Our principal executive offices are located at 701 Park of Commerce Boulevard, Boca Raton, Florida 33487 and consist of approximately 21,000 square feet of leased office space. We consider our facilities to be adequate for our current operations.
The following table sets forth our selected historical consolidated financial and operating data as of such dates and for such periods indicated below. These selected historical consolidated results are not necessarily indicative of results to be expected in any future period. You should read the following financial information together with the other information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes.
The selected historical income statement data for the years ended December 31, 2012, 2011 and 2010 and balance sheet data as of December 31, 2012 and 2011 were derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(1) 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, 2008 to determine earnings per share for the years ended December 31, 2011, 2010, 2009, and 2008. As of December 31, 2012, there were 21,206,121 issued and outstanding shares.
Company earns revenue/income from changes in the fair value of life insurance policies that the Company acquires and receipt of death benefits with respect to matured life insurance policies it owns as well as from interest accruing on outstanding loans and loan origination fees recognized over the life of outstanding loans. In the structured settlement business, the Company purchases structured settlement receivables at a discounted rate and sells these receivables to third parties.
See “Business” in this Annual Report on Form 10-K for additional information regarding our business and operations.
In addition, the Term Sheet contemplates that Imperial will contribute $500,000 to a trust to cover certain claims under its director and officer liability insurance policies.
The Company established a reserve related to the proposed derivative settlement and insurance trust of $2.5 million, which is included in other liabilities and a receivable for insurance recoverable from the Company’s D&O Carrier of $1.5 million, which is included in prepaid and other assets. The net effect of the settlement of $1.0 million is included in legal fees in the statement of operations for the year ended December 31, 2012.
The proposed settlement also requires Imperial to advance legal fees to and indemnify certain individuals covered under the policies. The obligation to advance and indemnify on behalf of these individuals, while currently unquantifiable, may be substantial and could have a material adverse effect on the Company’s financial position and results of operations.
Use of Updated Life Expectancies, Change in Mortality Table & Recent Announcements by Life Expectancy Providers
During the second half of 2012, the Company began receiving updated life expectancy reports on the insureds represented in the Company’s portfolio of life insurance policies from both its historical provider of life expectancy reports, AVS Underwriting LLC (“AVS”), and another third party life expectancy provider, 21st Services, LLC (“21st Services”). The procurement of these reports was undertaken in anticipation of a potential financing transaction as the Company believes that potential lenders in any long-term financing will likely require updated life expectancy reports and that such lenders may establish a loan-to-value ratio or borrowing base in any financing based off of a composite mortality factor or “blend” of life expectancy results furnished by these two providers. Additionally, the Company believes that many participants in the secondary and tertiary markets have utilized a blend by these life expectancy providers in pricing life insurance policies and that using a second life expectancy provider mitigates the effects of potential underwriting biases. Having taken these factors into consideration, the Company determined to input a composite mortality factor based off of AVS and 21st Services into its fair value model beginning in the third quarter. See Valuation of Insurance Policies in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
At December 31, 2012 , the Company had received updated life expectancies on 149 policies, which were blended and inputted in the Company’s fair value model at December 31, 2012. In cases where the Company did not receive updated life expectancy reports, the results of original AVS life expectancy reports together with life expectancy reports from 21st Services that were obtained when the original AVS life expectancy reports were obtained have been blended. Additionally and in consultation with third party actuarial consultants, the Company lengthened the life expectancy inputs to its fair value model on 45 policies with life expectancy reports that were more than two years old at December 31, 2012 based on the average lengthening reported on the 149 policies where update life expectancy reports were received. Had the Company not implemented such an adjustment on
affected policies, the fair value of the Company’s portfolio would have increased from the reported amount by $5.8 million. Additionally, the Company replaced its mortality table with a modified version of the 2008 Valuation Basic Table in the third quarter of 2012 as the third party that developed the Company’s previously used table has ceased operations. The Company believes that the table utilized in the third quarter is consistent with tables used by other market participants and did not have a material impact on the valuation of the Company’s life insurance policies.
