The Trust now uses mortality multipliers as its exclusive method of estimating longevity. On a quarterly basis, management compares actual maturities to projected maturities to refine and validate its analysis. See, Note 6, “Fair Value Measurements” to the accompanying consolidated financial statements in Item 8 for more information on the valuation of life insurance policies.
The following table provides a roll-forward of the fair value of life insurance policies for the years ended December 31, 2017 and 2016:
The net increase in net assets for the year ended December 31, 2017 was $11.3 million as compared to a net increase in net assets of $0.6 million for the period December 9, 2016 to December 31, 2016.
As of December 31, 2018, and 2017, the Position Holder Trust and IRA Partnership had no off-balance sheet arrangements.
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, 2018 and December 31, 2017, the allowance for doubtful accounts was $10.0 million and $5.0 million, respectively, and fully offset 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.
We have audited the accompanying balance sheets of Life Partners Position Holder Trust (the "Trust") as of December 31, 2018 and 2017, the related statements of operations, changes in net assets, and cash flows for the years ended December 31, 2018 and 2017 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, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.
The Trust encounters economic, legal, and longevity risk. The main components of economic risk potentially impacting the Trust are market risk, concentration of credit risk, and the increasing cost of insurance risk. The Trust’s 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. It is reasonably possible that future changes to estimates involved in valuing life insurance policies could change and materially affect future financial statements. 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 carrier’s deteriorating financial condition or otherwise. Another credit risk potentially impacting the Trust is the risk continuing fractional holders may default on their future premium obligations, increasing the Trust’s premium obligations. The increasing cost of insurance risk includes the carriers’ attempts to change a policy’s cost of insurance. While some cost of insurance increases are anticipated and taken into consideration in the Trusts forecasts, other cost of insurance increases are unilaterally imposed by the carrier. In the second quarter of 2018, one carrier increased the cost of insurance associated with its policies held by the Trust, representing about $188 million in face value, by approximately 45% over the prior cost of insurance. There is no additional impact in third and fourth quarters of 2018 from this carrier.
Premium liabilities are funds in escrow on behalf of continuing fractional holders for future payment of their premium obligations. If such funds are not used for such continuing fractional holder’s premium payments, they are refunded to the respective continuing fractional holder.
The Plan imposes restrictions on the Trust to maintain certain funds in segregated accounts. As of December 31, 2018, and 2017, the Trust has $51.2 million and $76.3 million, respectively, in restricted cash and cash equivalents. The restricted cash accounts are for: monies distributable to the fractional interest holders in policies that matured prior to the Plan becoming effective, maturities, premium reserves, premium obligations, and collateral deposits on debt.
In accordance with the Plan, the Trust issued New IRA notes of $35.9 million in exchange for claims against the Debtor’s estate and the incidental interests in life insurance policies. Those policies collateralize the Trust’s obligations under the notes. Interest accrues at 3% of outstanding balance and is paid annually in December. Principal is due in full on December 9, 2031. In accordance with the notes, beginning in December 2017, the Trust is required to make annual payments to a sinking fund for the principal payment due at maturity. Such fund is included in restricted cash on the accompanying balance sheet.
The sinking fund balance as of December 31, 2018 and 2017 is $4.8 million and $2.4 million, respectively.
Fair value measurements are classified based on the following fair value hierarchy:
The monthly net cash flows with interest and survivorship were discounted to arrive at the PHT Portfolio’s estimated value as of December 31, 2018 and 2017. Future changes in the longevity estimates and estimated cash flows could have a material effect on the PHT Portfolio’s fair value, and the Trust’s financial condition and results of operations.