The Trust maintains a small leasehold interest in the Subservicer’s office space for $1,000 per month.
increasing cost-of-insurance (premiums) on the life insurance contracts in our portfolio.
The change in estimated fair value of the Trust’s life insurance Policies includes realized gains (losses) on matured policies in addition to unrealized gains (losses) on policies which is affected by unwinding the discount over time, and changes in valuation assumptions, including mortality, cost of insurance and discount rates. Based upon our planned comparison of actual maturities to projected maturities, management elected to discontinue the use of LEs in favor of default mortality multipliers based on the 2015 Valuation Basic Table which increased the unrealized loss in 2018.
The decrease in total expenses of $5.7 million is primarily due to less interest paid as the notes payable balances have decreased over the same period noted above and less incurred in legal and professional fees due to increased efficiencies in the operations of the Trust. This decrease in cost is partially offset by an increase in the Trust’s fees payable to the U.S. Trustee, which is included in administrative and filing fees, while the bankruptcy remains pending.
Interest expense for the years ended December 31, 2018 and 2017 primarily consisted of interest related to two notes payables. See, Note 5 “Notes Payable” to the accompanying financial statements in Item 8 for more information on the notes payable.
During the year ended December 31, 2018, the Position Holder Trust paid premiums on Policies totaling $56.7 million on the PHT Portfolio. In addition, the Trust received $75.6 million from the maturity of life settlements during the year ended December 31, 2018. During the year ended December 31, 2017, the Position Holder Trust paid premiums on Policies totaling $37.5 million on the PHT Portfolio and received maturities of life settlements of $78.9 million.
The Position Holder Trust paid $31.0 and $19.9 million of its outstanding notes payable during the years ended December 31, 2018 and 2017, respectively.
The primary needs for working capital are to pay premiums on Policies and expenses relating to the administration of the Trust and its assets. The Trust is authorized for the use of collected death benefits, called the “Maturity Funds Facility,” from which the Trustee may borrow on a short-term revolving basis to fund its premium reserves. The Trust is also entitled to access the cash surrender value included in the beneficial ownership registered in its name to use for any purpose permitted by the Position Holder Trust Agreement, including to satisfy its share of the premium obligations relating to the Policies. If any such use results in a decrease in the death benefit payable under the related Policy, the decrease will be taken out of the Position Holder Trust’s share of the maturity proceeds of the Policy or, if the Trust’s share is insufficient, the Trust must make up the difference. Fees for servicing the Policies will be paid out of the death benefits paid on Policies in an amount equal to 2.65% of the death benefits paid. The Trust believes that these financial resources, in addition to proceeds from maturities, line of credit, and Maturity Funds Facility, are sufficient for it to continue its operations and to issue funds, as necessary, throughout the twelve months after the date of this report.
If the Trust elects to redeem any New IRA Notes, it must notify the New IRA Note Trustee of the redemption date and the principal amount to be redeemed at least 60 days before the redemption date (unless a shorter period is satisfactory to the trustee). If fewer than all the New IRA Notes are being redeemed, the notice must also specify a record date not less than 15 days after the date of the notice of redemption is given to the New IRA Note trustee. The New IRA Note trustee will select the notes to be redeemed on a pro rata basis in denominations of $100 principal amount and higher integral multiples of $100.
At December 31, 2018, the Position Holder Trust had $51.9 million of cash primarily consisting of $0.8 million held to pay Policy premiums, $31.3 million was held to pay for premiums collected and due on behalf of the continuing fractional holders, $14.3 million held to pay maturities collected and owed to current fractional holders, $4.8 million held as collateral deposits on debt, and $0.7 million was available to pay for operating expenses of the Trust. At December 31, 2017, the Position Holder Trust had $78.1 million of cash primarily consisting of $5.7 million held to pay Policy premiums, $30.3 million held to pay for premiums collected and due on behalf of the continuing fractional holders, $23.7 million held to pay pre and post effective date maturities collected and owed to current fractional holders, $16.6 million held as collateral deposits on debt, and $1.8 million available to pay for operating expenses of the Trust.