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 structured settlement receivables at fair value. Any change in fair value upon re-measurement of these investments is recorded through our unrealized change in fair value of life settlements and structured settlement receivables.
We purchase a certain number of fixed (life-contingent or non life-contingent), scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment. We negotiate a purchase price that is calculated as the present value of the future payments to be purchased, discounted at a rate equal to our required investment yield. From time to time, we sell portfolios of structured settlements to institutional investors. The sale price is calculated as the present value of the future payments to be sold, discounted at a negotiated yield. We record any amounts of sale proceeds in excess of our carrying value as a gain on sale.
We receive income from servicing life insurance policies controlled by a third party. These services include verifying premiums are paid and correctly applied and updating files for medical history and ongoing premiums.
We charged our borrowers an origination fee as part of the premium finance loan origination process. It was a one-time fee that is added to the loan amount and is due upon the date of maturity or upon repayment of the loan. Origination fees are recognized on an effective-interest method over the term of the loan.
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.
As a result of the voluntary termination of our premium finance business, we did not receive any revenue from agency fees in 2012 and Imperial Life and Annuity Services, LLC has voluntarily surrendered all its insurance agency licenses during the year ended December 31, 2012.
Interest expense is interest accrued monthly on credit facility borrowings that were used to fund premium finance loans and promissory notes that were used to fund operations and corporate expenses. Interest is generally compounded monthly and payable as the collateralized loans mature.
We specifically evaluate all loans for impairment, on a monthly basis, based on the fair value of the underlying life insurance policies as collectability is primarily collateral dependent. The fair value of the life insurance policy is determined using our valuation model, which is a Level 3 fair value measurement. For loans with lender protection insurance, the insured value is also considered when determining the fair value of the life insurance policy. The insured value is not directly correlated to any portion of the loan, such as principal, accrued interest, accreted origination income, or other fees, which may be charged or incurred on these types of loans. The insured value is the amount we would receive in the event that we filed a lender protection insurance claim. The lender protection insurer limits the insured value to an amount equal to or less than its determination of the value of the life insurance policy underlying our premium finance loan based on its own models and assumptions, which may be equal to or less than the carrying value of the loan receivable. For all loans, the amount of loan impairment, if any, is calculated as the difference in the fair value of the life insurance policy and the carrying value of the loan receivable. Loan impairments are charged to the provision for losses on loans receivable in our consolidated statement of operations.
when the transaction components that are not included in the loan, such as agency fees, offset or exceed the amount of the impairment.
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 recorded impairment even though no loans are considered non-performing as no payments are due by the borrower. Loans with insured collateral represented 22.7% and 65.9% of our loans as of December 31, 2012 and 2011, respectively.
In May 2009, we entered into a settlement agreement with Acorn whereby all obligations under the credit agreement were terminated. Acorn subsequently assigned its rights under the settlement agreement to Asset Based Resource Group, LLC (“ABRG”), an entity that is not related to us. As part of the settlement agreement, we continue to service the original loans and ABRG determines whether or not it will continue to fund the loans. We believe that ABRG will elect to fund the loan only if it believes there is value in the policy serving as collateral for the loan. If ABRG chooses not to continue funding a loan, we have the option to fund the loan or try to sell the loan or related policy to another party. We elect to fund the loan only if we believe there is value in the policy serving as collateral for the loan after considering the costs of keeping the policy in force. Regardless of whether we fund the loan or sell the loan or related policy to another party, our debt under the Acorn facility is forgiven and we record a gain on the forgiveness of debt. If we fund the loan, it remains as an asset on our balance sheet, otherwise it is written off and we record the amount written off as a loss on loan payoffs and settlements, net.
