(1) Includes amounts for related parties. Refer to our consolidated and combined financial statements for detail.
(2) As of February 3, 2011, the Company had 3,600,000 shares of common stock outstanding. The impact of the Company’s corporate conversion has been applied on a retrospective basis to January 1, 2007 to determine earnings per share for the years ended December 31, 2011, 2010, 2009, 2008 and 2007. As of December 31, 2011, there were 21,202,614 issued and outstanding shares.
(1) Includes amounts payable to related parties. Refer to our consolidated and combined financial statements for details.
You should read the following discussion in conjunction with the consolidated and combined financial statements and accompanying notes and the information contained in other sections of this Annual Report on Form 10-K, particularly under the headings “Risk Factors,” “Selected Financial Data” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements.
In February 2011, the Company sold 17,602,614 shares of common stock in its initial public offering at a price of $10.75 per share. The Company received net proceeds of approximately $174.2 million after deducting the underwriting discounts and commissions and its offering expenses.
In the life finance segment, the Company has historically provided premium finance for individual life insurance policies and purchased life insurance policies in the secondary and tertiary markets. A premium finance transaction is a transaction in which a life insurance policyholder obtains a loan to pay insurance premiums for a fixed period of time, which allows a policyholder to maintain coverage without additional out-of-pocket costs.
loans were predominately universal life policies that had an average death benefit of approximately $4.8 million and insured persons over age 75. Generally, the borrower was an irrevocable life insurance trust established by the insured which was both the legal owner and beneficiary of a life insurance policy serving as collateral for a premium finance loan.
A borrower was not required to make any payment on the premium loan until maturity. At the end of the loan term, the borrower either repaid the loan in full (including all interest and fees) or defaulted under the loan. In the event of default, subject to loan terms and conditions, the borrower typically relinquished control of the policy serving as collateral for the loan to us. If we acquired the policy upon a loan default, we either held it for investment, sought to sell the policy, or, if the loan was insured, we were paid a claim equal to the insured value of the policy, which may have been equal to or less than the amount we are owed under the loan. The amounts received in respect of claims were used to repay our lenders from whom, prior to 2011, we borrowed funds to extend premium finance loans to borrowers. As of December 31, 2011, we had 138 premium finance loans outstanding, 65.9% of which had collateral whose value is insured.
Second, we acquire life insurance policies through purchases directly from the original policy owners (the secondary market) and from institutional investors (the tertiary market). At December 31, 2011, we maintained licenses to transact life settlements in 25 of the states that currently require a license and could conduct business in 36 states and the District of Columbia.
During the capital markets dislocation in 2008 and 2009, in order to sell portfolios of structured settlements to strategic buyers, we were required to offer discount rates as high as approximately 12.0%. During the year ended December 31, 2011, our weighted average sale discount rate for sales of structured settlements was 10.5%, which includes the sale of both non-life contingent and life-contingent structured settlements. Life-contingent structured settlements are deferred payment streams that terminate upon the death of the structured settlement recipient. Non-life contingent structured settlements terminate on a pre-determined date and do not cease upon the recipient’s death.
We originated 873 transactions during the year ended December 31, 2011 as compared to 565 transactions during the same period in 2010, an increase of 54.5%. We incurred total expenses of $22.0 million during the year ended December 31, 2011 as compared to $13.1 million during the year ended December 31, 2010. The historical operating results of our structured settlement segment reflect our investment in the start-up costs and the initial growth of our structured settlement operations.
As a result of the voluntary termination of our premium finance business, we will not receive any revenue from agency fees in 2012 and beyond, and Imperial Life and Annuity Services, LLC has begun to voluntarily surrender its insurance agency licenses.
The weighted average per annum interest rate for premium finance loans outstanding as of the dates below is as follows:
We have elected to carry our investments in life settlements at fair value. As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record certain newly-acquired
Our weighted average interest rate for our credit facilities and promissory notes outstanding as of the dates indicated below is as follows:
In some instances, we make a loan to an insured whereby we immediately record a loan impairment valuation adjustment against the principal of the loan. Loans that experience an immediate impairment are made when the transaction components that are not included in the loan, such as agency fees, offset or exceed the amount of the impairment.
