Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549-1004
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
___________
Commission file number 000-55783
Commission file number 000-55784
Life Partners Position Holder Trust
Life Partners IRA Holder Partnership, LLC
(Exact name of registrants as specified in their
charters)
Texas
|
|
81-6950788
|
Texas
|
|
81-4644966
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification Nos.)
|
|
|
|
2001 Ross Ave.,
Suite 3600, Dallas TX
|
|
75201
|
(Address of principal executive offices)
|
|
(Zip Code)
|
214-698-7893
(Registrants’ telephone number, including area
code)
Not
Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check
mark whether the registrants: (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the registrants were required to file such reports), and (2)
have been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check
mark whether the registrants have submitted electronically and
posted on their corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrants were
required to submit and post such files). Yes ☒ No
☐
Indicate by check
mark whether the registrants are large accelerated filer,
accelerated filers, non-accelerated filers, smaller reporting
company filers, or emerging growth companies. See the definitions
of “large accelerated filer”, “accelerated
filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated
filers
|
☐
|
Accelerated
filers
|
☐
|
Non-accelerated
filers
|
☐
|
Smaller reporting
companies
|
☒
|
|
|
Emerging growth
companies
|
☐
|
If emerging growth
companies, indicate by check mark if the registrants have elected
not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act.☐
Indicate by check
mark whether the registrants are shell companies (as defined in
Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
The registrants do
not have any voting or non-voting equity securities.
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrants have filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ☒ No ☐
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
|
Page
No.
|
|
Life
Partners Position Holder Trust
|
|
|
3
|
||
4
|
||
5
|
||
6
|
||
7
|
||
|
|
|
Life Partners IRA Holder Partnership, LLC
|
|
|
21
|
||
22
|
||
23
|
||
24
|
||
25
|
||
|
|
|
27
|
||
38
|
||
38
|
||
|
|
|
|
||
|
|
|
40
|
||
40
|
||
40
|
||
40
|
||
40
|
||
40
|
||
40
|
LIFE PARTNERS POSITION HOLDER
TRUST
BALANCE SHEETS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
|
September 30,
2018
|
December 31,
2017
|
|
(Unaudited)
|
(Audited)
|
Assets
|
|
|
Cash
|
$425,620
|
$1,800,047
|
Maturities
receivable
|
21,653,285
|
19,438,534
|
Prepaids
and other assets
|
295,765
|
81,703
|
Restricted
cash and cash equivalents
|
45,357,333
|
76,304,593
|
Life
insurance policies
|
179,787,002
|
272,140,787
|
|
|
|
Total assets
|
$247,519,005
|
$369,765,664
|
|
|
|
Liabilities
|
|
|
Notes
payable
|
$51,048,454
|
$74,086,192
|
Assumed
tax liability
|
1,957,240
|
2,243,302
|
Premium
liability
|
22,839,350
|
30,225,729
|
Maturity
liability
|
13,113,876
|
23,643,936
|
Accounts
payable
|
1,036,594
|
34,507
|
Assumed
liabilities
|
-
|
18,293
|
Accrued
expenses
|
1,995,910
|
572,317
|
|
|
|
Commitments and Contingencies (Note 2)
|
|
|
|
|
|
Total liabilities
|
91,991,424
|
130,824,276
|
|
|
|
Net assets
|
$155,527,581
|
$238,941,388
|
LIFE PARTNERS POSITION
HOLDER TRUST
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND
2017
|
For the Three Months Ended
September 30,
|
For the Nine Months Ended
September 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
Income
|
|
|
|
|
Change
in fair value of life insurance policies
|
$(5,466,766)
|
$26,170,478
|
$(77,677,176)
|
$48,847,912
|
Other
income
|
102,696
|
-
|
1,268,478
|
-
|
|
|
|
|
|
Total (loss) income
|
(5,364,070)
|
26,170,478
|
(76,408,698)
|
48,847,912
|
|
|
|
|
|
Expenses
|
|
|
|
|
Interest
expense
|
737,574
|
1,805,161
|
2,807,970
|
5,422,804
|
Administrative
and filing fees
|
265,603
|
44,833
|
781,143
|
152,474
|
Insurance
|
-
|
375
|
6,108
|
10,855
|
Legal
fees
|
419,533
|
482,452
|
1,488,088
|
3,106,177
|
Professional
fees
|
706,305
|
1,526,120
|
2,123,576
|
2,988,586
|
Other
general and administrative
|
63,509
|
179,369
|
394,086
|
721,883
|
|
|
|
|
|
Total expenses
|
2,192,524
|
4,038,310
|
7,600,971
|
12,402,779
|
|
|
|
|
|
Net (decrease) increase in net assets resulting from
operations
|
$(7,556,594)
|
$22,132,168
|
$(84,009,669)
|
$36,445,133
|
LIFE PARTNERS POSITION HOLDER
TRUST
STATEMENTS OF CHANGES IN NET ASSETS
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
|
For the Nine Months Ended
September 30,
2018
|
For the Nine Months Ended
September 30,
2017
|
|
(Unaudited)
|
(Unaudited)
|
|
|
|
Net assets, beginning of period
|
$238,941,388
|
$203,749,554
|
Conversion
of debt to units (Note 5)
|
595,862
|
-
|
Net
(decrease) increase in net assets resulting from
operations
|
(84,009,669)
|
36,445,133
|
|
|
|
Net assets, end of period
|
$155,527,581
|
$240,194,687
|
Net asset value per unit:
|
|
|
Number of units
|
1,227,809,087
|
1,154,518,519
|
Net assets per unit
|
$0.13
|
$0.21
|
LIFE PARTNERS POSITION HOLDER
TRUST
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
|
For the Nine Months Ended
September 30,
|
|
|
2018
|
2017
|
|
(Unaudited)
|
(Unaudited)
|
Cash flows from operating activities:
|
|
|
Net (decrease) increase in net assets resulting from
operations
|
$(84,009,669)
|
$36,445,133
|
Adjustments to reconcile net (decrease) increase in net assets to
net cash used in operations:
|
|
|
Change
in fair value of life insurance policies
|
77,677,176
|
(48,847,912)
|
Change
in assets and liabilities:
|
|
|
Maturity
escrow held by third party
|
-
|
1,826,334
|
Premiums
receivable, net
|
-
|
661,878
|
Prepaids
and other assets
|
(214,062)
|
97,525
|
Assumed
tax liability
|
(286,062)
|
(778,428)
|
Creditor
trust funding
|
-
|
(5,000,000)
|
Premium
liability
|
(7,386,379)
|
5,350,329
|
Maturity
liability
|
(10,530,060)
|
(22,871,707)
|
Accounts
payable
|
1,002,087
|
2,720,331
|
Assumed
liabilities
|
(18,293)
|
(5,407,125)
|
Accrued
expenses
|
1,481,717
|
933,519
|
Net cash flows provided by (used in) operating
activities
|
22,283,545
|
(34,870,123)
|
Cash flows from investing activities:
|
|
|
Premiums
paid on life settlements
|
(41,563,853)
|
(24,599,593)
|
Net
change in maturities of life settlements
|
54,025,711
|
46,111,530
|
Net cash flows provided by investing activities
|
12,461,858
|
21,511,937
|
Cash flows from financing activities:
|
|
|
Payments
on notes payable
|
(22,500,000)
|
-
|
Net cash flows used in financing activities
|
(22,500,000)
|
-
|
|
|
|
Net decrease in cash
|
(32,321,687)
|
(13,358,186)
|
|
|
|
Cash, beginning of period
|
78,104,640
|
103,450,137
|
|
|
|
Cash, end of period
|
$45,782,953
|
$90,091,951
|
|
|
|
Supplemental cash flow information:
|
|
|
Cash
|
$425,620
|
$8,070,105
|
Restricted
cash
|
45,357,333
|
82,021,846
|
|
|
|
Total cash
|
$45,782,953
|
$90,091,951
|
|
|
|
Cash
paid for interest
|
$1,879,010
|
$3,403,128
|
LIFE PARTNERS POSITION HOLDER
TRUST
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 - Operations and Summary of Significant Accounting
Policies
Operations
Life Partners Position Holder Trust (the
“Position Holder Trust” or 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., 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 (“Bankruptcy
Court”) on November 1, 2016, as amended. The Plan became
effective on December 9, 2016, and the Bankruptcy Court appointed
Eduardo S. Espinosa, Esq. to serve as Trustee of the Trust and as
Manager of the Life Partners IRA Holder Partnership, LLC
(“IRA Partnership” or “Partnership”). 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 (collectively, the
“Debtors”). 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 with a face
value of approximately $2.2 billion as of December 9, 2016
(“Policies”). LPI Financial Services, Inc. was
organized to bill and collect certain fees charged to investors in
connection with the business.