On the notes that were cancelled under the Acorn facility, we had debt forgiven totaling zero and $5.0 million for the years ended December 31, 2012 and 2011, respectively. We recorded these amounts as gain on forgiveness of debt. Partially offsetting these gains, we had loan losses totaling zero and $4.1 million during the years ended December 31, 2012, and 2011, respectively. We recorded these amounts as loss on loan payoffs and settlements, net. As of December 31, 2012, there were no loans that remained outstanding from the original 119 loans financed in the Acorn facility.
The following table highlights the number of loans impacted by the Acorn settlement during the periods indicated below (dollars in thousands):
The preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We evaluate our judgments, estimates and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates and assumptions involved in the accounting for the loan impairment valuation, allowance for doubtful accounts, income taxes, valuation of structured settlements and the
In accordance with ASC 310, Receivables, we specifically evaluate all loans for impairment based on the fair value of the underlying policies as collectability is primarily collateral dependent. The loans are considered to be collateral dependent as the repayment of the loans is expected to be provided by the underlying insurance policies. In the event of default, the borrower typically relinquishes ownership of the policy to us in exchange for our release of the debt (or we enforce our security interests in the beneficial interests in the trust that owns the policy). For loans that have lender protection insurance, we make a claim against the lender protection insurance policy and, subject to terms and conditions of the lender protection insurance policy, our lender protection insurer has the right to direct control or take beneficial ownership of the policy upon payment of our claim. For loans without lender protection insurance, we have the option of selling the policy or maintaining it on our balance sheet for investment.
We evaluate the loan impairment valuation on a monthly basis based on our periodic review of the estimated value of the underlying collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The loan impairment valuation is established as losses on loans are estimated and the provision is charged to earnings. Once established, the loan impairment valuation cannot be reversed to earnings.
In order to originate premium finance transactions our lenders required that we procure lender protection insurance. This lender protection insurance mitigates our exposure to losses which may be caused by declines in the fair value of the underlying policies. At the end of each reporting period, for loans that have lender protection insurance, a loan impairment valuation is established if the carrying value of the loan receivable exceeds the amount of coverage. The lender protection insurance program was terminated as of December 31, 2010, and all loans originated after December 31, 2010, do not carry lender protection insurance coverage. Thus, for all loans originated in 2011 and beyond, a loan impairment valuation is established if the carrying value of a loan receivable exceeds the fair value of the underlying collateral. The Company ceased originating loans in the fourth quarter of 2011.
As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record newly-acquired structured settlements at fair value. We have the option to measure eligible financial assets, financial liabilities, and commitments at fair value on an instrument-by-instrument basis. This option is available when we first recognize a financial asset or financial liability or enter into a firm commitment. Subsequent changes in the fair value of assets, liabilities, and commitments where we have elected the fair value option are recorded in our consolidated statement of operations. We have made this election for our structured settlement assets because it is our intention to sell these assets within the next twelve months, and we believe it significantly reduces the disparity that exists between the GAAP carrying value of these structured settlements and our estimate of their economic value.
We follow ASC 820, Fair Value Measurements and Disclosures, 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. Our investments in life insurance policies and structured settlements are considered Level 3 assets as there is currently no active market where we are able to observe quoted prices for identical assets and our valuation model incorporates significant inputs that are not observable. Our impaired loans are measured at fair value on a non-recurring basis, as the carrying value is based on the fair value of the underlying collateral. The method used to estimate the fair value of impaired collateral-dependent loans depends on the nature of the collateral. For collateral that has lender protection insurance coverage, the fair value measurement is considered to be Level 3 as the insured value is an observable input to the Company, but not observable to market participants. For collateral that does not have lender protection insurance coverage, the fair value measurement is considered to be Level 3 as the estimated fair value is based on a model whose significant inputs are the life expectancy of the insured and the discount rate, which are not observable.