For loans that had lender protection insurance and matured during the years ended December 31, 2011 and 2010, 131 and 419 loans were not repaid at maturity, respectively, all of which were submitted to our lender protection insurer. The net carrying value of the loans (which includes principal, accrued interest income, and accrued origination fees, net of impairment) at the time of payoff during the years ended December 31, 2011 and December 31, 2010 was $49.7 million and $152.8 million, respectively. The amount of cash received by us for those loans was $51.5 million and $153.3 million, respectively. This resulted in a gain during the years ended December 31, 2011 and December 31, 2010 of $737,000 and $578,000, respectively. This gain was primarily attributable to the insurance amount at the time of payoff exceeding the contractual amounts due under the terms of the loan agreement. Therefore, the amount of claims paid by the lender protection insurer was in excess of 100% of the net carrying value of the loans. The following table provides information on the insured loans that were not repaid at maturity for the periods indicated below (dollars in thousands):
The following table shows the percentage of the total number of loans outstanding with lender protection insurance and the percentage of our total loans receivable balance covered by lender protection insurance as of the dates indicated below:
We use a method to determine the loan impairment valuation adjustment which assumes the “worst case” scenario for the fair value of the collateral based on the insured coverage amount. At the time of loan origination, we will record impairment even though no loans are considered non-performing as no payments are due by the borrower. Loans with insured collateral represented 65.9% and 93.9% of our loans as of December 31, 2011 and December 31, 2010, respectively.
The following table shows the amount of impairment recorded on loans outstanding with and without lender protection insurance during each period (dollars in thousands):
Beginning in July 2008, Acorn Capital Group stopped funding under its credit facility with us without any advance notice. Therefore, we did not have access to funds necessary to pay the ongoing premiums on the policies serving as collateral for our borrower’s loans that were financed under the Acorn facility. We did not incur liability with our borrowers because the terms of the Acorn loans provide that we are only required to fund future premiums if our lender provides us with funds. Through December 31, 2011, a total of 119 policies financed under the Acorn facility incurred losses primarily due to non-payment of premiums.
The following table highlights the impact of the Acorn settlement on our financial statements during the periods indicated below (dollars in thousands):
accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with the estimates as well as selected other critical accounting policies. For further information on our critical accounting policies, see the discussion in Note 2 to our audited consolidated and combined financial statements.
We report loans receivable acquired or originated by us at cost, adjusted for any deferred fees or costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20, Receivables-Nonrefundable Fees and Other Costs, discounts, and loan impairment valuation. All loans are collateralized by life insurance policies. Interest income is accrued on the unpaid principal balance on a monthly basis based on the applicable rate of interest on the loans.
In the ordinary course of business, a large portion of our borrowers default by not paying off the loan and relinquish ownership of the life insurance policy to us in exchange for our release of the obligation to pay amounts due. We also buy life insurance policies in the secondary and tertiary markets. We account for life insurance policies that we own as investments in life settlements (life insurance policies) in accordance with ASC 325-30, Investments in Insurance Contracts, which requires us to use either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. We have elected to account for these life insurance policies as investments using the fair value method.
Our valuation of insurance policies is a critical component of our estimate for the loan impairment valuation and the fair value of our investments in life settlements (life insurance policies). We currently use a probabilistic method of valuing life insurance policies, which we believe to be the preferred valuation method in the industry. The most significant assumptions which we estimate are the life expectancy of the insured and the discount rate.
In determining the life expectancy estimate, we analyze medical reviews from third-party medical underwriters. Historically, the Company has procured the majority of its life expectancy reports from two life expectancy report providers and uses AVS Underwriting, LLC (“AVS”) life expectancy reports for valuation purposes. The health of the insured is summarized by the medical underwriters into a life assessment
The calculation allows for the possibility that if the insured dies earlier than expected, the premiums needed to keep the policy in force will not have to be paid. Conversely, the calculation also considers the possibility that if the insured lives longer than expected, more premium payments will be necessary. Based on these considerations, each possible outcome is assigned a probability and the range of possible outcomes is then used to create a price for the policy.
As is the case with most market participants, the Company uses life expectancies that are provided by third-party life expectancy providers. These are estimates of an insured’s remaining years. If all of the insured lives in the Company’s life settlement portfolio live six months shorter or longer than the life expectancies provided by these third parties, the change in fair market value would be as follows:
At the end of each reporting period we re-value the life insurance policies using our valuation model in order to update our loan impairment valuation for loans receivable and our estimate of fair value for investments in policies held on our balance sheet. This includes reviewing our assumptions for discount rates and life expectancies as well as incorporating current information for premium payments and the passage of time.
