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 a life insurance portfolio of 3,140 Policies, with an aggregate fair value of $471.6 million and an aggregate face value of approximately $2.1 billion at December 31, 2017. The Trust’s portion of the Portfolio has a fair value of $272.1 million and a face value of $1.3 billion at December 31, 2017. 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.
The change in fair value of the Trust’s life insurance Policies is primarily due to realized gains on maturities, premiums paid, unwinding the discount over time, and changes in valuation assumptions, including mortality and discount rates.
The Position Holder Trust’s net increase in net assets resulting from operations for the period from December 9, 2016 to December 31, 2016, was $899 thousand. There was no tax expense nor benefit for the year ended December 31, 2016. The following is the analysis of the net increase in net assets resulting from operations for the period ending December 31, 2016:
The Plan authorizes the Trustee to use the Maturity Funds Facility to borrow on a short-term revolving basis to fund its premium reserves. The Position Holder Trust is also entitled to access the cash surrender value included in the beneficial ownership registered in its name from time to time 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 reduce the Trust’s share of the maturity proceeds of the Policy, or if the Trust’s share is insufficient, it must make up the difference.
The Trust maintains the majority of its cash in several accounts with a commercial bank. Balances on deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”); although the Trust’s balances may exceed the FDIC insurable amount at its banks.
Pursuant to the Plan, in December 2016 the Trust contributed $2 million to the Creditors’ Trust that was also established contemporaneously under the Plan. As of December 31, 2016, the Trust was obligated to fund an additional $10 million. The Trust paid $5 million in January 2017 and another $5 million in December 2017.
Undistributed earnings attributable to the Partnership’s interests in the Trust and recognized under the equity method represented approximately $11.3 million at December 31, 2017 and $615 thousand at December 31, 2016.
There exists a legal risk that courts would allow insurance carriers to retain premiums paid by the Trust in respect of insurance policies that are successfully rescinded or contested. In addition, the Trust's title or right to benefit from an insurance policy may be challenged by the insurer or the insured’s family.
As of December 31, 2017, and 2016, the Trust holds $23.6 million and $38.0 million, respectively, of maturities collected on behalf of continuing factional holders pending payment.
Certain reclassifications have been made to the 2016 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.
Under certain circumstances, the Trust may be required to indemnify certain persons performing services on behalf of the Trust for liability they may incur arising out of the indemnified persons' activities conducted on behalf of the Trust. There is no limitation on the maximum potential payments under these indemnification obligations, and, due to the number and variety of events and circumstances under which these indemnification obligations could arise, the Trust is not able to estimate such maximum potential payments. The Trust has not made any payments under such indemnification obligations, and no amount has been accrued in the accompanying financial statements for these indemnification obligations of the Trust.
The Plan imposes restrictions on the Trust to maintain certain funds in segregated accounts. As of December 31, 2017, and 2016, the Trust has approximately $23.6 million and $33.1 million, respectively in the pre and post effective maturity escrow account which are distributable to the fractional interest holders in those policies. The Plan further requires the Trust to maintain certain premium reserves in a segregated account. As of December 31, 2017 and 2016 those reserves for Policy premiums are approximately $5.7 million and $27.5 million, respectively. The Trust also maintains escrow accounts on behalf of the continuing fractional interest holders from which to fulfill their premium obligations, as of December 31, 2017 and 2016, the Trust holds approximately $30.2 million and $25.8 million, respectively, on their behalf. At December 31, 2017, the Trust also held $16.6 million as collateral deposits on debt.
Future scheduled principal payments on the above notes payable and required sinking fund contributions are as follows as of December 31, 2017:
The balances of the Trust's assets measured at fair value on a recurring basis as of December 31, 2017, are as follows:
The balances of the Trust's assets measured at fair value on a recurring basis as of December 31, 2016, are as follows:
In assessing and determining the Portfolio’s valuation, the Position Holder Trust retained Lewis & Ellis, Inc. as its principal actuaries. The Portfolio’s value was estimated using an actuarially based approach incorporating net cash flows and life expectancies. This approach applies a monthly mortality scale as generated by the specific life expectancy (LE) and/or a default mortality multiplier of each insured which is used to project the Portfolio’s present value of net cash flows (death benefits less premium payments and Servicing Company compensation). The mortality scale is actuarially rolled forward from the LE underwriting date to the valuation date. The Trust will not obtain current medical information for each insured which would be necessary to update the LE’s due to the significant time and financial burden that would be required. Accordingly, as LE’s become aged, less weight will be applied to them and more weight will be placed with the default mortality multiplier. A 25% discount will be applied quarterly starting 21 months past the underwriting date unit the aged LE date is fully discounted and replaced by the default mortality multiplier. An LE that is 24 to 26 months old will have a 50% discount, an LE that is 27 to 29 months old will have a 75% discount, and an LE greater than or equal to 30 months will solely use the default mortality multiplier, as described below.
The monthly net cash flows with interest and survivorship were discounted to arrive at the Portfolio’s estimated value as of December 31, 2017 and 2016. Future changes in the life expectancies and estimated cash flows could have a material effect on the Portfolio’s fair value, and the Trust’s financial condition and results of operations.
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. The tables below reflect the effect on the PHT Portfolio’s fair value if the actual life expectancy experienced is 5% less or 5% more than is currently estimated. If the life expectancy estimates increase by 5% or decrease by 5%, the change in estimated fair value of the life insurance policies would be as follows:
YEAR ENDED DECEMBER 31, 2017 and PERIOD FROM INCEPTION (DECEMBER 9, 2016) to
The Partnership 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.