As is the case with most market participants at December 31, 2012, the Company used a blend of life expectancies that are provided by two third-party LE 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 (dollars in thousands):
Although the Company believes that its entry into the Non-Prosecution Agreement had a positive effect on the market generally and for premium financed life insurance policies specifically, the Company believes that, when given the choice to invest in a policy that was associated with the Company’s premium finance business and a similar policy without such an association, all else being equal, an investor would have generally opted to invest in the policy that was not associated with the Company’s premium finance business. However, since entering into the Non-Prosecution Agreement, investors have required less of a risk premium to transact in these policies and the Company expects that, in time, investors will continue to require less of a risk premium to transact in policies associated with its premium finance business.
As of December 31, 2012, the Company owned 214 policies with an aggregate investment in life settlements of $113.4 million. Of these 214 policies, 171 were previously premium financed and are valued using discount rates that range from 16.80% to 33.80%. The remaining 43 policies are valued using discount rates that range from 14.80% to 21.30%.
Unrealized Change in Fair Value of Life Settlements-When the Company acquires certain life insurance policies 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 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.
Agency Fees-Agency fees were 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 was charged to the borrower which is amortized into income over the life of the loan.
Origination Fee Income-Loans often include origination fees which are fees payable to us on the date the loan matures. The fees are negotiated at the inception of the loan on a transaction by transaction basis. The fees are accreted into income over the term of the loan using the effective interest method.
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 that 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 fair value estimate 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.
Deferred costs include costs incurred in connection with acquiring and maintaining credit facilities and costs incurred in connection with securing lender protection insurance. These costs are amortized over the life of the related loan using the effective interest method and are classified as amortization of deferred costs in the accompanying consolidated statement of operations.
The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties (if any) on uncertain tax positions as a component of income tax expense.
In February of 2013 the Company was notified by the Internal Revenue Service of its intention to examine the Company’s partnership return for the year ended December 31, 2010. Audit field work for this examination has not been scheduled.
We have adopted ASC 718, Compensation-Stock Compensation. ASC 718 addresses accounting for share-based awards, including stock options, with compensation expense measured using fair value and recorded over 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.
Investment securities available for sale are carried at fair value, inclusive of unrealized gains and losses, and net of discount accretion and premium amortization computed using the level yield method. Net unrealized gains and losses are included in other comprehensive income (loss) net of applicable income taxes. Gains or losses on sales of investment securities available for sale are recognized on the specific identification basis.
Management evaluates securities for other than-temporary-impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the Company’s intent to hold the security until maturity or for a period of time sufficient for a recovery in value, whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the length of time and extent to which fair value has been less than amortized cost, the historical and implied volatility of the fair value of the security, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency and recoveries or additional declines in fair value subsequent to the balance sheet date.
Note 2 of the Notes to Consolidated Financial Statements discusses accounting standards adopted in 2012, as well as accounting standards recently issued but not yet required to be adopted and the 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 Financial Statements.
The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our financial statements, including the related notes to the financial statements. Our results of operations are discussed below in two parts: (i) our consolidated results of operations and (ii) our results of operations by segment.
Net loss for the year ended December 31, 2012 was $44.7 million as compared to a net loss of $39.2 million for the year ended December 31, 2011, an increase of $5.5 million or 14%. Total income was $19.2 million for the year ended December 31, 2012, a 57% decrease over total income of $44.2 million during the year ended in 2011. Total expenses were $63.9 million for the year ended December 31, 2012 compared to total expenses of $83.4 million incurred during the year ended December 31, 2011, a reduction of $19.5 million, or 23%.
Life finance segment expenses were $18.0 million during the year ended December 31, 2012 compared to $39.0 million during the year ended December 31, 2011, a decline of $21.0 million, or 54%. These declines were driven primarily by a $7.1 million reduction in provision for losses on loans receivable, a $6.9 million reduction
Results of operations in our life finance segment were adversely impacted by the USAO Investigation and related matters. Once the premium finance loans on our balance sheet mature, we will no longer have any revenue generated from interest income and origination income from premium finance loans.
Shortly after the Company was informed on September 27, 2011 that its premium finance loan business was the subject of the USAO Investigation, the Company decided to suspend originating new premium finance loans. During the year ended December 31, 2012, we originated zero loans, compared to 55 loans originated during the year ended December 31, 2011.
