The Position Holder Trust and the IRA Partnership came into existence on December 9, 2016, as a result of the Plan of Reorganization confirmed pursuant to the Chapter 11 bankruptcy proceeding initiated in 2015 by Life Partners Holdings, Inc. The Trust’s primary asset is its interest in a life insurance portfolio of 2,739 Policies, with an aggregate fair value of $250.4 million and an aggregate face value of approximately $1.5 billion at December 31, 2020. The Trust’s portion of the Portfolio has a fair value of $159.2 million and a face value of $1.0 billion at December 31, 2020. Adjustments in the calculation of aggregate fair value of the Portfolio may occur over time as maturities ensue in the Portfolio and life expectancies change.
Under the terms of the NorthStar servicing agreement, servicing fees shall be paid periodically, rather than being deferred until policy maturity. This change had an insignificant impact on the value of the Portfolio (see Notes to Financial Statements, Note 6 - Fair Value Measurements).
Under the agreement with Vida Capital, Inc. the old Servicing Company was entitled to its servicing fee upon the maturity of the individual life insurance policies and the Trust received its portion of the proceeds from the maturity, net of these fees. As such, the Trust accounted for servicing costs as a reduction of the related maturity proceeds. Starting November 1, 2020, under a new servicing agreement with NorthStar Life Services, LLC, the Trust is charged a monthly fixed servicing fee and maturity proceeds are no longer reduced by servicing costs. Accordingly, beginning November 1, 2020 the servicing fee is charged to expense monthly as incurred.
On November 13, 2019 the Partnership made a distribution of $12.1 million based on its share of the distribution from the Trust.
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 $15.0 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. There are no amounts outstanding as of December 31, 2020.
During the 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 was $8.7 million and only funds set aside in a sinking fund established pursuant to the Bankruptcy Plan for that purpose was used. Accrued interest on all New IRA Notes through the redemption dates was paid as well.
In 2019 there was a conversion of notes payable to IRA Partnership and Trust units of $0.3 million based on changes to elections for certain unit holders which were in dispute and resolved through settlement, mediation or court order. The Trust did not have any conversions of notes payable in 2020.
The Trust’s total outstanding liabilities decreased by $13.7 million from $70.1 million at December 31, 2019, to $56.4 million at December 31, 2020. The decrease was mainly attributable to the expenditure of cash to pay outstanding liabilities related to notes payable and a decrease in maturity liabilities.
The Position Holder Trust paid $30.0 million and $20.0 million in distributions during the years ended December 31, 2020 and 2019, respectively.
credit losses relating to available-for-sale fixed maturity securities will be recorded through an allowance for credit losses, rather than reductions in the amortized cost of the securities. The allowance methodology recognizes that value may be realized either through collection of contractual cash flows or through the sale of the security. Therefore, the amount of the allowance for credit losses will be limited to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was 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. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Life Partners Position Holder Trust (the “Trust”) was created on December 9, 2016, pursuant to the Revised Third Amended Joint Plan of Reorganization of Life Partners Holdings, Inc., et al. (the “Debtors”), dated as of October 27, 2016, which we call the “Plan,” that was confirmed by order of the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division on November 1, 2016. Life Partners Holdings, Inc. was the parent company of Life Partners, Inc., a Texas corporation, and its wholly-owned subsidiary LPI Financial Services, Inc., a Texas corporation. From 1991 until 2014, Life Partners, Inc. was a specialty financial services company engaged in the business of purchasing individual life insurance policies from third parties by raising money from the offer and sale to investors of “fractional interests” in such policies. LPI Financial Services, Inc. was organized to bill and collect certain fees charged to investors in connection with the business. Life Partners and LPI Financial Services also filed for protection under Chapter 11 of the Bankruptcy Code.
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, 2020, there were 6,497 holders of the 1,226,958,714 Units outstanding. As of December 31, 2019, there were 9,678 holders of the 1,235,715,080 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, 2020, the Trust’s portion of the portfolio consists of 2,739 life insurance policies, with a fair value of $159.2 million and an aggregate face value of approximately $1.0 billion. As of December 31, 2019, the Trust’s portion of the portfolio consisted of 2,896 life insurance policies, with a fair value of $172.2 million and an aggregate face value of approximately $1.1 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.
During the year ending December 31, 2020, the U.S. Bankruptcy Court for the Northern District of Texas approved the Trustee’s Motion to Approve Redemption of Additional Units and Member Interests, granting the Trustee the authority to redeem Trust Units in the Life Partners Position Holder Trust and Member Interests in the Life Partners IRA Holder Partnership, LLC, at the discretion of the Trustee and Manager, when financially or administratively practicable. Pursuant to the Court’s order 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.