Our primary sources of revenue/income are in the form of unrealized change in fair value of life settlements, agency fees, interest income, origination fee income, servicing income and realized gains on sales of structured settlements. Our revenue/income recognition policies for these sources of revenue/income are as follows:
Company’s borrowers defaulting on premium finance loans and relinquishing the underlying policy to the Company in exchange for being released from further obligations under the loan. We initially record these investments at the transaction price, which is the fair value of the policy for those acquired upon relinquishment or the amount paid for policies acquired for cash. The fair value of the investment in insurance policies is evaluated at the end of each reporting period. Changes in the fair value of the investment based on evaluations are recorded as changes in fair value of life settlements in our consolidated and combined statement of operations. The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. See “-Valuation of Insurance Policies.”
Agency Fees-Agency fees are paid by the referring life insurance agents based on negotiations between the parties and are recognized at the time a life finance loan is funded. Because agency fees are not paid by the borrower, such fees do not accrue over the term of the loan. A separate origination fee is charged to the borrower which is amortized into income over the life of the loan.
Interest and origination income on impaired loans is recognized when it is realizable and earned in accordance with ASC 605, Revenue Recognition. Persuasive evidence of an arrangement exists through a loan agreement which is signed by a borrower prior to funding and sets forth the agreed upon terms of the interest and origination fees. Interest income and origination income are earned over the term of the loan and are accreted using the effective interest method. The interest and origination fees are fixed and determinable based on the loan agreement. For impaired loans, we do not recognize interest and origination income which we believe is uncollectible. At the end of the reporting period, we review the accrued interest and accrued origination fees in conjunction with our loan impairment analysis to determine our best estimate of uncollectible income that is then reversed. We continually reassess whether the interest and origination income are collectible as the fair value of the collateral typically increases over the term of the loan. Since our loans are due upon maturity, we cannot determine whether a loan is performing or non-performing until maturity. For impaired loans, our estimate of proceeds to be received upon maturity of the loan is generally correlated to our current estimate of fair value of the collateral, but also incorporates expected increases in fair value of the collateral over the term of the loan, trends in the market, sales activity for life insurance policies and our experience with loans payoffs.
When a premium finance loan matures, we record the difference between the net carrying value of the loan and the cash received, or the fair value of the life insurance policy that is obtained in the event of payment default, as a gain or loss on loan payoffs and settlements, net. This account was significantly impacted by the Acorn settlement, as discussed above, whereby we recorded a loss on loan payoffs and settlements, net, of $4.1 million, $5.5 million and $10.2 million during the years ended December 31, 2011, 2010 and 2009, respectively.
Prior to our initial public offering, we converted from a Florida limited liability company to a Florida corporation (the “Conversion”). Prior to the Conversion we were treated as a partnership for federal and state income tax purposes. As a partnership our taxable income and losses were attributed to our members, and accordingly, no provision or liability for income taxes was reflected in the accompanying consolidated financial statements for periods prior to the Conversion.
the requisite service or performance period of the award. The fair value of equity instruments awarded upon or after the closing of our initial public offering will be determined based on a valuation using an option pricing model which takes into account various assumptions that are subjective. Key assumptions used in the valuation will include the expected term of the equity award taking into account both the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award.
In those instances where the Company has foreclosed on the collateral, the lender protection insurer has maintained its salvage collection and subrogation rights, and has been covering the cost of the ongoing premiums needed to maintain certain of these life insurance policies. However, the lender protection insurer may elect at any time to discontinue the payment of premiums which would result in lapse of the policies if the Company does not otherwise pay the premiums. The Company views these policies as having uncertain value because the lender protection insurer controls what happens to the policy from a payment of premium standpoint, and the amount of the lender protection insurer’s salvage collection and subrogation claim rights on any individual life insurance policy could equal the cash flow received by the Company with respect to any such policy. For these reasons, these policies are considered contingent assets and not included in the amount of life settlements on the accompanying consolidated and combined balance sheet.
The Company accounts for the maturities of life settlements with subrogation rights, net of subrogation expenses as contingent gains in accordance with Accounting Standards Codification (ASC) 450, Contingencies and recognizes the revenue from the maturities of these policies when all contingencies are resolved.
expected impact of these changes in accounting standards. Any material impact of adoption is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated and Combined Financial Statements.