Provision for losses on loans receivable was $515,000 during the year ended December 31, 2012, compared to $7.6 million during the year ended December 31, 2011, a decrease of $7.1 million or 93%. This provision records impairments on existing loans in order to adjust the carrying value of the loan receivable to the fair value of the underlying policy or when collectability of the LPIC claim payment is uncertain.
relinquishing the underlying policy to the Company, compared to 14 policies acquired in the same manner for 2011. As of December 31, 2012, the aggregate death benefit of the Company’s investment in life settlements is $1.1 billion. During the year ended December 31, 2012, we sold 6 policies and wrote off 1 policy.
Of these 214 policies owned as of December 31, 2012, 171 were previously premium financed and are valued using discount rates that range from 16.80% - 33.80%. The remaining 43 policies are valued using discount rates that range from 14.80% - 21.30%.
Selling, general and administrative expenses decreased by $400,000 to $21.5 million. Significant expense reductions were made in marketing costs of $1.1 million associated with a reduction in advertising and other promotional activities to drive new business and in other expenses of $1.2 million. These reductions were offset by increases in personnel costs of $400,000, professional fees of $600,000 and D&O insurance of $780,000.
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
The Company originated 55 premium finance loans during the year ended December 31, 2011. As a result of the aforementioned changes to the estimated fair value of the loan collateral, the provision for losses on loans receivable for these uninsured loans increased by $7.9 million in the year ended December 31, 2011.
For the period 2011, the unallocated expenses for 2011 were $22.5 million as compared to $10.9 million in 2010 an increase of $ 11.6 million. This increase was primarily due to the USAO Investigation whereby the company paid a penalty of $8.0 million coupled with legal fees of $ 6.0 million offset by a decrease in interest expense of $3.5 million.
Upon the implementation of ASC 740 in 2011, we recorded a one-time deferred tax liability of approximately $4.6 million for the federal and state tax effects of cumulative differences between financial and tax reporting which existed at the time of the Conversion. Pursuant to ASC 740 these deferred taxes were
We operate our business through two reportable segments: life finance and structured settlements. Our segment data discussed below may not be indicative of our future operations.
Our results of operations for our life segment for the periods indicated are as follows (in thousands):
weighted average per annum interest rate for life finance loans outstanding as of December 31, 2012 and 2011 was 13.4% and 12.3%, respectively. As a result of the voluntary termination of our premium finance business, we will cease earning interest income once our outstanding premium finance loans mature.
Servicing Fee Income. Servicing income was $1.2 million for the year ended December 31, 2012 compared to $1.8 million for 2011, a decrease of $600,000 or 33%. Servicing fee income is earned in providing asset servicing for third parties, which we began providing during the fourth quarter of 2010. This decrease was primarily due to a reduction in the number of policies serviced.
Interest Expense. Interest expense was $1.3 million for the year ended December 31, 2012 compared to $8.2 million for 2011, a decrease of $6.9 million, or 84%. The decrease in interest expense is due to a decline in notes payable from $19.3 million as of December 31, 2011 to zero as of December 31, 2012, a decrease of $19.3 million, or 100%.
Selling, General and Administrative Expenses. SG&A expenses were $14.1 million for the year ended December 31, 2012 compared to $13.2 million for 2011, an increase of $900,000 million or 7%. This was due primarily to an increase in legal expenses of $1.0 million related to two carrier rescission cases and D&O insurance expense of $863,000. These increases were offset by a decrease in personnel costs of $1.1 million mainly attributable to reduction in head count.
Agency Fee Income. Agency fee income was $6.5 million for the year ended December 31, 2011 compared to $10.1 million in 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 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.