Maturity liabilities are maturities collected on behalf of continuing fractional holders pending payment to those fractional holders, including reserve for unallocated funds from the inception of the Trust.
The Financial Accounting Standards Board 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, 2020 and 2019.
the income statement will reflect the measurement of expected credit losses for newly recognized financial assets as well as the expected increases or decreases (including the reversal of previously recognized losses) of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount
The Plan imposes restrictions on the Trust to maintain certain funds in segregated accounts. As of December 31, 2020, and 2019, the Trust has $99.5 million and $80.0 million, respectively, in restricted cash and cash equivalents. The restricted cash and cash equivalents 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.
Subsequent to the closing of the 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.
The balances of the Trust's assets measured at fair value on a recurring basis as of December 31, 2020 and 2019, are as follows:
In assessing and determining the PHT Portfolio’s valuation, the Position Holder Trust has retained Lewis & Ellis, Inc. as its principal actuaries.
The PHT Portfolio’s value was estimated using an actuarially based approach incorporating net cash flows and life expectancies as determined by a default mortality multiplier based on the 2015 Valuation Basic Table produced by the U.S. Society of Actuaries ("VBT") as opposed to specific life expectancies of insureds as the mortality multipliers from the VBT provide more accurate longevity projections across the portfolio. A default mortality multiplier for each insured was used to project the PHT Portfolio’s present value of net cash flows (death benefits less premium payments).
In first quarter of 2020, the Trust transitioned from the Select tables to the Ultimate tables from the VBT, and the Trust appropriately changed the mortality multipliers to best fit experience. Changing the PHT Portfolio’s use to the 2015 VBT Ultimate table rather than applying the 2015 VBT Select table provides a flatter pattern amongst mortality claims and better aligns to the characteristics of lives in the Trust's portfolio. The overall impact to the PHT's Portfolio from the change from the 2015 VBT Select table to the 2015 VBT Ultimate table was a decrease in fair value of approximately $5.0 million.
Life expectancy estimates are a significant input in the fair value determination. Future changes in the life expectancy estimates could have a material effect on the Portfolio’s fair value, which could have a material effect on its financial condition and results of operations.
Other Fair Value Considerations- All assets and liabilities except for the life insurance policies, which includes cash, maturities and premium receivable, notes payable and premium and maturity liability, are accounted for at their carrying value which approximates fair value.
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.
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 Life Partners Position Holder Trust (the "Position Holder Trust" or "Trust"). The Partnership held 737,912,834 and 746,085,361 units as of December 31, 2020 and December 31, 2019, respectively, of the Trust’s outstanding units totaling 1,226,958,714 and 1,235,715,080 as of December 31, 2020 and December 31, 2019, 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.
For the year ending December 31, 2020, the U.S. Bankruptcy Court for the Northern District of Texas approved the Partnership Manager’s Motion to Approve Redemption of Member Interests, granting the Manager the authority to redeem Member Interests in the Life Partners IRA Holder Partnership, LLC, at the discretion of the Manager, when financially or administratively practicable. Pursuant to the Court’s order the Partnership redeemed 7,231,667 Member Interest for $1.4 million for the year ending December 31, 2020. There were no redemptions for the year ending December 31, 2019.
Included in the redemption the Partnership redeemed 4,826,966 Member Interest for $0.9 million from the Life Partners Creditors’ Trust. The Partnership and the Life Partners Creditors’ Trust have common governing board members. The redemption was executed to reduce the administrative burden of the Partnership and to facilitate the expected termination of the Life Partners Creditor’s Trust. The Interests were redeemed at the same price per Interest as all other redemptions performed at the same or similar time and in accordance with the Motion approved by the U.S. Bankruptcy Court for the North District of Texas.
The Partnership accounts for its investment in the PHT using the equity method of its share of earnings or loss less distributions received. The Partnership and the Trust are closely connected, with a common trustee and common management. As a result of this common oversight and control, as well as the Partnership’s position as the majority holder of the Trust’s beneficial interest units, the Partnership is considered to have significant influence under the provisions of ASC 323, resulting in the application by the Partnership of the equity method of accounting.
The Partnership does not have its own cash accounts, and its operating expenses and distributions to its Unit holders are paid on behalf of the Partnership by the Trust. The Partnership settles its liabilities to the Trust through reduction of the funds it receives from distributions made by the Trust.