Results of operations in our life finance segment were adversely impacted by the USAO Investigation and related matters. During the year ended December 31, 2011, we originated 55 loans using equity capital, compared to 97 loans originated under the LPIC program during the year ended December 31, 2010. All 55 of these loans were originated during the nine months ended September 30, 2011, after which we suspended origination of premium finance loans. In connection with the Non-Prosecution Agreement, we are voluntarily terminating our premium finance business and we anticipate that we will no longer be originating any premium finance loans.
This decrease in number of loans originated resulted in a reduction in agency fees from $10.1 million during the year ended December 31, 2010 to $6.5 million during the year ended December 31, 2011, a decrease of $3.6 million. As of December 31, 2011, we had loans receivable totaling $29.4 million compared to $90.0 million as
of December 31, 2010, a decrease of $60.6 million, or 67%. Loans outstanding declined from 325 to 138. As a result, origination income and interest income, which accrue over the life of the loan and are therefore a function of the amount of loans outstanding, declined from $19.9 million and $18.7 million, respectively, during the year ended December 31, 2010, to $6.5 million and $7.8 million, respectively, during the year ended December 31, 2011. Offsetting these declines were a reduction of total life finance segment expenses from $68.6 million during the year ended December 31, 2010 to $38.9 million during the year ended December 31, 2011, a decrease of $29.7 million. Interest expense declined to $8.2 million, a reduction of $16.2 million, as notes payable declined from $91.6 million as of December 31, 2010 to $19.3 million as of December 31, 2011. Provision for losses on loans receivable was $7.6 million during the year ended December 31, 2011, compared to $4.5 million during the year ended December 31, 2010. Provision for losses on loans receivable for uninsured loans, however, increased during the year ended December 31, 2011, as a result of the impairment of the collateral based on decreases in the fair value of the collateral underlying those loans. Amortization of deferred costs, which are comprised primarily of upfront premiums previously paid to the LPIC insurer, were $6.1 million during the year ended December 31, 2011 compared to $24.5 million during the year ended December 31, 2010, a decline of $18.4 million. In connection with the Non-Prosecution Agreement, we voluntarily terminated our premium finance business and, as a result, we will no longer be generating agency fees which are tied directly to loan originations. Further, we will no longer generate loan, interest income, or origination income once our remaining loans mature.
As of December 31, 2011, the Company owned 190 policies with an aggregate investment in life settlements of $90.9 million. Of these 190 policies, 145 were previously premium financed and are valued using discount rates that range from 18.65% - 32.25%. The remaining 45 policies are valued using a discount rate of 16.65%. During the year ended December 31, 2011, the Company acquired 151 life insurance policies through purchases in the secondary and tertiary markets and as a result of certain of the Company’s borrowers defaulting on premium finance loans and relinquishing the underlying policy to the Company. Total aggregate death benefit of polices acquired during the year ended December 31, 2011 was $744.3 million.
Of the 55 premium finance loans originated during the year ended December 31, 2011, 11 are the Type 2 loans. These loans have an average principal balance of approximately $549,000 compared to approximately $280,000 on Type 1 loans originated during the year ended December 31, 2011. Agency fees as a percent of the principal balance of the loans averaged 39.0% and 20.7% on Type 1 and Type 2 loans, respectively.
In the third quarter of 2011, two individuals covered under policies which were subject to subrogation claims unexpectedly passed away. The Company collected the death benefit on one of these policies in the amount of $3.5 million during the third quarter. The other was the result of an accidental death and the $10.0 million face value of the policy was larger than average. The Company has not collected the $10.0 million death benefit under this policy as of December 31, 2011. The Company accounted for each of these polices as
contingent gains in accordance with ASC 450, Contingencies and recognized $3.2 million in death benefits net of subrogation expense of $312,000 in its consolidated and combined statement of operations during the third quarter of 2011. In accordance with ASC 450, the Company expects to recognize death benefits, net of subrogation expenses on the larger policy in the second quarter of 2012. The Company believes these contingent gains to be unpredictable. No expectations for similar gains in the future should be inferred from the events occurring in the third quarter of 2011.
