insurance policies,” in Note 6, “Fair Value Measurements”. The following table summarizes the Trust's life insurance policies grouped by remaining life expectancy as of:
The Trust anticipates funding the estimated premium payments from maturities of life insurance policies. It also maintains premium reserves and access to lines of credit.
On December 9, 2016, the Trust obtained a term loan from Vida Opportunity Fund, LP, an affiliate of Vida Capital, Inc., for $55.0 million. Interest accrues at 11% of outstanding balance per annum and is paid quarterly. Principal is due in full on December 9, 2018 but is not subject to a prepayment penalty. Substantially all of the Trust’s assets collateralize the loan. The Trust made principal payments of $20 million in 2017 leaving a balance outstanding on the term loan of $35 million at December 31, 2017.
On December 9, 2016, the Trust entered into a revolving line of credit with Vida Longevity Fund, LP, an affiliate of Vida Capital, Inc., for $25.0 million. Interest accrues at 11% of outstanding balance and is paid quarterly. The line of credit matures on December 9, 2018, at which point any amount outstanding is due in full. As of December 31, 2017, and 2016, no amounts have been drawn on the line of credit.
Level 3 - Valuation is based on inputs that are both significant to the fair value measurement and unobservable. Level 3 inputs include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value generally require significant management judgment or estimation.
In connection with its formation and the inception of its activities on December 9, 2016, the Partnership issued limited liability company interests (“Member Interests”) in satisfaction of claims against the Debtors. The only assets of the Partnership are beneficial interest units of the Trust. The Partnership held 733,164,743 and 692,883,523 units as of December 31, 2017 and December 31, 2016, respectively, of the Trust’s outstanding units totaling 1,162,059,511 and 1,012,355,948 as of December 31, 2017 and December 31, 2016, respectively. The sole purpose of the Partnership is to hold Trust interests to permit holders of Partnership Interests to participate in distributions of the proceeds of the liquidation of the Trust. The Partnership was created to allow IRA Holders to hold an interest in an entity classified as a partnership for federal tax purposes, rather than the assets of a grantor trust, such as the Position Holder Trust. The Partnership’s sole asset is its investment in the Trust and it engages in no other business activity.
The Financial Accounting Standards Board (the “FASB”) has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Partnership has no material uncertain income tax positions as of December 31, 2017 or December 31, 2016.