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 September 30, 2018 and December 31,
2017, there were 10,443 and 10,187 holders of the 1,227,809,087 and
1,162,059,511 units outstanding, respectively. The Trust owns a
portfolio of life insurance policies; a portion of the policies is
encumbered by the beneficial interest of continuing fractional
interest holders. The Trust’s portion of the portfolio
consists of positions in 3,060 and 3,140 life insurance policies,
with aggregate fair values of $179.8 million and $272.1 million and
an aggregate face values of approximately $1.3 billion and $1.3
billion at September 30, 2018 and December 31, 2017, respectively.
The fair value of the interests in the life insurance policies
owned by continuing fractional interest holders are not reflected
in the Trust’s financial statements.
Description of Securities
Units
represent beneficial interests in the Trust, and all holders of
Units are entitled to receive cash distributions from the Trust in
accordance with their respective Pro Rata Shares. A Trust
beneficiary’s respective “Pro Rata Share” means
the ratio, expressed as a percentage, of (i) the number of Units
which such Trust beneficiary is the registered owner, to (ii) the
total number of Units outstanding as of the measurement date,
subject to modification for purposes of distributing any recovered
assets.
Under
the Plan, the Trustee will distribute at least annually to the Unit
holders all of the distributable cash (as defined in the Position
Holder Trust Agreement) generated during each calendar year,
subject to any reserve established by the Trustee reasonably
necessary to maintain the value of the registrant’s assets or
to meet claims and contingent liabilities. The Trustee may not make
a distribution until the Trust repays a $55.0 million loan with
Vida Capital (“Exit Loan Facility”) in full. The
balance of this loan at September 30, 2018 and December 31, 2017 is
$12.5 million and $35.0 million, respectively.
Summary of Significant Accounting Policies
Basis of Presentation
In
the opinion of management, the financial statements of the Trust as
of September 30, 2018 and for the three and nine months ended
September 30, 2018 and 2017 include all adjustments and accruals,
consisting only of normal, recurring accrual adjustments, which are
necessary for a fair presentation of the results for the interim
periods. These interim results are not necessarily indicative of
results for a full year.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles in the United States ("GAAP") have been
condensed in or omitted from this report pursuant to the rules and
regulations of the United States Securities and Exchange Commission
(the "SEC"). These financial statements should be read together
with the consolidated financial statements and notes thereto
included in the Trust's Annual Report on Form 10-K for the year
ended December 31, 2017.
Certain
reclassifications have been made to the 2017 financial statement
and footnote amounts to conform to the 2018 presentation. There was
no impact on net assets or changes in net assets related to the
reclassifications.
The
Trust’s primary purpose is the liquidation of the
Trust’s assets and the distribution of proceeds to its
beneficial interest holders. The Trust expects that fulfilling its
purpose requires a significant amount of time, and that the Trust
will have significant ongoing operations during that period due to
the nature of its assets and its plan to maximize the proceeds to
its beneficiaries by maintaining the majority of its life insurance
policies until maturity. As a result, the Trust has concluded that
its liquidation is not imminent, in accordance with the definitions
under accounting principles generally accepted in the United States
of America and has not applied the liquidation basis of accounting
in presenting its financial statements. The Trust will continue to
evaluate its operations to determine when its liquidation becomes
imminent and the liquidation basis of accounting is
required.
Investments in Life Insurance Policies
The Trust accounts for its interests in life
insurance policies at fair value in accordance with ASC
325-30, Investments in Insurance
Contracts. Life
insurance policies are reflected at their estimated fair values.
Any resulting changes in estimates are reflected in operations in
the period the change becomes apparent.
Fair Value of Life Insurance Policies
The Trust follows ASC 820, Fair Value Measurements
and Disclosures, in estimating
the fair value of its life insurance policies, which defines fair
value as an exit price representing the amount that would be
received if an asset were sold or that would be paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in pricing an asset or
liability.
As
a basis for considering such assumptions, the guidance establishes
a three-level, fair value hierarchy that prioritizes the inputs
used to measure fair value. Level 1 relates to quoted prices in
active markets for identical assets or liabilities. Level 2 relates
to observable inputs other than quoted prices included in Level 1.
Level 3 relates to unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of
the assets or liabilities. The Trust’s investments in life
insurance policies are considered to be Level 3 as there is
currently no active market where the Trust is able to observe
quoted prices for identical assets and the Trust’s valuation
model incorporates significant inputs that are not
observable.
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.”
Income Recognition
The
Trust’s investments in life insurance policies are its
primary source of income. Gain or loss is recognized from ongoing
changes in the portfolio’s estimated fair value, including
any gains or losses at maturity. Gains or losses from maturities
are recognized on receipt of an insured party’s death notice
or verified obituary and determined based on the difference between
the death benefit and the policy’s estimated fair value at
maturity.
Premiums Receivable
The
Trust assumed the Debtors’ receivables related to life
insurance policy premiums and service fees that were paid to the
Debtors on behalf of fractional interest holders prior to the
Trust’s effective date. After December 9, 2016, the policy
premiums allocable to continuing fractional interest holders are
those persons' obligations and not the Trust’s. If a
continuing fractional interest holder defaults on future premium
obligations, such position is deemed contributed to the Trust in
exchange for the number of Units provided by the Plan.
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. The
Trust may recover any outstanding receivable balances pursuant to
the Trustee’s set-off rights under the Plan.
Maturities Receivable
Maturities
receivable consist of the Trust’s portion of life insurance
policy maturities that occurred, but payment was not yet received
as of the end of the reporting period.
Income Taxes
No
provision for state or federal income taxes from operations has
been made as the liability for such taxes is attributable to the
Unit holders rather than the Trust. The Trust is a grantor trust
with taxable income or loss passing through to the Unit holders. In
certain instances, however, the Trust may be required under
applicable state laws to withhold amounts otherwise due to Unit
holders and remit them directly to state or federal tax
authorities. Such payments on behalf of the Unit holders are deemed
distributions to them.
The
Financial Accounting Standards Board (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 September 30, 2018 or
December 31, 2017.
The
Trust, at its inception, also assumed approximately $2.9 million in
federal income tax liabilities from the Debtors as an Unsecured
Priority Claim under the Plan which total approximately $2.0
million and $2.0 million as of September 30, 2018 and December 31,
2017, respectively, related to taxes, penalties, and interest from
the Debtors’ 2008, 2009, and 2010 income tax returns. This
tax obligation contains imputed interest at 4% annually and has
remaining annual installments in 2018 and 2019.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses primarily include professional
services, legal fees and expected litigation settlements, some of
which are Debtors’ obligations assumed at inception by the
Trust pursuant to the Plan. The Trust also accrues liabilities for
state taxes payable and other miscellaneous accruals. The Trust
accrues liabilities when costs are incurred, and such costs can be
reasonably estimated.
Premium Liability
Premium
liabilities are funds in escrow on behalf of continuing fractional
holders for future payment of their premium obligations. If such
funds are not used for such continuing fractional holder’s
premium payments, they are refunded to the respective continuing
fractional holder.
Maturity Liability
Maturity
Liabilities are maturities collected on behalf of continuing
factional holders pending payment.
Recently Adopted Accounting Guidance
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.
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.
Use of Estimates
The
preparation of these financial statements, in conformity with GAAP,
requires the Trust 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. The
estimates related to the valuation of the life insurance policies
represent significant estimates made by the Trust.
Risks and Uncertainties
The
Trust encounters economic, legal, and longevity risk. The main
components of economic risk potentially impacting the Trust are
market risk, concentration of credit risk, and the increasing cost
of insurance risk. The Trust’s market risks include interest
rate risk and the risk of declines in valuation of the
Trust’s life insurance policies, including declines caused by
the selection of increased discount rates associated with the
Trust’s fair value model. It is reasonably possible that
future changes to estimates involved in valuing life insurance
policies could change and materially affect future financial
statements. Concentration of credit risk is the risk that an
insurance carrier who has issued life insurance policies held by
the Trust, does not remit the amount due under those policies due
to the carrier’s deteriorating financial condition or
otherwise. Another credit risk potentially impacting the Trust is
the risk continuing fractional holders may default on their future
premium obligations, increasing the Trust’s premium
obligations. The increasing cost of insurance risk includes the
carriers’ attempts to change a policy’s cost of
insurance. While some cost of insurance increases are anticipated
and taken into consideration in the Trusts forecasts; other cost of
insurance increases are unilaterally imposed by the carrier. In the
second quarter of 2018, one carrier increased the cost of insurance
associated with its policies held by the Trust, representing about
$188 million in face value, by approximately 45% over the prior
cost of insurance.
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.
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 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.
Note 2 - Commitments and Contingencies
Litigation
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. If, at the time
of evaluation, the loss contingency related to a litigation or
regulatory matter is not both probable and estimable, the matter
will continue to be monitored for further developments that would
make such loss contingency both probable and estimable. When a loss
contingency related to a litigation or regulatory matter is deemed
to be both probable and estimable, the Trust will establish an
accrued liability with respect to such loss contingency and record
a corresponding amount of litigation-related expense. The Trust
will then continue to monitor the matter for further developments
that could affect the amount of any such accrued liability. There
have been no material changes to any litigation matters during the
three and nine months ended September 30, 2018.