In our structured settlements segment, total income was $11.9 million for the year ended December 31, 2011 compared to $9.5 million for the year ended December 31, 2010, an increase of $2.4 million. This increase was due to an increase in transactions originated to 873 during the year ended December 31, 2011 compared to 565 transactions originated during the year ended December 31, 2010. Segment SG&A expenses increased by $8.9 million to $22.0 million as we continued to build our infrastructure. This led to a segment operating loss of $10.0 million during the year ended December 31, 2011 an increase of $6.5 million over segment operating loss of $3.5 million recorded during the year ended December 31, 2010.
Under the lender protection program, we pay lender protection insurance premiums at or about the time the coverage for a particular loan becomes effective. We record this amount as a deferred cost on our balance sheet, and then expense the premiums over the life of the underlying premium finance loans using the effective interest method. As of September 8, 2010, the deferred premium costs associated with the Ableco facility totaled $5.4 million. Since these insurance claims have been prepaid and Ableco has been repaid in full, we have accelerated the expensing of these deferred costs and recorded this $5.4 million expense as Amortization of Deferred Costs. Also in connection with the termination of the Ableco facility, we have accelerated the expensing of approximately $980,000 of deferred costs which resulted from professional fees related to the creation of the Ableco facility. We recorded these charges as Amortized Deferred Costs. In the aggregate, we accelerated the expensing of $6.4 million in deferred costs as a result of this one-time transaction. The insurance claims settlement of $96.9 million was recorded as lender protection insurance claims paid in advance on our consolidated and combined balance sheet. As the premium finance loans mature and in the event of default, the insurance claim is applied against the premium finance loan. As of December 31, 2010, we have approximately $31.2 million remaining of lender protection insurance claims paid in advance related to premium finance loans which have not yet matured. The remaining premium finance loans financed by Ableco will mature by August 5, 2011.
Amortization of deferred costs increased to $24.5 million during the year ended December 31, 2010 as compared to $18.3 million for the year ended December 31, 2009, an increase of $6.2 million, or 34%, due to the settlement claims agreement described above. In total, lender protection insurance related costs accounted for $20.7 million and $16.0 million of total amortization of deferred costs during the years ended December 31, 2010 and 2009, respectively.
Gain on forgiveness of debt decreased to $7.6 million during the year ended December 31, 2010 compared to $16.4 million for the year ended December 31, 2009, a decrease of $8.8 million, or 54%. The reduced gain on forgiveness of debt was offset by a reduction in loss on loan settlement and payoffs, net of $5.5 million as a result of our writing off of fewer loans that were originated under the Acorn facility.
Gain on sale of structured settlements was $6.6 million during the year ended December 31, 2010 compared to $2.7 million for the year ended December 31, 2009. The increase was primarily due to the number of transactions sold. In 2010, we sold 630 structured settlements compared to 439 sales in 2009.
Agency Fee Income. Agency fee income was $6.5 million for the year ended December 31, 2011 compared to $10.1 million for the year ended December 31, 2010, a decrease of $3.6 million, or 36%. Agency fee income is earned solely as a function of originating loans. We funded 55 loans during the year ended December 31, 2011, a 43% decrease compared to the 97 loans funded during the year ended December 31, 2010 under credit facilities with lender protection insurance. The Company began originating loans using equity capital instead of debt in late February 2011 after the completion of our initial public offering. As a result of the voluntary termination of our premium finance business, we will not receive any revenue from agency fees in 2012 and beyond, and Imperial Life and Annuity has begun to voluntarily surrender its insurance agency licenses.
Agency fees as a percentage of the principal balance of the loans originated during each period was as follows (dollars in thousands):
Origination Fee Income. Origination fee income was $6.5 million for the year ended December 31, 2011, compared to $19.9 million for the year ended December 31, 2010, a decrease of $13.4 million, or 68%. Origination fee income decreased due to a decline in the average balance of loans receivable, net, as noted above. Also, the Company reduced origination fees charged after ceasing the LPIC program, under which the majority of origination fees were passed along to the LPIC provider. Origination fees as a percentage of the principal balance of the loans originated was 25.0% during the year ended December 31, 2011 compared to 41.5% for the year ended December 31, 2010. As a result of the voluntary termination of our premium finance business, we will cease accruing origination fee income once our outstanding premium finance loans mature.
