| 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 March 31, 2019 and December 31, 2018, are as follows:
As of March 31, 2019
As of December 31, 2018
Assets:
Investments in Life Insurance Policies
Level 1 $ - $ -
Level 2 $ $
Level 3 $ 191,450,064 $ 186,251,760
Total Fair Value $ 191,450,064 $ 186,251,760 Quantitative Information about Level 3 Fair Value Measurements
Life insurance policies
March 31, 2019
December 31, 2018
Fair Value $ 191,450,064 $ 186,251,760
Face Value $ 1,225,300,184 $ 1,258,390,716
Valuation Techniques Discounted Cash flow Discounted Cash flow
Unobservable Inputs Discount Rate Discount rate
Range 24.5-25.8 % 24.8-25.8 % 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 during the current or prior year, 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 as opposed to specific life expectancies of insureds which
were based on increasingly out of date medical information. 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 December 31, 2018. The multipliers used are 100% for the life settlement males, 90% 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. The Trust continually evaluates and updates
its forecasts of future premium obligations for individual policies. The Trust considers these potential changes to estimated future
cash flows in its consideration of the discount rate. The Trust also continues 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. 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 March 31, 2019 and December 31, 2018.
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 March 31, 2019 and December 31, 2018 would be as follows:
As of March 31, 2019 Life Expectancy Months Adjustment Weighted Average Life Expectancy Fair Change in
-5% $ 207,869,834 $ 16,419,770
No change 5.1 years $ 191,450,064 —
+5% $ 174,411,990 $ (17,038,074 )
As of December 31, 2018 Life Expectancy Months Adjustment Weighted Average Fair Change in
-5% $ 202,547,381 $ 16,295,621
No change 5.2 years $ 186,251,760 —
+5% $ 169,348,101 $ -16,903,659 ) 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 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. 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 March 31, 2019 and December 31, 2018 would be as follows:
As of March 31, 2019 Fair Value Change in Fair Value
Rate Adjustment
+ 2% $ 180,565,225 $ -10,884,839
No change 191,450,064 -
- 2% $ 203,672,638 $ 12,222,574
As of March 31, 2019 Fair Value Change in Fair Value
Rate Adjustment
+2% $ 175,204,064 $ (11,047,696
No change 186,251,760 -
- 2% $ 198,679,523 $ 12,427,763 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 March 31, 2019:
Carrier Percentage of Face Value Percentage of Fair Value Carrier Rating
The Lincoln National Life Insurance 10.9 % 13.4 % A+
Transamerica Financial Life Insurance 9.1 % 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, 2018:
Carrier Percentage of Face Value Percentage of Fair Value Carrier Rating
The Lincoln National Life Insurance 10.4 % 13.4 % A+
Transamerica Financial Life Insurance 9.6 % 13.1 % 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 March 31, 2019 and 2018:
2019 2018
Balance at January 1, $ 186,251,760 $ 272,140,787
Realized gain on matured policies 20,473,991 11,064,379
Unrealized loss on assets held (4,712,688 ) (18,953,112 )
Change in estimated fair value 15,761,303 (7,888,733 )
Matured policies, net of fees (25,238,083 ) (16,974,197 )
Premiums paid 14,675,084 10,282,164
Balance at March 31, $ 191,450,064 $ 257,560,021 Other
Fair Value Considerations |