Interest Income. Interest income was $7.8 million for the year ended December 31, 2011 compared to $18.3 million in 2010, a decrease of $10.5 million, or 57%. During the years ended December 31, 2011 and December 31, 2010, the Company originated 55 and 97 loans respectively. Interest income declined as the balance of loans receivable, net decreased from $90.0 million as of December 31, 2010 to $29.4 million as of December 31, 2011 due to significant loan maturities. There were no significant changes in interest rates. The weighted average per annum interest rate for life finance loans outstanding as of December 31, 2011 and 2010 was 12.3% and 11.4%, respectively. As a result of the voluntary termination of our premium finance business, we will cease earning interest income once our outstanding premium finance loans mature.
Servicing Fee Income. Servicing income was $1.8 million for the year ended December 31, 2011 compared to $403,000 in 2010. Servicing fee income is earned in providing asset servicing for third parties, which we began providing during the fourth quarter of 2010.
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 in 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 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 in 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. 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.
Realized Gain on Sale of Structured Settlements. During the year ended December 31, 2012, 1,235 structured settlements were sold which resulted in a gain of $11.5 million compared to 601 structured settlements sold with a gain of $5.8 million during the year ended December 31, 2011. Segment financing costs remained high during the first three quarters of 2012 as a result of the USAO Investigation, which impacted the realized gain on sale of structured settlements.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $400,000 to $21.5 million for the year ended December 21, 2012. Significant expense reductions were made in marketing costs of $1.1 million associated with a reduction in advertising and other promotional activities to drive new business and in other expenses of $1.2 million. These reductions were offset by increases in personnel costs of $400,000, professional fees of $600,000 and D&O insurance of $780,000.
This segment continues to be characterized by high growth in lead generation and sales, as well as high operating costs. This led to a segment operating loss of $7.5 million during the year ended December 31, 2012, a decrease of $2.5 million over the segment operating loss of $10.0 million recorded during year ended December 31, 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses $22.0 million for the year ended December 31, 2011 compared to $13.1 million in December 31, 2010, an increase $8.9 million or 68%. This increase was due in part to an increase in personnel expenses of 5.8 million due to due to hiring additional employees throughout 2011 and stock-based compensation and employee bonuses in connection with our initial public offer in 2011. In addition, we recorded additional indirect variable expenses associated with the increase in the number of structured settlements originated during the period, including an increase in advertising of $1.2 million, an increase in legal expenses $804,000, an increase in office supplies professional fees of approximately $512,000 and a net increase in other expenses of approximately $600,000.
We estimate that we will need to pay $27.7 million in premiums to keep our current portfolio of life insurance policies in force through 2013. As of December 31, 2012, we had approximately $19.1 million of cash and cash equivalents, and marketable securities, including $1.1 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). On March 27, 2013, a subsidiary of the Company borrowed $45 million under an 18-month bridge facility. The facility was funded by entities affiliated with certain of the Company’s shareholders, Indaba Capital Management, LLC, Brooklyn Capital Management, LLC, Nantahala Capital Management LLC and NS Advisors LLC, and is secured by substantially all of the Company’s life insurance policies. This facility should provide the Company with adequate liquidity to pay premiums on its portfolio of life insurance through December 31, 2013.
The Company also expects during the next 12 months that, as part of the framework for the settlement embodied by the Term Sheet, it will, among other things, agree to pay $1.0 million of a $12.0 million payment to settle the class action litigation and will agree to contribute $500,000 to a trust to cover certain claims under its director and officer liability insurance policies, which will further stress the Company’s liquidity position. In addition, under the Term Sheet, the Company will undertake to advance legal fees and indemnify certain individuals covered under the director and officer liability insurance policies. The obligation to advance and indemnify on behalf of these individuals, while currently unquantifiable, may be substantial and could have an adverse effect on the Company’s financial position and results of operations.
