You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report.
While the Position Holder Trust is a liquidating trust with no intent to continue or to engage in a trade or business, the nature of the life insurance policies assets being liquidated are such that it is not practical or advantageous to simply liquidate the Policies by disposing of them. In this regard, there is no viable secondary market for the Policies, nor is there another practical means of disposing of them or monetizing them in the near term.
The Plan requires that the continuing fractional holders pay premium calls within 60 days of the day the Trust sends an invoice. The failure of a continuing fractional holder to timely pay a premium call on a position results in a premium default with respect to that position. Upon a premium default, the continuing fractional holder is deemed to have contributed its position to the Trust in exchange for Units. Section 5.05(c) of the Plan requires that the Trust reduce the number of Units issued upon a default by 20% - the subsection (c)(i) discount.
On August 03, 2020, the Trust made a distribution to Unit holders for the amount of $30.0 million based on the holder's Pro Rata share of the outstanding Units. The Trust distributed $20.0 million to the Unit holders for the year ending December 31, 2019.
The decrease in total expenses of $1.2 million is primarily due to the fees paid in 2019 totaling $2.5 million to Vida Capital, Inc for termination of the policy services provided by it to the Trust (see Item 1. Description of Business, "Administration and Operations"). The decrease in expenses is offset by an increase in professional fees associated with change in servicer and due to addition of servicing fee to expenses starting November 2020.
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. Financial Statements for more information on the valuation of life insurance policies.
During the year ended December 31, 2020, the Position Holder Trust paid premiums on Policies totaling $62.8 million on the PHT Portfolio. In addition, the Trust received $143.5 million from the maturity of life settlements during the year ended December 31, 2019. During the year ended December 31, 2018, the Position Holder Trust paid premiums on Policies totaling $44.7 million on the PHT Portfolio and received maturities of life settlements of $130.0 million.
The Trust redeemed 20,011,309 units for $3.7 million for the year ending December 31, 2020. There were no redemptions for the year ending December 31, 2019.
On August 3, 2020, the Trust made a distribution to Unit holders for the amount of $30.0 million based on the holder's Pro Rata share of the outstanding Units. The Trust distributed $20.0 million to the Unit holders for the year ending December 31, 2019.
The principal source of the Trust’s operating liquidity is the Trust’s share of the death benefits from the maturity of life insurance policies, interest income and refund of premiums paid on behalf of others. The principal uses of that liquidity include payment of premiums on policies, liquidation of existing debt, payment of general and administrative expenses and distribution to the unit holders, if any.
Subsequent to the closing of the current reporting period, effective as of January 29, 2021, the Trust renewed the revolving credit facility with the Veritex for an additional 2-year term. As part of the renewal, the revolving credit facility was increased to $25.0 million and shall bear interest at the rate of 5% per annum. The Veritex Credit Facility will continue to be secured by a lien on the Position Holder Trust’s assets.
During the years ended December 31, 2020 and 2019, the Position Holder Trust paid premiums on Policies totaling $62.8 million and $44.7 million, respectively on the PHT Portfolio. Also, for the years ended December 31, 2020 and 2019, there were maturities received of $138.9 million and $124.5 million, respectively.
The Position Holder Trust paid $9.7 million and $16.5 million of its outstanding notes payable during the years ended December 31, 2020 and 2019, respectively. There were no new financing activities during the years ended December 31, 2020 and 2019.
financial assets (or a group of financial assets) measured at amortized cost will be required to be presented at the net amount expected to be collected, with an allowance for credit losses deducted from the amortized cost basis, resulting in a net carrying value that reflects the amount the entity expects to collect on the financial asset at purchase
We have audited the accompanying balance sheets of Life Partners Position Holder Trust (the “Trust”) as of December 31, 2020 and 2019, the related statements of operations, changes in net assets, and cash flows for the years ended December 31, 2020 and 2019, 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, 2020 and 2019 and the results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
We obtained an understanding of management’s process to develop their fair value estimate and ensure accuracy of key data used in their estimation process. We also evaluated the design of key controls used by management to develop their fair value estimate.
