the reliability of assumptions underlying our actuarial models, including life expectancy estimates.
These forward-looking statements are based on current expectations, estimates and projections about us, our beliefs and our assumptions and the information currently available to us. Although we believe that the assumptions for these forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Consequently, no representation or warranty can be given that the estimates, opinions, or assumptions made in or referenced will prove to be accurate. The actual results of the Trust and IRA Partnership could differ materially from those suggested or implied by any forward-looking statements. We undertake no obligation to update our forward-looking statements.
Net decrease in net assets for the year ended December 31, 2018 was $70.5 million as compared to a net increase in net assets of $35.2 million for the same period last year. The following are the components of net change in net assets resulting from operations for the years ended December 31, 2018 and 2017:
The following table provides a roll-forward of the fair value of life insurance policies for the years ended December 31, 2018 and 2017:
The net decrease in net assets for the year ended December 31, 2018 was $48.7 million as compared to a net increase in net assets of $11.3 million for the same period in the last year.
The Partnership recognizes income on its respective portion of the Trust which is controlled by its investment in the Trust’s life insurance Policies and the changes in their aggregate fair value. There was no tax expense nor benefit for the years ended December 31, 2018 and 2017. The primary decrease in income and net assets is due to the change in valuation of the investment portfolio as describe above in the section related to the Trust.
The Trust recognizes income on its respective portion of the Policies primarily from changes in their aggregate fair value. There was no tax expense nor benefit for the period ended December 31, 2017 and 2016. The primary increase in income is due to the change in valuation of the investment portfolio as described in Note 6 “Fair Value Measurements” in the accompanying financial statements. This presentation is making a comparison to the 2016 period which is only December 9, 2016 to December 31, 2016, therefore the increase as disclosed was expected due to the few days of operations in 2016.
The increase in total expenses of $13.8 million is primarily due to the fact there were only 22 days of operations in 2016 versus 2017. Therefore, all categories have significantly increase over the prior period.
The Partnership recognizes income on its respective portion of the Trust which is controlled by its investment in the Trust’s life insurance Policies and the changes in their aggregate fair value. There was no tax expense nor benefit for the period ended December 31, 2017 and 2016. The primary increase in income and net assets is due to the change in valuation of the investment portfolio as describe above in the section related to the Trust.
Vida Opportunity Fund, LP, an affiliate of Vida Capital, Inc. provided the $55 million Exit Loan Facility needed to provide for consummation of the reorganization transactions contemplated by the Plan. At the same time, Vida Longevity Fund, LP, also an affiliate of Vida Capital, Inc., provided a $25 million revolving line of credit. The obligations are secured by liens on virtually all of the Position Holder Trust’s assets.
Subsequent to the closing of the reporting period, effective as of January 17, 2019, the Life Partners Position Holders Trust paid the remaining balances in full related to the Exit Loan Facility and terminated the $55 Million Exit Loan Facility with Vida Opportunity Fund, LP and the $25 Million Revolving Line of Credit with Vida Longevity Fund, LP. All liens and security interests of the lenders under these loan facilities have been terminated and released.
The Trust’s total outstanding liabilities decreased by $37.1 million from $130.8 million at December 31, 2017, to $93.7 million at December 31, 2018. The decrease was mainly attributable to the expenditure of cash to pay outstanding liabilities related to notes payable and a decrease in premium and maturity liabilities.
The Position Holder Trust paid $31.0 million and $19.9 million of its outstanding notes payable during the years ended December 31, 2018 and 2017, respectively. There were no new financing activities during the years ended December 31, 2018 and 2017. After year end, on January 15, the Trust paid $4.0 million to Vida Opportunity Fund, LP for the final payment of the loan and on January 1, the Trust paid $0.9 million to H. Thomas Moran.