Indemnification of Certain Persons
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 Trust maintains insurance to mitigate
its exposure to this contingency risk.
Note 3 - Restricted Cash
The Plan imposes restrictions on the Trust to maintain certain
funds in segregated accounts. As of September 30, 2018, and
December 31, 2017, the Trust has $45.4 million and $76.3 million,
respectively, in restricted cash and cash equivalents. The
restricted cash 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.
Note 4 - Life Insurance Policies
As
of September 30, 2018, the Trust owns an interest in 3,060 policies
of which 555 are life settlement policies and 2,505 are viaticals
(the “PHT Portfolio”). The PHT Portfolio’s
aggregate face value is approximately $1.3 billion as of September
30, 2018 of which $1.1 billion is attributable to life settlements
and $203.0 million is attributable to viaticals. The PHT
Portfolio’s aggregate fair value is $179.8 million as of
September 30, 2018 of which $177.4 million is attributable to life
settlements and $2.4 million is attributable to
viaticals.
As
of December 31, 2017, the Trust owned an interest in 3,140 policies
of which 600 are life settlement policies and 2,540 are viaticals.
The PHT Portfolio’s aggregate face value was approximately
$1.3 billion as of December 31, 2017 of which $1.1 billion was
attributable to life settlements and $179.1 million was
attributable to viaticals. The PHT Portfolio’s aggregate fair
value was estimated at $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.
Life expectancy reflects the probable number of
years remaining in the life of a class of persons determined
statistically, affected by such factors as heredity, physical
condition, nutrition, and occupation. It is not an estimate or an
indication of the actual expected maturity date or indication of
the timing of expected cash flows from death benefits. During the
three months ended June 30, 2018, the Trust discontinued the use of
life expectancies originally inherited from the Debtors based on
management’s determination that such life expectancies had
become outdated. Management now utilizes default mortality
multipliers to determine the estimated longevity of its
insureds. See: Note 6 – Fair Value Measurements, below for
a more detailed discussion of this change in estimating the
insureds’ longevity. The following tables (i) illustrate the
immediate impact on near term longevity estimates; and (ii)
summarize the Trust's life insurance policies grouped by remaining
life expectancy as of September 30, 2018 and December 31,
2017:
As of September 30, 2018:
Remaining Life Expectancy (Years)
|
Number of Life Insurance Policies
|
Face Value
|
Fair Value
|
0-1
|
-
|
$-
|
$-
|
1-2
|
1
|
46,395
|
2,689
|
2-3
|
1
|
241,667
|
64,776
|
3-4
|
51
|
66,825,234
|
18,436,538
|
4-5
|
157
|
301,447,433
|
63,138,803
|
Thereafter
|
2,850
|
907,098,726
|
98,144,196
|
|
3,060
|
$1,275,659,455
|
$179,787,002
|
As of December 31, 2017:
Remaining Life Expectancy (Years)
|
Number of Life Insurance Policies
|
Face Value
|
Fair Value
|
0-1
|
21
|
$45,189,634
|
$36,855,871
|
1-2
|
33
|
61,077,238
|
36,814,730
|
2-3
|
60
|
65,934,777
|
30,372,137
|
3-4
|
57
|
94,187,235
|
31,657,796
|
4-5
|
130
|
211,916,460
|
50,004,422
|
Thereafter
|
2,839
|
784,622,390
|
86,435,831
|
|
3,140
|
$1,262,927,734
|
$272,140,787
|
Estimated
premiums to be paid by the Trust for its portfolio during each of
the five succeeding fiscal years and thereafter as of September 30,
2018, are as follows:
2018
|
$13,540,474
|
2019
|
61,870,115
|
2020
|
65,044,672
|
2021
|
62,448,318
|
2022
|
56,660,126
|
Thereafter
|
252,349,128
|
Total
|
$511,912,833
|
The
Trust is required to pay premiums to keep its portion of life
insurance policies in force. 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. Additionally, as the continuing
fractional holders default on their future premium obligations, the
Trust’s premium liability will increase.
The
Trust’s estimated total future premium payable are $511.9
million as of September 30, 2018. This is an increase of $103.5
million from the total estimated future premiums of $408.4 million
as of December 31, 2017. The increase in estimated premiums payable
is due to: (i) increases in estimated life expectancies resulting
from the use of standard mortality multipliers compared to
previously used life expectancy estimates; (ii) increases in the
cost of insurance imposed by certain life insurance companies; and
(iii) continued optimization of premiums for each policy in the
portfolio.
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 two
factors: (a) by 20% – the subsection (c)(i) discount; and (b)
to exclude income received by the PHT before the default –
the subsection (c)(ii) discount (collectively, the “Section
5.05(c) Discount”).
In
April 2017, the bankruptcy court temporarily stayed the imposition
of Section 5.05(c) Discount. That stay expired in the third quarter
of 2018 for certain positions held by continuing fractional
holders. Instead of receiving one unit per dollar of face value
represented by a defaulted position, affected continuing fractional
holders will receive significantly fewer units. The amount of the
Section 5.05(c) discount varies month to month.
The
Trust anticipates funding the estimated premium payments from
maturities of life insurance policies. It also maintains premium
reserves and access to lines of credit.
Note 5 - Notes Payable
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. Principal is due in full on December 9,
2018, but is not subject to a prepayment penalty. Substantially all
of the Trust’s assets collateralize the loan. As of September
30, 2018 and December 31, 2017, the outstanding balances were $12.5
million and $35.0 million, respectively. Subsequent to the quarter
ending September 30, 2018 the trust paid $8.5 million on this note
payable leaving a balance of $4.0 million as of November 8,
2018.
On
December 9, 2016, the Trust entered into a revolving line of credit
with Vida Longevity Fund, LP, an affiliate of Vida Capital, Inc.,
for $25.0 million. Interest accrues at 11% of outstanding balance
and is paid quarterly. The line of credit matures on December 9,
2018, at which point any amount outstanding is due in full. As of
September 30, 2018 and December 31, 2017, no amounts have been
drawn on the line of credit.
In
accordance with the Plan, the Trust issued notes totaling
approximately $36.5 million in exchange for claims against the
Debtor’s estate and the interests in life insurance policies
held by the exchanging claimants. The proceeds from those interests
collateralize the Trust’s obligations under the notes.
Interest accrues at 3% of the outstanding balance and is paid
annually in December. Principal is due in full on December 9, 2031.
In accordance with the note, beginning in December 2017, the Trust
is required to make annual payments to a sinking fund to reserve
for the current year’s interest payment and 1/15 of the
notes’ original principal amount. Such fund is included in
restricted cash on the accompanying balance sheets. As of September
30, 2018 and December 31, 2017, the outstanding balances of the
notes were $35.9 million and $36.5 million, respectively. The
sinking fund associated with these notes had balances of $4.9
million and $2.4 million at September 30, 2018 and December 31,
2017, respectively. 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 election for the unit holders
which were in dispute and resolved through settlement, mediation or
court order.
On
March 28, 2017, the Trust was ordered to pay the Chapter 11
trustee’s fees totaling $5.5 million. The first payment of
$2.8 million was paid in 2017. The remaining balance is in the form
of a note payable in the amount of $2.8 million and is due in three
equal annual payments on January 1 beginning in 2019. The note does
not bear interest as ordered by the Court, thus the note has been
discounted by $0.2 million, based on an implied interest rate of 3%
as of December 31, 2017. As of September 30, 2018 and December 31,
2017, the outstanding balance was $2.6 million.
Future
scheduled principal payments on the long-term debt are as follows
as of September 30, 2018:
|
Long-Term
Debt
|
2018
|
$12,500,000
|
2019
|
3,308,739
|
2020
|
3,308,739
|
2021
|
3,308,739
|
2022
|
2,392,072
|
Thereafter
|
21,528,644
|
Total
|
$46,346,930
|
Note 6 - Fair Value Measurements
The
Trust carries its life insurance policies at fair value. Fair value
is defined as an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date. Fair value measurements are classified based on the following
fair value hierarchy:
Level 1 - Valuation is based on unadjusted quoted prices in active
markets for identical assets and liabilities that are accessible at
the reporting date. Since valuations are based on quoted prices
that are readily and regularly available in an active market,
valuation of these products does not entail a significant degree of
judgment.
Level 2 - Valuation is determined from pricing inputs that are
other than quoted prices in active markets that are either directly
or indirectly observable as of the reporting date. Observable
inputs include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and interest rates and
yield curves that are observable at commonly quoted
intervals.
Level 3 - Valuation is based on inputs that are both significant to
the fair value measurement and unobservable. Level 3 inputs include
situations where there is little, if any, market activity for the
financial instrument. The inputs into the determination of fair
value generally require significant management judgment or
estimation.