We performed testing over the completeness and accuracy of the significant data used by management and the Trust’s engaged actuary to develop the fair value estimate for life insurance policies. Such data includes policyholder information, policy value, annual premium and projected outlays, and future maturity estimates. We also validated the accuracy of the discounted cash flow analysis, including assessment of the discount rate utilized.
COVID-19 has not impacted the Trust’s ability to realize maturity receivables and pay its premium obligations or other expenses. The Trust will continue to monitor the impact of risk associated with mortality experience, default on future premium obligations by the continuing fractional holders which would increase the Trust’s premium obligations and any risk associated with default on payment obligations by the insurance policy carriers.
The Trust accounts for its interests in life insurance policies at fair value in accordance with ASC 325-30, Investments in Insurance Contracts. Any resulting changes in fair value estimates are reflected in operations in the period the change becomes apparent.
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, 2020 and 2019, the allowance for doubtful accounts was $1.0 million and $3.2 million, respectively, and fully offset 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.
Distributions payable are distributions declared by the Trust pending payment to Unit holders.
The main components of legal risk are: (i) the risk that an insurer could successfully challenge its obligation to pay policy benefits at maturity; and (ii) that an insured’s family could successfully challenge the Trust’s entitlement to an insurance policy’s benefits. In either case, there is also risk that the Trust would be unable to recover the premiums it paid towards the insurance policy.
The Trust maintains the majority of its cash and cash equivalents in several accounts with a commercial bank. Balances on deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”). However, from time to time the Trust's balances may exceed the FDIC insurable amounts as such in those cases the cash and cash equivalents are not insured.
Certain reclassifications have been made to the 2019 financial statement presentation to correspond to the current year’s format. Total assets, net assets, and changes in net assets resulting from operations are unchanged due to these reclassifications.
In accordance with applicable accounting guidance, the Trust establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Trust does not establish an accrued liability. As a litigation or regulatory matter develops, the Trust, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Such matters will continue to be monitored for further developments.
Estimated premiums to be paid by the Trust for its portfolio during each of the five succeeding fiscal years and thereafter as of December 31, 2020, are as follows:
In year ending December 31, 2020 the Trust did a partial redemption of all remaining notes equal to 1/15th of the outstanding balance of those notes and the Trust redeemed in full all New IRA Notes having an outstanding balance of $19,500 or less. The amount paid in connection with the redemption were $8.7 million and only funds set aside in a sinking fund established pursuant to the Bankruptcy Plan for that purpose were used. Accrued interest on all New IRA Notes through the redemption dates was paid as well.
Future scheduled principal payments on the long-term debt are as follows as of December 31, 2020:
The following is a summary of the methodology used to estimate the PHT Portfolio’s fair value measured on a recurring basis and within the above fair value hierarchy. The overall methodology did not change during the current or prior year.
The monthly net cash flows with interest and survivorship were discounted to arrive at the PHT Portfolio’s estimated value as of December 31, 2020 and December 31, 2019. 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.
The effect of changes in the weighted average discount rate on the death benefit and premiums used to estimate the PHT Portfolio’s fair value has been analyzed. If the weighted average discount rate increased or decreased by 2 percent and the other assumptions used to estimate fair value remained the same, the change in estimated fair value would be as follows:
The following table provides information about the life insurance issuer concentrations that exceed 10% of total death benefit or 10% of total fair value of the Trust's life insurance policies as of December 31, 2019:
The following table provides a roll-forward of the fair value of life insurance policies for the years ended December 31, 2020 and 2019:
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
The Partnership's only investment is in the Life Partners Position Holder's Trust. As such, the Partnership's income is largely dependent on the Trust's operations and the Partnership would be significantly impacted by any adverse effects of the novel coronavirus (COVID-19) pandemic on the Trust's operations.