The Trust’s valuation of life insurance policies is a critical estimate within the financial statements. The Trust currently uses a probabilistic method of valuing life insurance policies, which the Trust believes to be the preferred valuation method in its industry. The Trust calculates the assets’ fair value using a present value technique to estimate the fair value of the projected future cash flows. The most significant assumptions in estimating the fair value are the Trust’s estimate of the insureds’ longevity, anticipated future premium obligations and the discount rate. See Note 6, “Fair Value Measurements” in the accompanying financial statements.
LIFE PARTNERS POSITION HOLDER TRUST STATEMENT OF CASH FLOWS YEARS ENDED
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 and 2017.
The Trust also assumed income tax liabilities of the Debtors at its inception which total approximately $2.0 and $2.0 million as of December 31, 2018 and 2017, respectively, related to taxes, penalties, and interest from the Debtors’ 2008, 2009, and 2010 income tax returns. These obligations bear interest at 4% annually and are due in full by January 2020.
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”). However, from time to time the Trust's balances may exceed the FDIC insurable amounts.
In March 2018, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" to clarify certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. In addition to amending Topic 825, Financial Instruments, FASB added Topic 321, Investments-Equity Securities, and made a number of consequential amendments to the codification. The amendments in ASU 2018-03 are effective for public business entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years beginning after June 15, 2018. The Trust adopted ASU 2018-03 in third quarter of 2018 and there was no impact on the recognition and measurement of financial assets and liabilities.
As of December 31, 2018, the Trust owns an interest in 3,037 policies of which 548 are life settlement policies and 2,489 are viaticals. As of December 31, 2017, the Trust owns an interest in 3,140 policies of which 600 are life settlement policies and 2,540 are viaticals (the “PHT Portfolio”). The PHT Portfolio’s aggregate face value is $1.3 billion as of December 31, 2018 of which $1.1 billion is attributable to life settlements and $203.1 million is attributable to viaticals. The PHT Portfolio’s aggregate face value is $1.3 billion as of December 31, 2017 of which $1.1 billion is attributable to life settlements and $179.1 million is attributable to viaticals. The PHT Portfolio’s aggregate fair value is $186.3 million as of December 31, 2018 of which $182.0 million is attributable to life settlements and $4.3 million is attributable to viaticals. The PHT Portfolio’s aggregate fair value was $272.1 million as of December 31, 2017 of which $270.6 million was attributable to life settlements and $1.5 million was attributable to viaticals.
The amount of $503.7 million represents the estimated total future premiums payable by the Trust. The Trust is required to pay its portion to keep the life insurance policies in force during the life expectancies of all the underlying insured lives. The estimated total future premium payments could increase or decrease significantly to the extent that insurance carriers increase the cost of insurance on their issued policies or that actual mortalities of insureds differ from the estimated life expectancies. If the continuing fractional holders default on their future premium obligations, the Trust’s premium liability may increase.
On December 9, 2016, the Trust obtained a term loan from Vida Opportunity Fund, LP, an affiliate of Vida Capital, Inc., for $55.0 million. Interest accrues at 11% of outstanding balance per annum and is paid quarterly. Substantially all of the Trust’s assets collateralize the loan. The Trust made principal payments of $31.0 million in 2018 leaving a balance outstanding on the term loan of $4.0 million at December 31, 2018. The maturity date of the term loan was December 9,2018; however, an extension was agreed to until June 7, 2019. On January 15, 2019, the Trust paid $4.0 million to Vida Opportunity Fund, LP for the final payment of the loan.
Beginning in the second quarter of 2018, 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 VBT. 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 and servicing company compensation).
The servicing company is paid 2.65% of each maturity as compensation. All estimated cash flows of the Policies are net of such compensation.
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 Trust. The Partnership held 747,775,628 and 733,164,743 units as of December 31, 2018 and December 31, 2017, respectively, of the Trust’s outstanding units totaling 1,237,019,204 and 1,162,059,511 as of December 31, 2018 and December 31, 2017, 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.
The preparation of these financial statements, in conformity with generally accepted accounting principles in the United States of America (“GAAP”), requires the Partnership to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from these estimates and such differences could be material.