The
balances of the Trust's assets measured at fair value on a
recurring basis as of September 30, 2018 and December 31, 2017, are
as follows:
|
As of
September 30,
2018
|
As of
December 31,
2017
|
Assets:
|
|
|
Investments
in Life Insurance Policies
|
|
|
Level
1
|
$-
|
$-
|
|
|
|
Level
2
|
$-
|
$-
|
|
|
|
Level
3
|
$179,787,002
|
$272,140,787
|
|
|
|
Total Fair Value
|
$179,787,002
|
$272,140,787
|
Quantitative Information about Level 3 Fair Value
Measurements
Life
insurance policies
|
September 30,
2018
|
December 31,
2017
|
|
|
|
Fair
Value
|
$179,787,002
|
$272,140,787
|
|
||
Face
Value
|
$1,275,659,455
|
$1,262,927,734
|
|
||
Valuation
Techniques
|
Discounted
Cash
flow
|
Discounted
Cash
flow
|
|
||
Unobservable
Inputs
|
Discount
rate
|
Discount
rate
|
|
||
Range
|
26.5%-31.8%
|
25.5%-31.8%
|
The
life insurance policies’ fair value estimates were reduced
significantly in the second quarter of 2018. The primary cause of
the change was the use of standard mortality multipliers for all
policies as opposed to using previous life expectancy estimates
that were previously determined by the Debtor for certain policies.
A secondary cause was the increase in the cost of insurance imposed
by certain life insurance companies on a number of
policies.
In
assessing and determining the PHT Portfolio’s valuation, the
Position Holder Trust retained Lewis & Ellis, Inc. as its
principal actuaries.
The
following is a summary of the methodology used to estimate the
assets’ fair value measured on a recurring basis and within
the above fair value hierarchy. The overall methodology did not
change from first quarter 2018 to the third quarter 2018; however,
the method for estimating longevity was modified during the second
quarter of 2018.
For
the prior year and the first quarter of 2018, the PHT
Portfolio’s value was estimated using an actuarially based
approach incorporating net cash flows and life expectancies as
provided by third-party life expectancy providers when they were
available. This approach applied 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 PHT Portfolio’s present value of net cash flows
(death benefits less premium payments and servicing company
compensation). The mortality scale was actuarially rolled forward
from the LE underwriting date to the valuation date.
The
LEs that the Trust holds were issued by life expectancy providers
to the Debtor during the course of the bankruptcy. The LEs were
approaching, and in some cases exceeding, two years since issuance.
As LEs age, they become less reliable because they are based on
increasingly out of date medical information. After two years, many
industry participants obtain new medical information from insureds
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
LE’s aged, less weight would be applied to them and more
weight would be placed with the default mortality multiplier. A 26%
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.
As
a result of its planned comparison of actual to expected
mortalities during the second quarter of 2018, the Trust noticed a
growing divergence between actual and expected maturities. After
further analysis, the Trust determined that the LEs in its
possession were less reliable than previously understood and that
the mortality multipliers were providing more accurate longevity
projections across the portfolio. Accordingly, the Trust’s
management decided to accelerate its migration towards the
mortality multipliers and stop using the LEs.
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
default mortality multipliers have not changed since the inception
of the Trust. The multipliers used are 100% for the life settlement
males, 100% for the Life Settlement females, and 350% for the
viaticals regardless of gender. On a quarterly basis, the Trust
compares actual mortalities to expected mortalities to refine its
analysis.
The
exclusive use of the mortality multipliers has had the effect of
extending anticipated longevity of the insureds in the PHT
Portfolio. As a result, the amount of premiums that the Trust
anticipates paying increased as did the anticipated length of time
before the receipt of the death benefit. These factors were major
contributors to the 2018 reduction in the estimated fair value of
the PHT Portfolio.
During
the third quarter of 2018, the Trust had a decrease in value of
$10.5 million due to the changes in future premium obligations on
251 policies, maturities during the quarter, and discount rate
changes offset by gains for LE aging.
The
Trust is engaged in the process of updating its forecasts of future
premium obligations for individual policies. During the course of
this process, the Trust discovered that the forecasts for certain
policies did not extend to the contractual maturity date of those
insurance policies. The PHT is creating new forecasts for all such
policies as part of its general process of updating forecasts. It
anticipates that it will take between six and nine months to
complete new forecasts for these policies. The Trust management is
still evaluating any potential impact; however, such future
revisions could have a material impact on the
valuation.
The
Trust will continue to monitor historical deaths on a quarterly
basis. We will compare actual to expected mortalities to refine our
mortality multipliers; such that they reasonably
“validate” based on our analysis of trends. An in-depth
review of the historical death experience to the mortality tables
will be conducted on our third quarter results as an annual process
to ensure the Trust information is current for the most accurate
estimating process of valuing the investment
portfolio.
The
servicing company is paid 2.65% of each maturity as compensation.
All estimated cash flows of the Policies are net of such
compensation.
The
monthly net cash flows with interest and survivorship were
discounted to arrive at the PHT Portfolio’s estimated value
as of September 30, 2018 and December 31, 2017. 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.
Life expectancy sensitivity analysis
The
table below reflects 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 estimate
increases by 5% or decreases by 5%, the change in estimated fair
value of the life insurance policies as of September 30, 2018 and
December 31, 2017 would be as follows:
As of September 30, 2018
Life Expectancy Months Adjustment
|
Average Life Expectancy
|
Fair Value
|
Change in Fair Value
|
-5%
|
|
$195,899,070
|
$16,112,068
|
No
change
|
5.1 years
|
$179,787,002
|
-
|
+ 5%
|
|
$163,085,348
|
$(16,701,654)
|
As of December 31,
2017
Life Expectancy Months Adjustment
|
Average Life Expectancy
|
Fair Value
|
Change in Fair Value
|
-5%
|
|
$286,717,730
|
$14,576,943
|
No
change
|
3.6 years
|
$272,140,787
|
-
|
+ 5%
|
|
$257,057,325
|
$(15,083,462)
|
Cost of Insurance
Over the past several years, various insurers have
increased the cost of insurance tables used in certain of their
policies. The PHT Portfolio has not been exempt from these
increases. The most significant of these to date have been
increases announced by Lincoln National Life Insurance Company, PHL
Variable Life Insurance Company and John Hancock Life Insurance
Company. The Trust’s portfolio has a significant
concentration of policies issued by these carriers.
See: Credit Exposure to Insurance Companies,
below.
Because
the cost of insurance affects the premiums paid, an increase in the
cost of insurance negatively impacts the affected policies’
valuation. The fair value estimates take into account all known
increases in the cost of insurance. The Trust has not separately
analyzed the impact of the cost of insurance increases to determine
how much of the reduction in valuation during the second quarter of
2018 was due to the cost of insurance increase separate and apart
from the longevity increase. Management believes, however, that the
negative impact from the cost of insurance increase is material,
albeit smaller than that of the longevity increase.
Discount rate
The
discount rate is another significant input in the fair value
determination. The Trust’s estimate incorporates market
factors, the size of the portfolio, and various policy specific
quantitative and qualitative factors including known information
about the underlying insurance policy, its economics, the insured
and the insurer.
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 percentage points
and the other assumptions used to estimate fair value remained the
same, the change in estimated fair value as of September 30, 2018
and December 31, 2017 would be as follows:
As of September 30, 2018
Rate Adjustment
|
Fair Value
|
Change in Fair Value
|
+ 2%
|
$169,817,823
|
$(9,969,179)
|
No
change
|
$179,787,002
|
-
|
- 2%
|
$190,914,518
|
$11,127,516
|
As of December 31, 2017
Rate Adjustment
|
Fair Value
|
Change in Fair Value
|
+2%
|
$259,806,309
|
$(12,334,478)
|
No
change
|
$272,140,787
|
-
|
- 2%
|
$285,785,223
|
$13,644,436
|
Future
changes in the discount rates used by the Trust to value life
insurance policies could have a material effect on the Trust's fair
value analysis, which could have a material adverse effect on the
Trust’s financial condition and results of
operations.
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.