During the years ended December 31, 2018 and 2017, the Position Holder Trust paid premiums on Policies totaling $56.7 million and $37.5 million, respectively on the PHT Portfolio. Also, for the years ended December 31, 2018 and 2017, there were maturities received of $75.6 million and $66.9 million, respectively.
The Trust assumed the Debtors’ receivables related to life insurance policy premiums and service fees that were paid to the Debtors on behalf of fractional interest holders prior to the Trust’s effective date. After December 9, 2016, the policy premiums allocable to continuing fractional interest holders are those persons' obligations and not the Trust’s obligations. If a continuing fractional interest holder defaults on future premium obligations, such position is deemed contributed to the Trust in exchange for the number of Units provided by the Plan.
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 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, 2018 or December 31, 2017.
Undistributed earnings (losses) attributable to the Partnership’s interests in the Trust and recognized under the equity method represented approximately ($48.3) million at December 31, 2018 and $11.3 million at December 31, 2017.
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, 2018 or 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 matured on December 9, 2018, at which point there was no amount outstanding. As of December 31, 2017, there were no amounts outstanding on the line of credit.
Also subsequent to the closing of the reporting period, to provide for short term capital needs of the Position Holders Trust, if any, effective as of January 30, 2019, the Position Holders Trust entered into a $15 million revolving credit facility with Veritex Community Bank of Dallas (“Veritex Credit Facility”), Texas. The Veritex Credit Facility, is secured by a lien on the Position Holder Trust’s assets, has an initial 2-year term and, as to any amounts drawn thereunder, shall bear interest at the rate of 6% per annum.
On March 28, 2017, the Trust, was ordered to pay the Chapter 11 trustee’s fees totaling $5.5 million. The first payment of $2.8 million was paid in 2017. The remaining balance is in the form of a note payable in the amount of $2.8 million and is due in three equal annual payments on January 1 beginning in 2019. The note does not bear interest as ordered by the Court, thus the note has been discounted by $0.2 million, based on an implied interest rate of 3%. As of December 31, 2018, and 2017, the outstanding balance was $2.7 million and $2.6 million, respectively.
The Trust carries its life insurance policies at fair value. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The balances of the Trust's assets measured at fair value on a recurring basis as of December 31, 2018 and 2017, are as follows:
In assessing and determining the PHT Portfolio’s valuation, the Position Holder Trust retained Lewis & Ellis, Inc. as its principal actuaries.
The LEs that the Trust holds were issued by life expectancy providers to the Debtor during the course of the bankruptcy. The LEs were approaching, and in some cases exceeding, two years since issuance. As LEs age, they become less reliable because they are based on increasingly out of date medical information. After two years, many industry participants obtain new medical information from insureds
As a result of its planned comparison of actual to expected mortalities during the second quarter of 2018, the Trust noticed a growing divergence between actual and expected maturities. After further analysis, the Trust determined that the LEs in its possession were less reliable than previously understood and that the mortality multipliers were providing more accurate longevity projections across the portfolio. Accordingly, the Trust’s management decided to accelerate its migration towards the mortality multipliers and stop using the LEs.
The default mortality multipliers have changed during 2018. The multipliers used in 2018 are 110% for males and 90% for females the the life settlements, and 350% for the viaticals regardless of gender. In 2017, the multipliers used were 100% for males and females for the life settlements and 350% for the viaticals regardless of gender. On a quarterly basis, the Trust compares actual mortalities to expected mortalities to refine its analysis.
The discount rate is another significant input in the fair value determination. The Trust’s estimate incorporates market factors, the size of the portfolio, and various policy specific quantitative and qualitative factors including known information about the underlying insurance policy, its economics, the insured and the insurer.
The Partnership's management is responsible for these financial statements. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.