Gain on Forgiveness of Debt. Gain on forgiveness of debt was $5.0 million for the year ended December 31 2011 compared to $7.6 million for the year ended December 31, 2010, a decrease of $2.6 million, or 34%. These gains arise out of a settlement agreement with Acorn Capital. Zero loans out of 119 loans financed in the Acorn facility remained outstanding as of December 31, 2011. The gains were largely offset by a loss on loan payoffs, net related to Acorn loans of $4.1 million and $5.5 million during the year ended December 31, 2011, and 2010, respectively.
Gain on Maturities of Life Settlements with Subrogation Rights, net. In the third quarter of 2011, two individuals covered under policies which were subject to subrogation claims passed away. The Company collected the death benefit on one of these policies in the amount of $3.5 million during the third quarter. The other was the result of an accidental death and the $10.0 million face value of the policy was larger than average. The Company has not collected the $10.0 million death benefit under this policy as of December 31, 2011. The Company accounted for the maturities of each of these polices as contingent gains in accordance with ASC 450, Contingencies and recognized $3.2 million in death benefits net of subrogation expenses of $312,000 in its consolidated and combined statement of operations during the third quarter of 2011. In 2012, the Company negotiated a settlement in respect of the larger policy and, in accordance with ASC 450, the Company expects to recognize death benefits, net of subrogation expenses on the larger policy in the second quarter of 2012. See Note 26-Subsequent Events. No expectations for similar gains in the future should be inferred from the events occurring in the third quarter of 2011.
Interest Expense. Interest expense was $8.2 million for the year ended December 31, 2011 compared to $24.4 million for the year ended December 31, 2010, a decrease of $16.2 million, or 66%. The decrease in interest expense is due to a decline in notes payable from $89.2 million as of December 31, 2010 to $19.3 million as of December 31, 2011, a decrease of $69.9 million, or 78%.
Provision for Losses on Loans Receivable. Provision for losses on loans receivable was $7.6 million for the year ended December 31, 2011 compared to $4.5 million for the year ended December 31, 2010, an increase of $3.1 million. This provision records loan impairments on existing loans in order to adjust the carrying value of the loan receivable to the fair value of the underlying policy. For 2011, the provision for losses on loans receivable increased in the latter half of the year as a result of the decline in the estimated fair value of the collateral due to the higher discount rate we applied in the fair value model. See Notes 10, 15 and 16 to the accompanying consolidated and combined financial statements.
Loss on Loan Payoffs and Settlements, Net. Loss on loan payoffs and settlements, net, was $3.8 million for the year ended December 31, 2011 compared to $5.0 million for the year ended December 31, 2010, a decrease of $1.2 million, or 23%. In the year ended December 31, 2011, we wrote off 15 loans compared to 22 loans written off in the year ended December 31, 2010, all of which were included in the Acorn settlement. Excluding the impact of the Acorn settlements, we had a gain on loan payoffs and settlements, net, of approximately $772,000 and a $500,000 for the years ended December 31, 2011 and 2010, respectively.
Adjustments to our allowance for doubtful accounts for past due agency fees are charged to bad debt expense. Our determination of the allowance is based on an evaluation of the agency fee receivable, prior collection history, current economic conditions and other inherent risks. We review agency fees receivable aging on a regular basis to determine if any of the receivables are past due. We write off all uncollectible agency fee receivable balances against our allowance. The aging of our agency fees receivable as of the dates below is as follows (in thousands):
An analysis of the changes in the allowance for doubtful accounts for past due agency fees during the years ended December 31, 2011 and 2010 is as follows (dollars in thousands):
The allowance for doubtful accounts for past due agency fees as of December 31, 2011 was $260,000 as compared to $205,000 as of December 31, 2010. Throughout 2011, we continued to evaluate the collectability of agency fee receivables and recorded approximately $82,000 in bad debt expense during the year ended December 31, 2011.
Gain on Sale of Life Settlement. Gain on sale of life settlements was $2.0 million for 2010 as compared to $0 for 2009. This relates to gains on sales of life settlements including gains from company-owned life settlements and gains from sales on behalf of third parties. There were no such transactions during 2009.
Change in equity investments. Change in equity investment was a decrease of $1.3 million for 2010 as compared to $0 for 2009. We wrote off our entire investment in life settlement fund as the Company determined that the estimated fair value of the investment was zero and the decline was other than temporary.