Credit Exposure to Insurance Companies
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
September 30, 2018:
Carrier
|
Percentage of Face Value
|
Percentage of Fair Value
|
Carrier Rating
|
The
Lincoln National Life Insurance
|
10.3%
|
13.7%
|
A+
|
Transamerica
Financial Life Insurance
|
9.4%
|
12.2%
|
A+
|
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, 2017:
Carrier
|
Percentage of Face Value
|
Percentage of Fair Value
|
Carrier Rating
|
The
Lincoln National Life Insurance
|
11.5%
|
13.6%
|
A+
|
Transamerica
Financial Life Insurance
|
9.4%
|
11.5%
|
A+
|
John
Hancock Life Insurance (USA)
|
7.9%
|
12.4%
|
A+
|
Changes in Fair Value
The
following table provides a roll-forward of the fair value of life
insurance policies for the three months ended September 30, 2018
and 2017:
|
2018
|
2017
|
Balance
at June 30,
|
$190,303,387
|
$273,147,684
|
Realized
gain on matured policies
|
16,794,590
|
16,122,334
|
Unrealized
gain (loss) on assets held
|
(22,261,356)
|
10,025,350
|
Change
in estimated fair value
|
(5,466,766)
|
26,147,684
|
|
|
|
Matured
policies, net of fees
|
(19,153,583)
|
(19,344,711)
|
Premiums
paid
|
14,103,964
|
6,182,269
|
Balance
at September 30,
|
$179,787,002
|
$286,155,720
|
The
following table provides a roll-forward of the fair value of life
insurance policies for the nine months ended September 30, 2018 and
2017:
|
2018
|
2017
|
Balance
at December 31,
|
$272,140,787
|
$263,579,040
|
Realized
gain on matured policies
|
44,831,548
|
42,337,121
|
Unrealized
gain (loss) on assets held
|
(122,508,724)
|
6,510,792
|
Change
in estimated fair value
|
(77,677,176)
|
48,847,913
|
|
|
|
Matured
policies, net of fees
|
(56,240,462)
|
(50,870,826)
|
Premiums
paid
|
41,563,853
|
24,599,593
|
Balance
at September 30,
|
$179,787,002
|
$286,155,720
|
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.
Note 7 – Premium Receivable
At
September 30, 2018 and December 31, 2017, the premium receivable
was fully reserved for at $5.0 million, all of which was 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.
LIFE PARTNERS IRA HOLDER PARTNERSHIP,
LLC
BALANCE SHEETS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
|
September 30,
2018
|
December 31,
2017
|
|
(Unaudited)
|
(Audited)
|
Assets
|
|
|
Investment
in Life Partners Position Holder Trust
|
$94,732,368
|
$150,752,520
|
|
|
|
Total assets
|
$94,732,368
|
$150,752,520
|
|
|
|
Liabilities
|
|
|
Due
to the Life Partners Position Holder Trust
|
$153,381
|
$35,526-
|
|
|
|
Total liabilities
|
$153,381
|
$35,526-
|
|
|
|
Net assets
|
$94,578,987
|
$150,716,994
|
LIFE PARTNERS IRA HOLDER PARTNERSHIP,
LLC
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
|
For the Three
Months Ended
September
30,
|
For the Nine
Months Ended
September
30,
|
||
|
2018
|
2017
|
2018
|
2017
|
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
Income
|
|
|
|
|
Equity income
(loss) from Life Partners Position Holder Trust
|
$(4,641,746)
|
$7,939,010
|
$(56,020,152)
|
$12,697,198
|
Expenses
|
|
|
|
|
Professional
fees
|
$9,810
|
$-
|
$117,855
|
$-
|
|
|
|
|
|
Increase
(decrease) in net assets
|
$(4,651,556)
|
$7,939,010
|
$(56,138,007)
|
$12,697,198
|
LIFE PARTNERS IRA HOLDER PARTNERSHIP,
LLC
STATEMENTS OF CHANGES IN NET ASSETS
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
For the Nine Months Ended
September 30, 2018
|
|
|
For the Nine Months Ended September 30, 2017
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Net assets, beginning of period
|
$
|
150,716,994
|
|
$
|
139,451,651
|
|
|
Increase (decrease) in net assets
|
|
(56,138,007)
|
|
|
12,697,198
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
$
|
94,578,987
|
|
$
|
152,148,849
|
|
|
Net asset value per unit:
|
|
|
|
|
|
|
|
Number of units
|
|
|
747,862,666
|
|
|
731,317,865
|
|
Net assets per unit
|
|
$
|
0.13
|
|
$
|
0.21
|
|
LIFE PARTNERS IRA HOLDER PARTNERSHIP,
LLC
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2018 and 2017
|
For the Nine
Months Ended
September
30,
|
|
|
2018
|
2017
|
|
(Unaudited)
|
(Unaudited)
|
Cash
flows from operating activities:
|
|
|
Net
increase (decrease) in net assets
|
$(56,138,007)
|
$12,697,198
|
Adjustments
to reconcile net increase (decrease) in net assets to net cash used
in operations:
|
|
|
Investment in Life
Partners Position Holder Trust
|
$56,020,152
|
$(12,697,198)
|
Change
in assets and liabilities:
|
|
|
Due to Life
Partners Position Holder Trust
|
117,855
|
-
|
Net
cash used in operating activities
|
$-
|
$-
|
Net change in
cash
|
$-
|
$-
|
Cash,
beginning of period
|
$-
|
$-
|
Cash
end of period
|
$-
|
$-
|
LIFE PARTNERS IRA HOLDER
PARTNERSHIP, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 - Operations
The Life Partners IRA Holder Partnership, LLC (the
“IRA Partnership” or “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 (“Bankruptcy Court”) on
November 1, 2016. The Plan became effective on December 9,
2016 and the Bankruptcy Court appointed Eduardo S. Espinosa, Esq.
to serve as Trustee of the Life Partners Position Holder Trust
(“Trust”) and as manager of Life Partners IRA Holder
Partnership, LLC. 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.
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
747,862,666 and 733,164,743 units as of September 30, 2018 and
December 31, 2017, respectively, of the Trust’s outstanding
units totaling 1,227,809,087 and 1,162,059,511 as of September 30,
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 Trust. The
Partnership’s sole asset is its investment in the Trust and
it engages in no other business activity.
Note 2 - Significant Accounting Policies
Equity Method Accounting
The
Partnership accounts for its investment in the Trust using the
equity method of accounting in accordance with Accounting Standards
Codification (ASC) 323, Investments – Equity Method and Joint
Ventures. 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 following table presents summary financial information for the
Trust:
Balance Sheet Data
|
September 30,
2018
|
December 31,
2017
|
|
(Unaudited)
|
(Audited)
|
Investment
in life insurance policies
|
$179,787,002
|
$272,140,787
|
All
other assets
|
67,732,003
|
97,624,877
|
|
|
|
Total assets
|
$247,519,005
|
$369,765,664
|
|
|
|
Total liabilities
|
$91,991,424
|
$130,824,276
|
|
|
|
Net assets
|
$155,527,581
|
$238,941,388
|
Income Statement Data
|
Three Months
Ended
September
30,
2018
|
Nine Months
Ended
September
30,
2018
|
Three Months
Ended September 30,
2017
|
Nine Months
Ended September 30,
2017
|
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|
|
|
|
|
Change in fair
value of life insurance policies
|
$(5,466,766)
|
$(77,677,176)
|
$26,170,478
|
$48,847,912
|
Other
income
|
102,696
|
1,268,478
|
-
|
-
|
|
|
|
|
|
Total
income (loss)
|
$(5,364,070)
|
$(76,408,698)
|
26,170,478
|
$48,847,912
|
|
|
|
|
|
Total
expenses
|
$2,192,524
|
$7,600,971
|
$4,038,310
|
$12,402,779
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting from
operations
|
$(7,556,594)
|
$(84,009,669)
|
$22,132,168
|
$36,445,133
|
Income Taxes
No
provision for state or Federal income taxes has been made as the
liability for such taxes is attributable to the members rather than
the Partnership. In certain instances, however, the Partnership may
be required under applicable state laws to remit directly to state
tax authorities amounts otherwise due to members prior to any
distributions. Such payments on behalf of the members are deemed
distributions to them.
The
Financial Accounting Standards Board (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
Partnership’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
Partnership has no material uncertain income tax positions as of
September 30, 2018 nor December 31, 2017.
Use of Estimates
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
Risks and Uncertainties
The Partnership, due to the nature of its assets
and operations, is subject to significant risks and uncertainties
affecting the Trust which encounters economic risk. The two main
components of economic risk potentially impacting the
Partnership’s interest in the Trust are market risk and
concentration of credit risk. The market risks include interest
rate risk and the risk of declines in valuation of the
Trust’s life insurance policies, including declines caused by
the selection of increased discount rates associated with the
Trust’s fair value model and changes in other assumptions to
the Trust’s fair value model. Concentration of credit risk is
the risk that an insurance carrier who has issued life insurance
policies held by the Trust, does not remit the amount due under
those policies due to the deteriorating financial condition of the
carrier or otherwise. It is reasonably possible that future changes
to estimates involved in valuing life insurance policies could
result in material effects to the Partnership’s financial
position and results of operations.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.
You
should read the following discussion in conjunction with the
financial statements and accompanying notes and the information
contained in other sections of this quarterly report on Form 10-Q.
The statements in this discussion and analysis concerning
expectations regarding Life Partners Position Holder Trust’s
(“Position Holder Trust” or “Trust”) and
the Life Partners IRA Holder Partnership, LLC’s (“IRA
Partnership” or “Partnership”) future
performance, liquidity and capital resources, as well as other
non-historical statements in this discussion and analysis, are
forward-looking statements. The actual results of the Trust and
Partnership could differ materially from those suggested or implied
by any forward-looking statements.