Notes under the Bridge Facility were issued at 92% of their face amount and are pre-payable at par at any time. The Bridge Facility is subject to mandatory prepayment provisions upon the issuance of additional debt, equity raises and asset sales. Mandatory prepayments are generally at par although certain asset sales and a change of control each trigger a mandatory prepayment obligation at 109%. The Bridge Facility requires the maintenance of a 2 times asset coverage ratio and six months of cash on hand to pay interest on the Bridge Facility and premiums on life insurance policies owned by Greenwood. Upon a failure to maintain requisite cash on hand, the Company may be obligated to sell policies to repay the lenders under the Bridge Facility.
Upon the occurrence of certain events of default under the indenture, all amounts due under the note are automatically accelerated. ISF 2011 is subject to several restrictive covenants under the terms of the indenture. The restrictive covenants include that ISF 2011 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 2011 other than certain permitted distributions from available cash, (iv) make any repurchase or redemption of any equity interests of ISF 2011 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.
The following table summarizes the maturities of our premium finance loans outstanding as of December 31, 2012 (dollars in thousands):
Net cash provided by investing activities for the year ended December 31, 2012 was $48.6 million, an increase of $141.2 million from $92.5 million of cash used in investing activities in 2011. The increase was primarily due to $10.3 million increase in proceeds from the sale and repayment of investment securities available-for-sale, $51.8 million decrease in originations of loans receivable, $45.4 million decrease in cash proceeds from loan payoffs and lender protection insurance claims received in advance and $5.6 million increase in proceeds from sale of life settlements. These were offset by $92.5 million decrease in purchases of investment securities available-for-sale, $11.4 million increase in premiums paid on investments in life settlements and $50.4 million decrease in purchases of life insurance policies.
Net cash used in investing activities for the year ended December 31, 2011 was $92.5 million, an increase of $195.5 million from $103.0 million of cash provided in investing activities in 2010. The increase was primarily due to a $128.0 million increase in purchases of investment securities available-for-sale, a $77.1 million decrease in cash proceeds from loan payoffs and lender protection insurance claims received in advance, a $49.2 million increase in purchases of life insurance policies, and a $15.6 million increase in premiums paid on investments in life settlements, offset by a $69.5 million increase in proceeds from the sale and repayment of investment securities available-for-sale and a decrease of $6.0 million in originations of loans receivable during the period.
Net cash used in financing activities for the year ended December 31, 2012 was $19.7 million, a decrease of $160.6 million from $140.9 million of cash provided by investing activities in 2011. The decrease was primarily due to a decrease of $174.2 million in proceeds from our initial public offering, net of offering costs, $16.9 million decrease in cash used in the repayment of borrowings under credit facilities, $2.6 million decrease in borrowings from affiliates and a $234,000 decrease in borrowings under credit facilities.
The following table summarizes our contractual obligations as of December 31, 2012 (in thousands):
Our assets and liabilities are, and will be in the future, interest-rate sensitive in nature. As a result, interest rates may influence our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation or changes in inflation rates. We do not believe that inflation had any material impact on our results of operations in the periods presented in our financial statements presented in this report.
As described above in “-Critical Accounting Policies-Gain on Maturities of Life Settlements with Subrogation Rights, Net,” the Company considers policies that it acquired as a result of borrower default as contingent assets and does not include those policies in the amount of life settlement policies on its consolidated balance sheet. In the third quarter of 2011, two individuals covered under policies that 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 of 2011.
The other was the result of an accidental death and the $10.0 million face value of the policy was larger than average. In the second quarter of 2012, the Company negotiated a settlement in respect of the larger policy and collected approximately $6.1 million, net of subrogation expenses of 910,000, in respect of the larger policy and reported a gain in accordance with ASC 450, Contingencies in its consolidated statement of operations for the second quarter of 2012. The Company believes these contingent gains to be unpredictable because the lender protection insurer can discontinue paying the premiums necessary to keep policies subject to subrogation and salvage claims in force at any time and the amount of the lender protection insurer’s subrogation and salvage claim on any individual life insurance policy could, and in time will, equal the cash flow received by the Company with respect to any such policy. No expectations for similar gains in the future should be inferred from these contingent gains.