Interest Expense. Interest expense was $24.4 million for the year ended December 31, 2010 compared to $28.5 million for the year ended December 31, 2009, a decrease of $4.1 million or 14%. The decrease in interest expense is due to a reduction in the amount of loans outstanding, as a result of the repayment of outstanding indebtedness with the proceeds received in connection with the Ableco claims settlement agreement described above.
Realized Gain on Sale of Structured Settlements. Realized gain on sale of structured settlements was $5.8 million for the year ended December 31, 2011 compared to $6.6 million for the year ended December 31, 2010. During the year ended December 31, 2011, we sold 601 of structured settlements for a gain of $5.8 million. During the year ended December 31, 2010, we sold 630 structured settlements for a gain of $6.6 million. Included in these 2010 results was a portfolio purchase and sale of 131 transactions that resulted in a gain of $64,000.
Unrealized Change in Fair Value of Structured Settlement Receivables. Unrealized change in fair value of investments and structured receivables was $5.3 million for the year ended December 31, 2011 compared to $2.5 million for the same period in 2010. At December 31, 2011 we had 288 structured receivables on our balance sheet compared with 84 structured settlement receivables on our balance sheet as of December 30, 2010. The large increase was due to the Company’s inability to finance these receivables in the dedicated financing facility. See “-Liquidity and Capital Resources-Financing Arrangements Summary.” As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record certain newly-acquired structured settlements at fair value.
advertising of $1.2 million, an increase in legal expenses $804,000, an increase in office supplies, and professional fees in the aggregate amount of approximately $512,000 and a net increase in other expenses of approximately $600,000.
Gain on Sale of Structured Settlements. Gain on sale of structured settlements was $6.6 million for the year ended December 31, 2010 compared to $2.7 million for the year ended December 31, 2009, an increase of $3.9 million or 144%. During the year ended December 31, 2010, we sold 630 structured settlements for a gain of $6.6 million, a 70% gain as a percentage of the purchase price of $25.8 million as compared to 26% gain as a percentage of the purchase price during the year ended December 31, 2009.
Historically, we have funded operations primarily from cash flows from operations and various forms of debt financing insured by LPIC. In February 2011, we completed our initial public offering of common stock and received net proceeds of approximately $174.2 million after deducting the underwriting discounts and commissions and our offering expenses. We intended to use approximately $130.0 million of the net proceeds in our life finance segment and up to $20.0 million in our structured settlement activities. We further intended to use the remaining proceeds for general corporate purposes. During the year ended December 31, 2011, the Company invested approximately $128.0 million of the cash proceeds it received from its initial public offering in an investment portfolio consisting of investment grade fixed income securities and short-term marketable securities, pending deployment for purchases of life insurance policies and payments of premium. As of December 31, 2011, the investment portfolio was comprised of approximately $57.2 million fixed income investments. In addition, the Company had approximately $16.3 million of cash and cash equivalents as of December 31, 2011. See Note 26, Subsequent Events to our Audited Consolidated and Combined Financial Statements.
We estimate that we will need to pay $24.1 million in premiums to keep our current portfolio of life insurance policies in force through 2012 and an additional $24.6 million to keep the portfolio in force through 2013. As of December 31, 2011, we had approximately $75.1 million of cash, cash equivalents, and marketable securities including $691,000 of restricted cash. As of June 30, 2012, we had approximately $51.2 million of cash and cash equivalents, and marketable securities including $1.0 million of restricted cash. Additionally, we have not yet experienced the mortalities of insureds or received the resulting death benefits from our life insurance policies (other than from policies with subrogation rights that are not reported on our balance sheet and that are considered contingent assets). We expect the lack of mortalities of insureds to continue at least through 2012. We have sufficient cash and cash equivalents to pay the premiums necessary to keep the life insurance policies that we own in force and our operating expenses through at least 2012 although we will need to proactively manage our cash in advance of any liquidity shortfall. Based on our current internal forecast, we do not anticipate a liquidity shortfall prior to the third quarter of 2013. However, if we do not begin to experience mortalities and collect the related death benefits in a timely manner prior to that time, we will likely need to seek additional capital to pay the premiums, by means of debt or equity financing or the sale of some of the policies that we own. We may also seek to reduce our operating expenses in order to preserve the value of our existing portfolio of policies, and/or, under certain scenarios, lapse or sell certain of our policies or some combination of the above. The lapsing of policies, if any, would create losses as the assets would written down to zero.