Business Overview
The Position Holder Trust was created on December
9, 2016, pursuant to the Revised Third Amended Joint Plan of
Reorganization of Life Partners Holdings, Inc., et
al., 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 (“Bankruptcy
Court”) on November 1, 2016, as amended. The Plan became
effective on December 9, 2016, and the Bankruptcy Court appointed
Eduardo S. Espinosa, Esq. to serve as Trustee of the Trust and as
Manager of the IRA Partnership. 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 (collectively, the “Debtors”). 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 with a face value of approximately $2.2 billion as
of December 9, 2016 (“Policies”). LPI Financial
Services, Inc. was organized to bill and collect certain fees
charged to investors in connection with the
business.
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 September 30, 2018 and December 31,
2017, there were 10,443 and 10,187 holders of the 1,227,809,087 and
1,162,059,511 Units outstanding, respectively. The Trust owns a
portfolio of life insurance policies; a portion of the policies is
encumbered by the beneficial interest of continuing fractional
interest holders. The Trust’s portion of the portfolio
consists of positions in 3,060 and 3,140 life insurance policies,
with aggregate fair values of $179.8 million and $272.1 million and
an aggregate face values of approximately $1.3 billion and $1.3
billion at September 30, 2018 and December 31, 2017, respectively.
The fair value of the interests in the life insurance policies
owned by continuing fractional interest holders are not reflected
in the Trust’s financial statements.
The
Bankruptcy Court organized the Trust and the Partnership in order
to liquidate the assets of the Debtors in a manner calculated to
conserve, protect and maximize the value of the assets, and to
distribute the proceeds thereof to the Trust’s securities
holders in accordance with the Plan. The Trust and IRA Partnership
have no other business interests nor operations and will not
acquire any additional life insurance policies in the future. The
Trust’s beginning assets and liabilities were contributed
pursuant to the Plan as of December 9, 2016.
Continuing Operations
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
Position Holder Trust expects that fulfilling its liquidating
purpose will require a significant amount of time. As such, the
Trust will have significant ongoing operations during that period
due to the nature of its assets and its plan to maximize the
proceeds to its beneficiaries bymaintaining the majority of its
Policies until maturity. As a result, the Trust has concluded that
its liquidation is not imminent, in accordance with the definitions
under accounting principles generally accepted in the United States
and has not applied the liquidation basis of accounting in
presenting its financial statements. The Trust will continue to
evaluate its operations to determine when its liquidation becomes
imminent and the liquidation basis of accounting is
required.
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 two
factors: (a) by 20% – the subsection (c)(i) discount; and (b)
to exclude income received by the PHT before the default –
the subsection (c)(ii) discount (collectively, the “Section
5.05(c) Discount”).
In
April 2017, the bankruptcy court temporarily stayed the imposition
of Section 5.05(c) Discount. That stay expired in the third quarter
of 2018 for certain positions held by continuing fractional
holders. Instead of receiving one unit per dollar of face value
represented by a defaulted position, affected continuing fractional
holders will receive significantly fewer units. The amount of the
Section 5.05(c) discount varies month to month.
The
Partnership operations consist entirely of its interests in the
operations of the Trust and will continue as long as the Trust is
liquidating its assets. The Partnership utilizes the equity method
of accounting for its interests in the Trust and recognizes its
proportionate interest in the results of the Trust’s
continuing operations accordingly.
Critical Accounting Policies
Position Holder Trust
Investments in Life Insurance Policies
The Trust accounts for its interests in life
insurance policies at fair value in accordance with ASC
325-30, Investments in Insurance
Contracts. Life
insurance policies are reflected at their estimated fair values.
Any resulting changes in estimates are reflected in operations in
the period the change becomes apparent.
Fair Value of Life Insurance Policies
The Trust follows ASC 820, Fair Value Measurements
and Disclosures, in estimating
the fair value of its life insurance policies, which defines fair
value as an exit price representing the amount that would be
received if an asset were sold or that would be paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in pricing an asset or
liability.
As
a basis for considering such assumptions, the guidance establishes
a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. Level 1 relates to quoted prices in active
markets for identical assets or liabilities. Level 2 relates to
observable inputs other than quoted prices included in Level 1.
Level 3 relates to unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of
the assets or liabilities. The Trust’s investments in life
insurance policies are considered to be Level 3 as there is
currently no active market where the Trust is able to observe
quoted prices for identical assets and the Trust’s valuation
model incorporates significant inputs that are not
observable.
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.
Income Recognition
The
Trust’s investments in life insurance policies are its
primary source of income. Gain or loss is recognized from ongoing
changes in the portfolio’s estimated fair value, including
any gains or losses at maturity. Gains or losses from maturities
are recognized at receipt of a death notice or verified obituary
for an insured party and determined based on the difference between
the death benefit and the estimated fair value of the policy at
maturity.
Premiums Receivable
The
Trust assumed the Debtors’ receivables related to life
insurance policy premiums and service fees that were paid to the
Debtors on behalf of fractional interest holders prior to the
Trust’s effective date. After December 9, 2016, the policy
premiums allocable to continuing fractional interest holders are
those persons' obligations and not the Trust. If a continuing
fractional interest holder defaults on future premium obligations,
such position is deemed contributed to the Trust in exchange for
the number of Units provided by the Plan.
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
September 30, 2018 and December 31, 2017, the allowance for
doubtful accounts was $5.0 million, all of which was 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.
Maturities Receivable
Maturities
receivable consist of the Trust’s portion of life insurance
policy maturities that occurred, but payment was not yet received
as of the reporting period.
Income Taxes
No
provision for state or federal income taxes has been made as the
liability for such taxes is attributable to the Unit holders rather
than the Trust. The Trust is a grantor trust with taxable income or
loss passing through to the Unit holders. In certain instances,
however, the Trust may be required under applicable state laws to
remit directly to state tax authorities amounts otherwise due to
Unit holders. Such payments on behalf of the Unit holders are
deemed distributions to them.
The
Financial Accounting Standards Board (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 September 30, 2018 or
December 31, 2017.
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 September 30, 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 have remaining annual
installments in 2018 and 2019.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses primarily include professional
services, legal fees and expected litigation settlements, some of
which are obligations assumed by the Trust that were incurred prior
to the effective date of the Trust. The Trust also accrues
liabilities for state taxes payable and other miscellaneous
accruals. The Trust accrues liabilities when costs are incurred,
and such costs can be reasonably estimated.
Premium Liability
As
of September 30, 2018, and December 31, 2017, the Trust holds $20.9
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.
Maturity Liability
As
of September 30, 2018, and December 31, 2017, the Trust holds $13.1
million and $23.6 million, respectively, of maturities collected on
behalf of continuing factional holders pending
payment.
Risks and Uncertainties
The
Trust encounters economic, legal, and longevity risk. The main
components of economic risk potentially impacting the Trust are
market risk, concentration of credit risk, and the increasing cost
of insurance risk. The Trust’s market risks include interest
rate risk and the risk of declines in valuation of the
Trust’s life insurance policies, including declines caused by
the selection of increased discount rates associated with the
Trust’s fair value model. It is reasonably possible that
future changes to estimates involved in valuing life insurance
policies could change and materially affect future financial
statements. Concentration of credit risk is the risk that an
insurance carrier who has issued life insurance policies held by
the Trust, does not remit the amount due under those policies due
to the carrier’s deteriorating financial condition or
otherwise. Another credit risk potentially impacting the Trust is
the risk continuing fractional holders may default on their future
premium obligations, increasing the Trust’s premium
obligations. The increasing cost of insurance risk includes the
carriers’ attempts to change a policy’s cost of
insurance. While some cost of insurance increases are anticipated
and taken into consideration in the Trusts forecasts, other cost of
insurance increases are unilaterally imposed by the carrier. In the
second quarter of 2018, one carrier increased the cost of insurance
associated with its policies held by the Trust, representing about
$188 million in face value, by approximately 45% over the prior
cost of insurance. There is no additional impact in third quarter
of 2018.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.
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 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.
Recently Adopted Accounting Guidance
In May 2014, the 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.
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, the Board
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.
IRA Partnership
Equity Method Accounting
The
Partnership accounts for its investment in the Trust using the
equity method of accounting in accordance with Accounting Standards
Codification (ASC) 323, Investments – Equity Method and Joint
Ventures. The Partnership and the Trust are closely connected, with
a common trustee and common management. Due to 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.
Income Taxes
No
provision for state or federal income taxes has been made as the
liability for such taxes is attributable to the members rather than
the Partnership. The Partnership is a limited liability company
with taxable income or loss passing through to the members. In
certain instances, however, the Partnership may be required under
applicable laws to remit amounts otherwise due to members, directly
to state or federal tax authorities. Such payments on behalf of the
members are deemed distributions to them.
