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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

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, 2020 and December 31, 2019, are as follows:


	As of March 31, 2020		As of December 31, 2019
Assets:
Investments in Life Insurance Policies
Level 1	$	—	$	—

Level 2	$	—	$	—

Level 3	$	178,822,344	$	172,242,734

Total Fair Value	$	178,822,344	$	172,242,734

Quantitative Information about Level 3 Fair Value Measurements


Life insurance policies	March 31, 2020		December 31, 2019
Fair Value	$	178,822,344	$	172,242,734

Face Value	$	1,124,578,878	$	1,129,545,328

Valuation Techniques	Discounted cash flow		Discounted cash flow

Unobservable Inputs	Discounted rate, Mortality assumptions		Discounted rate, Mortality assumptions

Weighted average discount rates
Life Settlements	23.6%		24.7%
Viaticals	25.6%		25.7%

Mortality assumptions - 2015 VBT mortality multipliers:
Life Settlements	90% - 100%		90% - 110%
Viaticals	350%		350%

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.

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 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 March 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. As of December 31, 2019 the default mortality multipliers used are 110% 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. In first quarter of 2020, we have shifted from the Select tables to the Ultimate tables from the VBT, and we have appropriately changed the mortality multipliers to best fit experience. Changing the PHT Portfolio’s use to the 2015 VBT Ultimate table rather than

applying the 2015 VBT Select table provides a flatter pattern amongst mortality claims and better aligns to the characteristics of lives in the Trust's portfolio. The overall impact to the PHT's Portfolio from the change from the 2015 VBT Select table to the 2015 VBT Ultimate table was a decrease in fair value of approximately $5.0 million.

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, 2020 and December 31, 2019. 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, 2020 and December 31, 2019 would be as follows:


As of March 31, 2020	Weighted Average Life Expectancy	Fair Value		Change in Fair Value
As of Life Expectancy Months Adjustment
-5%		$	194,653,176	$	15,830,832
No change	4.8 years	$	178,822,344	—
+5%		$	162,381,250	$	(16,441,094)


As of December 31, 2019	Weighted Average Life Expectancy	Fair Value		Change in Fair Value
As of Life Expectancy Months Adjustment
-5%		$	188,372,343	$	16,129,609
No change	4.8 years	$	172,242,734	—
+5%		$	155,482,251	$	(16,760,483)

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. 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 PHT's 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, 2020 and December 31, 2019 would be as follows:


As of March 31, 2020	Fair Value		Change in Fair Value
Rate Adjustment
+2%	$	168,726,909	$	(10,095,435)
No change	$	178,822,344	—
-(2)%	$	190,147,372	$	11,325,028


As of December 31, 2019	Fair Value		Change in Fair Value
Rate Adjustment
+2%	$	163,300,406	$	(8,942,328)
No change	$	172,242,734	—
-(2)%	$	182,200,298	$	9,957,564

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, 2020:


Carrier	Percentage of Face Value		Percentage of Fair Value		Carrier Rating
Transamerica Financial Life Insurance	9.7	%	12.5	%	A+
The Lincoln National Life Insurance	10.0	%	11.5	%	A+


Carrier	Percentage of Face Value		Percentage of Fair Value		Carrier Rating
Transamerica Financial Life Insurance	9.6	%	12.7	%	A+
The Lincoln National Life Insurance	10.4	%	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 March 31, 2020 and 2019:


	2020		2019
Balance at January 1,	$	172,242,734	$	186,251,760
Realized gain on matured policies	18,245,701		20,473,991
Unrealized losses on assets held	(5,619,381)		(4,712,688)
Change in estimated fair value	12,626,320		15,761,303
Matured policies, net of fees	(21,573,696)		(25,238,083)
Premiums paid	15,526,986		14,675,084
Balance at March 31,	$	178,822,344	$	191,450,064

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.

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