Fair Value Measurements

12 Months Ended

Dec. 31, 2021

LIFE PARTNERS POSITION HOLDER TRUST [Member]

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 December 31, 2021 and 2020, are as follows:

	As of December 31, 2021		As of December 31, 2020

Assets: Investments in Life Insurance Policies
Level 1	$	—	$	—

Level 2	$	—	$	—

Level 3	$	190,324,232	$	159,179,912

Total Fair Value	$	190,324,232	$	159,179,912

Quantitative Information about Level 3 Fair Value Measurements

Life insurance policies	December 31, 2021			December 31, 2020

Fair Value	$	190,324,232		$	159,179,912

Face Value	$	896,807,879		$	997,429,412
Valuation Techniques	Discounted cash flow			Discounted cash flow

Unobservable Inputs	Discount rate, Mortality assumptions			Discount rate, Mortality assumptions

Weighted average discount rates:
Life settlements		15.0	%		26.7	%
Viaticals		20.0	%		27.3	%

Mortality assumptions - 2015 VBT mortality multipliers:
Life settlements	85% - 90		%	90% - 100		%
Viaticals		350	%		350	%

In assessing and determining the PHT Portfolio’s valuation, the Position Holder Trust has retained Lewis & Ellis, Inc. as its principal actuaries.

The following is a summary of the methodology used to estimate the PHT Portfolio’s 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.

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 Valuation Basic Table produced by the U.S. Society of Actuaries (“VBT”) as opposed to specific life expectancies of insureds as the mortality multipliers from the VBT Ultimate table provide more accurate longevity projections across the portfolio. 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).

As of December 31, 2021, the default mortality multipliers used are 90% for the life settlement males, 85% for the life settlement females, and 350% for the viaticals regardless of gender. As of December 31, 2020, the default mortality 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 Trust compares actual to expected mortalities to evaluate and refines the mortality multipliers; such that they reasonably “validate” based on the Trust’s analysis of trends.

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 monthly net cash flows with interest and survivorship were discounted to arrive at the PHT Portfolio’s estimated value as of December 31, 2021, and December 31, 2020. 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

Life expectancy estimates are a significant input in the fair value determination. Future changes in the life expectancy estimates could have a material effect on the Portfolio’s fair value, which could have a material effect on its financial condition and results of operations.

The tables below reflect the effect on the PHT Portfolio’s fair value if the actual life expectancy experienced is 5% less or 5% more than is currently estimated. If the life expectancy estimates increase by 5% or decrease by 5%, the change in estimated fair value of the life insurance policies would be as follows:

As of December 31, 2021, Life Expectancy Months Adjustment	Average Life Expectancy	Fair Value		Change in Fair Value
-5%		$	205,107,243	$	14,783,011
No change	4.8 years	$	190,324,232	—
+5%		$	174,841,781	$	(15,482,451)

As of December 31, 2020, Life Expectancy Months Adjustment	Average Life Expectancy	Fair Value		Change in Fair Value
-5%		$	173,516,265	$	14,336,353
No change	4.7 years	$	159,179,912	—
+5%		$	144,277,667	$	(14,902,245)

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 percent and the other assumptions used to estimate fair value remained the same, the change in estimated fair value would be as follows:

As of December 31, 2021, Rate Adjustment	Fair Value		Change in Fair Value
+2%	$	176,945,811	$	(13,378,421)
No change	$	190,324,232	—
-2%	$	205,683,115	$	15,358,883

As of December 31, 2020, Rate Adjustment	Fair Value		Change in Fair Value
+2%	$	151,012,859	$	(8,167,053)
No change	$	159,179,912	—
-2%	$	168,255,950	$	9,076,038

Future changes in the discount rates used by the Trust to value life insurance policies could have a material effect on the fair value of the Portfolio, 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.

In the first quarter of 2021, the Trust’s actuarial firm, Lewis and Ellis, modified the discount rate used to value the portfolio. This change had a material impact on the fair value of the Trust’s portfolio. These changes were made as a result of i) The full on-boarding by NorthStar of the Trust’s portfolio, which produced more clarity into premium streams, the Trust’s ability to track insureds and thus deaths. ii) The majority of premium streams have been fully optimized. This not only improves clarity into the Trust’s payment obligations, it also resulted in cost savings for the Trust. iii) The importance of having specific LEs for the senior life settlement portion of the portfolio has been diminished by the fact that the average age of the insureds has now surpassed the age of 90, and iv) the Trust has now exited bankruptcy which increases the marketability of the Trust’s portfolio.

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 December 31, 2021:

Carrier

Percentage of

Face Value

Percentage of

Fair Value

Carrier Rating

Transamerica Financial Life Insurance Company

9.2

12.0

John Hancock Life Insurance Company

7.3

10.7

A+

Carrier

Percentage of

Face Value

Percentage of

Fair Value

Carrier Rating

Transamerica Financial Life Insurance Company

10.2

13.5

The Lincoln National Life Insurance Company

10.0

11.5

A+

Changes in Fair Value

The following table provides a roll-forward of the fair value of life insurance policies for the years ended December 31, 2021 and 2020:

	2021			2020

Balance at January 1,	$	159,179,912		$	172,242,734
Realized gain on matured policies		87,067,964			116,516,353
Unrealized loss on policies held		(2,090,621	)		(48,860,066	)
Change in estimated fair value		84,977,343			67,656,287

Matured policies, net of fees		(117,225,608	)		(143,525,300	)
Premiums paid		63,392,585			62,806,191
Balance at December 31,	$	190,324,232		$	159,179,912

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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Life Partners Position Holder Trust 10-K