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
Partnership’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
Partnership has no material uncertain income tax positions as of
September 30, 2018 nor December 31, 2017.
Risks and Uncertainties
The
Partnership, due to the nature of its assets and operations, is
subject to significant risks and uncertainties affecting the Trust.
The two main components of economic risk potentially impacting the
Partnership’s interest in the Trust are market risk and
concentration of credit risk. The market risks include interest
rate risk and the risk of declines in valuation of the
Trust’s life insurance policies, including declines caused by
the selection of increased discount rates associated with the
Trust’s fair value model. Concentration of credit risk is the
risk that an insurance carrier who has issued life insurance
policies held by the Trust, does not remit the amount due under
those policies due to the deteriorating financial condition of the
carrier or otherwise. It is reasonably possible that future changes
to estimates involved in valuing life insurance policies could
change and result in material effects to the Partnership’s
financial position and results of operations.
Results of Continuing Operations
As
of September 30, 2018, the Trust owns an interest in 3,060 policies
of which 555 are life settlement policies and 2,505 are viaticals
(the “PHT Portfolio”). The PHT Portfolio’s
aggregate face value is approximately $1.3 billion as of September
30, 2018 of which $1.1 billion is attributable to life settlements
and $203.0 million is attributable to viaticals. The PHT
Portfolio’s aggregate fair value is $179.8 million as of
September 30, 2018 of which $177.4 million is attributable to life
settlements and $2.4 million is attributable to
viaticals.
As
of December 31, 2017, the Trust owned an interest in 3,140 policies
of which 600 are life settlement policies and 2,540 are viaticals.
The PHT Portfolio’s aggregate face value is approximately
$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 was
estimated at $272.1 million as of December 31, 2017 of which $270.6
million was attributable to life settlements and $1.5 million is
attributable to viaticals.
The
Policies were valued using a base or foundational discount rate of
15%, with further valuation adjustments based upon the size of the
insured pool, life expectancy data, distinctions between life
settlement and viatical policies and whether the Policies are whole
life, convertible term or non-convertible term policies and with a
post-adjustment weighted average discount rate of 26.5% for life
settlements and 31.8% for viaticals. See, Note 6, “Fair Value
Measurements” to the accompanying consolidated financial
statements.
Three Months Ended September 30, 2018 Compared to Three Months
Ended September 30, 2017
Results of Operations for the Trust
Net
decrease in net assets for the three months ended September 30,
2018 was $7.6 million as compared to a net increase in net assets
of $22.1 million for the same period last year. The following are
the components of net change in net assets resulting from
operations for the three months ended September 30, 2018 and
2017:
|
Three Months
Ended September 30,
|
|||
|
2018
|
2017
|
Change
|
%
Change
|
|
|
|
|
|
Income
(loss)
|
$(5,364,070)
|
$26,170,478
|
$(31,534,548)
|
(121)
|
Expenses
|
2,192,524
|
4,038,310
|
(1,845,786)
|
(46)
|
|
|
|
|
|
Increase
(decrease) in net assets
|
$(7,556,594)
|
$22,132,168
|
$(29,688,762)
|
|
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 three months ended September 30,
2018 and 2017. The primary decrease 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.
The
following table provides a roll-forward of the fair value of life
insurance policies for the three months ended September 30, 2018
and 2017:
|
2018
|
2017
|
|
|
|
Balance
at June 30,
|
$190,303,387
|
$273,147,684
|
Realized
gain on matured policies
|
16,794,590
|
16,122,334
|
Unrealized
gain (loss) on assets held
|
(22,261,356)
|
10,025,350
|
Change
in estimated fair value
|
(5,466,766)
|
26,147,684
|
|
|
|
Matured
policies, net of fees
|
(19,153,583)
|
(19,344,711)
|
Premiums
paid
|
14,103,964
|
6,182,269
|
Balance
at September 30,
|
$179,787,002
|
$286,155,720
|
The
change in estimated fair value of the Trust’s life insurance
Policies includes realized gains (losses) on matured policies in
addition to unrealized gains (losses) on policies which is affected
by unwinding the discount over time, and changes in valuation
assumptions, including mortality and discount rates. This includes
the fact that beginning in the second quarter of 2018, the Trust
stopped using LEs issued by life expectancy providers to the
debtor. Based upon our planned comparison of actual maturities to
projected maturities, management determined to accelerate its
existing program of deemphasizing the LEs in favor of default
mortality multipliers based on the 2015 Valuation Basic
Table.
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.
Expenses
|
Three Months
Ended September 30,
|
|||
|
2018
|
2017
|
$
Change
|
%
Change
|
|
|
|
|
|
Interest
|
$737,574
|
$1,805,161
|
$(1,067,587)
|
(59)
|
Administrative and
filing fees
|
265,603
|
44,833
|
220,770
|
492
|
Insurance
|
-
|
375
|
(375)
|
(100)
|
Legal
fees
|
419,533
|
482,452
|
(62,919)
|
(13)
|
Professional
fees
|
706,305
|
1,526,120
|
(819,815)
|
(54)
|
Other general and
administrative expenses
|
63,509
|
179,369
|
(115,860)
|
(65)
|
|
|
|
|
|
Total
expenses
|
$2,192,524
|
$4,038,310
|
$(1,845,786)
|
|
The
decrease in total expenses of $1.8 million is primarily due to less
interest paid as the notes payable balances have decreased over the
same period noted above and less incurred in legal and professional
fees due to increased efficiencies in the operations of the Trust.
This decrease in cost is partially offset by an increase in the
Trust’s fees payable to the U.S. Trustee, which is included
administrative and filing fees, while the bankruptcy remains
pending.
Interest
expense for the three months ended September 30, 2018 and 2017
primarily consisted of interest on two note payables.
Results of Operations for the Partnership
The
net decrease in net assets for the three months ended September 30,
2018 was $4.7 million as compared to a net increase in net assets
of $1.3 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 three months
ended September 30, 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.
Nine Months ended September 30, 2018 Compared to Nine Months Ended
September 30, 2017
Results of Operations for the Trust
The
net decrease in net assets for the nine months ended September 30,
2018 was $84.0 million as compared to a net increase in net assets
of $36.4 million for the same period in the last year.
|
Nine Months
Ended September 30,
|
|||
|
2018
|
2017
|
$
Change
|
%
Change
|
|
|
|
|
|
Income
(loss)
|
$(76,408,698)
|
$48,847,912
|
$(125,256,610)
|
(256)
|
Expenses
|
7,600,971
|
12,402,779
|
(4,801,808)
|
(39)
|
|
|
|
|
|
Increase
(decrease) in net assets
|
$(84,009,669)
|
$36,445,133
|
$(120,454,802)
|
|
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 nine months ended September 30,
2018 and 2017. The primary decrease 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.
The
following table provides a roll-forward of the fair value of life
insurance policies for the nine months ended September 30, 2018 and
2017:
|
2018
|
2017
|
|
|
|
Balance
at December 31,
|
$272,140,787
|
$263,579,040
|
Realized
gain on matured policies
|
44,831,548
|
42,337,121
|
Unrealized
gain (loss) on assets held
|
(122,508,724)
|
6,510,792
|
Change
in estimated fair value
|
(77,677,176)
|
48,847,913
|
|
|
|
Matured
policies, net of fees
|
(56,240,462)
|
(50,870,826)
|
Premiums
paid
|
41,563,852
|
24,599,593
|
Balance
at September 30,
|
$179,787,002
|
$286,155,720
|
The change in
estimated fair value of the Trust’s life insurance Policies
includes realized gains (losses) on matured policies
in
addition to unrealized gains (losses) on policies which is affected
by the unwinding the discount over time and changes in valuation
assumptions, including mortality and discount rates. This includes
the fact that beginning in the second quarter of 2018, the
LE values as provided by the servicing company are not being
utilized on a going forward basis as LEs being less reliable. See,
Note 6, “Fair Value Measurements” to the accompanying
financial statement. Based upon our mortality analysis relative to
actual maturities as compared to projected maturities, it is
management’s opinion to discontinue the use of this data. The
Trust now uses mortality multipliers by type/gender based upon our
continued review/analysis of historical maturities. See, Note 6,
“Fair Value Measurements” to the accompanying financial
statements.
Expenses
|
Nine Months
Ended September 30,
|
|||
|
2018
|
2017
|
$
Change
|
%
Change
|
|
|
|
|
|
Interest
|
$2,807,970
|
$5,422,804
|
$(2,614,834)
|
(48)
|
Administrative
and filing
fees
|
781,143
|
152,474
|
628,669
|
412
|
Insurance
|
6,108
|
10,855
|
(4,747)
|
(44)
|
Legal
fees
|
1,488,088
|
3,106,177
|
(1,618,089)
|
(52)
|
Professional
fees
|
2,123,576
|
2,988,586
|
(865,010)
|
(29)
|
Other general and
administrative expenses
|
394,086
|
721,883
|
(327,797)
|
(45)
|
|
|
|
|
|
Total
expenses
|
$7,600,971
|
$12,402,779
|
$(4,801,808)
|
|
The
decrease in total expenses of $4.8 million is primarily due to less
interest paid as the notes payable balances have decreased over the
same period noted above and less incurred in legal and professional
fees due to increased efficiencies in the Trust’s operations.