As of December 31, 2011, we had total debt outstanding of $19.3 million. This debt is collateralized by life insurance policies with lender protection insurance underlying premium finance loans that we have assigned, or in which we have sold participations rights, to our special purpose entities. For the Cedar Lane facility, we have guaranteed 5% of the applicable special purpose entity’s obligations. Our chief executive officer and our former chief operating officer made certain guaranties to lenders for the benefit of the special purpose entities for matters other than financial performance. These guaranties are not unconditional sources of credit support, but
are intended to protect the lenders against acts of fraud, willful misconduct or a borrower commencing a bankruptcy filing. To the extent lenders sought recourse against our chief executive officer and our former chief operating officer for such non-financial performance reasons, then our indemnification obligations to our chief executive officer and our former chief operating officer may require us to indemnify them for losses they may incur under these guaranties.
We are subject to several restrictive covenants under the facility. The restrictive covenants include that Imperial PFC Financing II, LLC cannot: (i) create, incur, assume or permit to exist any lien on or with respect to any property, (ii) create, incur, assume, guarantee or permit to exist any additional indebtedness (other than certain types of subordinated indebtedness), (iii) declare or pay any dividend or other distribution on account of any equity interests of Imperial PFC Financing II, LLC, (iv) make any repurchase, redemption, retirement, defeasance, sinking fund or similar payment, or acquisition for value of any equity interests of Imperial PFC Financing II, LLC or its parent (direct or indirect), or (v) issue or sell or enter into any agreement or arrangement for the issuance and sale of any shares of its equity interests, any securities convertible into or exchangeable for its equity interests or any warrants. Imperial Holdings has executed a guaranty of payment for 5.0% of amounts outstanding under the facility.
Upon the occurrence of certain events of default under the indenture, all amounts due under the note are automatically accelerated. ISF 2010 is subject to several restrictive covenants under the terms of the indenture. The restrictive covenants include that ISF 2010 cannot: (i) create, incur, assume or permit to exist any lien on or with respect to any assets other than certain permitted liens, (ii) create, incur, assume, guarantee or permit to exist any additional indebtedness, (iii) declare or pay any dividend or other distribution on account of any equity interests of ISF 2010 other than certain permitted distributions from available cash, (iv) make any repurchase or redemption of any equity interests of ISF 2010 other than certain permitted repurchases or redemptions from available cash, (v) enter into any transactions with affiliates other than the transactions contemplated by the indenture, or (vi) liquidate or dissolve.
During the quarter ended 2011, the Company suspended financing under this agreement but resumed financing in 2012.
On the same day the Omnibus Termination Agreement was executed, December 30, 2011, WSF entered into a forward purchase and sale agreement (“PSA”) to sell up to $40.0 million of life-contingent structured settlement receivables to Compass Settlements, LLC (“Compass”), an entity managed by Beacon. Subject to predetermined eligibility criteria and on-going funding conditions, Compass committed, in increments of $5.0 million, up to $40.0 million to purchase life-contingent structured settlement receivables from WSF. The PSA obligates WSF to sell the life-contingent structured settlement receivables it originates to Compass on an exclusive basis for twenty-four months, subject to Compass maintaining certain purchase commitment levels. Additionally, the Company agreed to guaranty WSF’s obligation to repurchase any ineligible receivables sold under the PSA and certain other related obligations.
The following table summarizes the maturities of our premium finance loans outstanding as of December 31, 2011 (dollars in thousands):
Net cash used in investing activities in 2009 was $29.3 million, a decrease of $73.5 million from $102.8 million of cash used in investing activities in 2008. The decrease was primarily due to a $43.2 million decrease in cash used for origination of loans receivable and a $32.6 million increase in proceeds from loan payoffs.
Net cash provided by financing activities for the year ended December 31, 2011 was $140.9 million, an increase of $217.8 million from $76.8 million of cash used in investing activities for the year ended December 31, 2010. The increase was primarily due to an increase of $174.2 million in proceeds from our initial public offering, net of offering costs and a $93.2 million decrease in cash used in the repayment of borrowings from affiliates offset by a $45.7 million decrease in borrowings under credit facilities and from affiliates during the year ended December 31, 2011.
(2) Expected interest payments are calculated based on outstanding balances of our credit facilities as of December 31, 2011 and assumes repayment of principal and interest at the maturity date of the related premium finance loan, which may be prior to the final maturity of the credit facility.