uncertainties and estimates related to our ability to make cash distributions in satisfaction of payment obligations as life insurance policies mature.
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 3,037 Policies, with an aggregate fair value of $303.5 million and an aggregate face value of approximately $2.0 billion at December 31, 2018. The Trust’s portion of the Portfolio has a fair value of $186.3 million and a face value of $1.3 billion at December 31, 2018. 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.
Net increase in net assets for the year ended December 31, 2017 was $35.2 million as compared to a net increase in net assets of $.9 million for the period ended December 31, 2016. The following are the components of net change in net assets resulting from operations for the years ended December 31, 2017 and 2016:
Interest expense for the years ended December 31, 2017 and 2016 primarily consisted of interest related to two note payables.
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, dividend 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.
Outstanding debt at December 31, 2018 was $42.6 million and included $4.0 million of outstanding principal on the Vida Opportunity Fund, LP loan, $35.9 million secured 15-year promissory note issued by the Trust to the IRA holders (“New IRA Notes”), and $2.7 million to the initial trustee. Outstanding debt at December 31, 2017 was $74.1 million and included $35.0 million of outstanding principal on the Vida Opportunity Fund, LP loan, $36.5 million of New IRA Notes, and $2.6 million to the initial Trustee.
In the third quarter of 2018, there was a conversion of notes payable to IRA Partnership and Trust units of $0.6 million based on changes to elections for certain unit holders which were in dispute and resolved through settlement, mediation or court order.
On March 28, 2017, the Bankruptcy Court allowed $5.5 million to be paid as compensation for the services rendered by H. Thomas Moran as the Chapter 11 trustee, with fifty percent (50%), or $2.8 million, paid promptly. The remaining amount is to be paid in cash pursuant to the terms of an unsecured promissory note issued by the Trust (the “Moran Note”). The note does not bear interest and the principal amount will be paid in three equal annual installments on January 1 of 2019, 2020 and 2021, with the full principal amount paid no later than December 30, 2021, or in full on or after January 1, 2019. Subsequent to the end of the reporting period, on January 11, 2019, the Trust paid $0.9 million, as its first installment payment under the Moran Note.
The Trust also assumed income tax liabilities of the Debtors at its inception which total approximately $2.0 million and $2.0 million as of December 31, 2018 and December 31, 2017, respectively, related to taxes, penalties, and interest from the Debtors’ 2008, 2009, and 2010 income tax returns. These obligations include imputed interest at 4% annually and are due in full by January 2020.
As of December 31, 2018, and December 31, 2017, the Trust holds $33.2 million and $30.2 million, respectively, in escrow for future payment of premium obligations. To the extent advanced premiums received from continuing fractional holders are not used for premium payments, they are refunded to the respective continuing fractional holder.
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, 2018, there were 10,442 holders of the 1,237,019,204 Units outstanding. As of December 31, 2017, there were 10,187 holders of the 1,162,059,511 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, 2018, the Trust’s portion of the portfolio consists of 3,037 life insurance policies, with a fair value of $186.3 million and an aggregate face value of approximately $1.3 billion. As of December 31, 2017, the Trust’s portion of the portfolio consists of 3,140 life insurance policies, with a fair value of $272.1 million and an aggregate face value of approximately $1.3 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.
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 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.
Longevity risk refers to the reasonable possibility that actual mortalities of insureds in the Trust’s portfolio extend over longer periods than are anticipated, resulting in the Trust paying more in premiums and delaying its collection of death benefits. Further, increased longevity may encourage additional continuing fraction holders to default on their premium obligations, increasing the Trust’s positions and its premium payment burden. The Trust management is still evaluating any potential impact; however, such future revisions could have a material impact on the valuation
The Trust was required to contributed $12 million to the Creditor’s Trust that was established contemporaneously under the Plan. As of December 31, 2017, the Trust was fully funded, and the Trust has no further obligations to the Creditor’s Trust.
In May 2014 FASB issued Accounting Standards Update ("ASU") No. 2014-09 ("ASC 606") "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in ASC 605 “Revenue Recognition” ("ASC 605") and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Trust adopted ASC 606 as of January 1, 2018 using the retrospective transition method. There is no impact to the Trust's recognition of revenue associated with the adoption of ASC 606.
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, 2018, are as follows:
Future scheduled principal payments on the notes payable and required sinking fund contributions are as follows as of December 31, 2018:
and purchase new LEs. The Trust does not purchase new LEs because of the significant time and financial burden that would be required to obtain new medical releases from the insureds and collect their medical records from various doctors, clinics and hospitals.
Because it had a number of LEs that were becoming aged and, thus, less reliable, the Trust began to incrementally phase out the LEs in favor of a mortality multiplier based on the 2015 Valuation Basic Table produced by the U.S. Society of Actuaries (“2015 VBT”) beginning in December 31, 2017. Accordingly, as the LEs aged, less weight would be applied to them and more weight would be placed with the default mortality multiplier. A 25% discount would be applied quarterly starting 21 months past the underwriting date until the aged LE date was fully discounted and replaced by the default mortality multiplier. A LE that is 24 to 26 months old would 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 would only use the default mortality multiplier, as described below. The Trust anticipated eliminating reliance on most of its LEs in favor of the mortality multiplier by the end of calendar year 2018. If a policy did not have a LE, or the LE became aged, a default mortality multiplier was used, based on the 2015 VBT.
The Trust re-evaluates its discount rates at the end of every reporting period in order to estimate the discount rates that could reasonably be used by market participants in a transaction involving the Trust's life insurance policies. In doing so, the Trust engages third party consultants to corroborate its assessment, engages in discussions with other market participants and extrapolates the discount rate underlying actual sales of insurance policies.
The following table provides information about the life insurance issuer concentrations that exceed 10% of total death benefit and 10% of total fair value of the Trust's life insurance policies as of
The following table provides a roll-forward of the fair value of life insurance policies for the twelve months ended December 31, 2018 and 2017:
We have audited the accompanying balance sheets of Life Partners IRA Holder Partnership, LLC (the "Partnership") 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 Partnership as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the year ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.
Undistributed earnings (losses) attributable to the Partnership’s interests in the Trust and recognized under the equity method represented approximately ($48.7) million at December 31, 2018 and $11.3 million at December 31, 2017.