This decrease in cost is partially offset by a increase in the
Trust’s fees payable to the U.S. Trustee, which is included
in the administrative and filing fees, while the bankruptcy remains
pending.
Interest
expense for the nine months ended September 30, 2018 and 2017
primarily consisted of interest on two note payables.
Results of Operations for the Partnership
The
net decrease in net assets for the nine months ended September 30,
2018 was $56.1 million as compared to a net increase in net assets
of $12.7 million for the same period 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 nine months
ended September 30, 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.
Liquidity and Capital Resources
Overview and Cash Flow
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.
The
primary needs for working capital are to pay premiums on Policies
and expenses relating to the administration of the Trust and its
assets. The Trust is authorized for the use of collected death
benefits, called the “Maturity Funds Facility,” from
which the Trustee may borrow on a short-term revolving basis to
fund its premium reserves. The Trust is also entitled to access the
cash surrender value included in the beneficial ownership
registered in its name 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 be taken out of the Position
Holder Trust’s share of the maturity proceeds of the Policy
or, if the Trust’s share is insufficient, the Trust must make
up the difference. Fees for servicing the Policies will be paid out
of the death benefits paid on Policies in an amount equal to 2.65%
of the death benefits paid.
Capital
Loan Facilities
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.
Outstanding
debt for the period ended September 30, 2018 was $51.0 million and
included $12.5 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 $2.6 million to the Chapter 11 trustee.
Outstanding debt for the period ended 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 an individual.
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.
New IRA Notes
The
Debtors’ estate included 1,177 security holders who held
their positions through their individual retirement accounts
(“IRA”), which are prohibited investments for an IRA.
As a result, the Plan included a mechanism to resolve the IRA
investors’ claims by establishing the Partnership and
authorizing the issuance of the New IRA Notes.
The
Position Holder Trust was authorized to issue New IRA Notes in a
principal amount of $63.7 million bearing interest at 3.0% per
annum, due 2031. As of September 30, 2018, there were $35.9 million
of New IRA Notes outstanding. Interest is payable annually in
December.
If
the Trust elects to redeem any New IRA Notes, it must notify the
New IRA Note trustee of the redemption date and the principal
amount to be redeemed at least 60 days before the redemption date
(unless a shorter period is satisfactory to the trustee). If fewer
than all the New IRA Notes are being redeemed, the notice must also
specify a record date not less than 15 days after the date of the
notice of redemption is given to the New IRA Note trustee. The New
IRA Note trustee will select the notes to be redeemed on a pro rata
basis in denominations of $100 principal amount and higher integral
multiples of $100.
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 election for the unit holders which were in dispute and resolved
through settlement, mediation or court order.
Other Notes Payable
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 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.
Liquidity
At
September 30, 2018, the Position Holder Trust had $45.8 million of
cash primarily consisting of $0.8 million held to pay Policy
premiums, $20.9 million was held to pay for premiums collected and
due on behalf of the continuing fractional holders, $13.4 million
held to pay maturities collected and owed to current fractional
holders, $10.3 million held as collateral deposits on debt, and
$0.4 million was available to pay for operating expenses of the
Trust. At December 31, 2017, the Position Holder Trust had $78.1
million of cash primarily consisting of $5.7 million was held to
pay Policy premiums, $30.3 million was held to pay for premiums
collected and due on behalf of the continuing fractional holders,
$23.7 million was held to pay pre and post effective date
maturities collected and owed to current fractional holders, $16.6
million was held as collateral deposits on debt, and $1.8 million
was available to pay for operating expenses of the
Trust.
The
Trust’s total outstanding liabilities decreased by $38.8
million from $130.8 million at December 31, 2017, to $92.0 million
at September 30, 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.
During
the three months ended September 30, 2018 and 2017, the Position
Holder Trust paid premiums on Policies totaling $14.1 million and
$6.2 million, respectively on the PHT Portfolio. Also, for the
three months ended September 30, 2018 and 2017, there were
maturities of $19.2 million and $19.3 million,
respectively.
The
Position Holder Trust paid $10.0 million of its outstanding notes
payable during the three months ended September 30, 2018. There
were no financing activities during the three months ended
September 30, 2017. Subsequent to the quarter ending September 30,
2018 the trust paid $6.0 million on October 19, 2018.
The
Trust has a liquidity risk associated with the payment of premiums
by the continuing fractional interest holders. Under the Plan, the
Trust bills continuing fractional interest holders for their share
of premiums due over the coming twelve months. If a continuing
fractional interest holder fails to pay its share of the premiums
on a position, the continuing fractional interest holder defaults
and the position is deemed to have been contributed to the Trust in
exchange for Units. The Trust is then responsible for the premium
payments related to the defaulted interest. Therefore, a
significant increase in the non-payment by continuing fractional
interest holders may adversely affect the liquidity of the
Trust.
Off-Balance Sheet Arrangements
As
of September 30, 2018, and December 31, 2017, the Trust and
Partnership had no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
Market
risk is the risk of potential economic loss principally arising
from adverse changes in the fair value of financial instruments.
The major components of market risk are credit risk and interest
rate risk. As of September 30, 2018, we did not hold a material
amount of financial instruments for trading purposes.
Credit Risk
Credit
risk consists primarily of the potential loss arising from adverse
changes in the financial condition of the issuers of the life
insurance policies that we own.
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 our life settlements as of September 30,
2018.
Carrier
|
Percentage of Face Value
|
Percentage of Fair Value
|
Carrier Rating
|
The
Lincoln National Life Insurance
|
10.3%
|
13.7%
|
A+
|
Transamerica
Financial Life Insurance
|
9.4%
|
12.2%
|
A+
|
Interest Rate Risk
The
note payable to Vida Opportunity Fund, LP and the Trust’s
revolving line of credit were established at a fixed interest rate.
Accordingly, fluctuations in interest rates during the period
ending September 30, 2018, did not impact the Trust’s
operations.
Item 4. Controls and
Procedures.
Evaluation of Disclosure Controls and Procedures
The
Company, under the supervision and with the participation of its
management, including Trustee, evaluated the effectiveness of the
design and operation of the Company's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) or Rule 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on
that evaluation, the Trustee concluded that the Company's
disclosure controls and procedures were not effective as of
September 30, 2018.
In
preparing the financial statements for the year ended December 31,
2017, for the Position Holder Trust and the Partnership, we
identified a material weakness in our internal control over
financial reporting, as defined by the SEC guidelines for public
companies. The material weakness identified relates to the Position
Holder Trust and the Partnership having not yet established
processes and controls sufficient to ensure the accuracy of data
and information regarding its Policies, insured parties and
position holder interests on an ongoing basis. In addition, such
controls are not fully implemented at the servicer and subservicer,
and relevant controls to monitor the performance of those
organizations are not yet in place.
Remediation Plan and Actions
The
Trust is actively working on the entity level and computer general
and application controls in response to this assessment. We began
implementing entity level controls to provide oversight on
financial reporting and cash management provided by the servicing
company. In addition, the servicing company has begun to implement
new accounting and operating systems that incorporate appropriate
accounting controls over their assigned functions. We believe that
the continued implementation of these measures will address and
remedy this material weakness in our internal control over
financial reporting by December 31, 2018.
Changes in Internal Control Over Financial Reporting
Except
as described above, there were no other changes in the
Trust’s internal control over financial reporting (as such
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
within the fiscal quarter to which this report relates, that have
materially affected, or reasonably likely to materially affect, the
Trust’s internal control over financial
reporting.
PART II—OTHER
INFORMATION
Item 1. Legal
Proceedings.
There
have been no material changes to any litigation matters during the
three months ended September 30, 2018.
Item 1A. Risk Factors.
Not
required for smaller reporting companies.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior
Securities.
None.
Item 4. Mine Safety
Disclosures.
Not
applicable.
Item 5. Other
Information.
None
Item 6. Exhibits.
Exhibit
No.
|
|
Description
|
|
||
|
||
|
||
|
||
|
|
|
101.INS
|
|
XBRL Instance Document.
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
Document.
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
Document.
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
Document.
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
Document.
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
Document.
|
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
Dated:
November 12, 2018
|
LIFE PARTNERS POSITION HOLDER TRUST
|
|
|
|
By: /s/
Eduardo S. Espinosa
|
|
Eduardo
S. Espinosa, Trustee
|
|
|
|
LIFE PARTNERS IRA HOLDER PARTNERSHIP, LLC
|
|
|
|
By: /s/
Eduardo S. Espinosa
|
|
Eduardo
S. Espinosa, Manager
|
41